tax treatment of contributions to retirement funds
The date of implementation of new rules relating to the tax treatment of contributions to retirement funds, which were expected to take effect on 1 March 2015, was postponed until 1 March 2016, in terms of the Taxation Laws Amendment Act of 2014.
Among other changes, the new rules will affect the employees’ tax implications of employer contributions to retirement funds, and the deductibility for income tax purposes by the member of such contributions, thus affecting both participating employers and members. In addition, depending on the nature of the benefits available to members, the retirement fund may be obliged to provide information to the participating employer in respect of contributions for specific categories of fund members. The implications of some of these changes are highlighted below.
The current position is that contributions to a pension fund or a provident fund, which an employer is required to make in terms of the rules of the applicable fund in respect of its employees, do not constitute a taxable benefit under the Seventh Schedule to the Income Tax Act. However, any contribution by an employer to the retirement annuity fund of an employee does constitute a taxable benefit in the employee’s hands in terms of the Seventh Schedule to the Income Tax Act.
Proposed new rules
Under the proposed new rules, employer contributions to any retirement fund will be taxable in the hands of the employee for whose benefit they were made. Thus, with effect from 1 March 2016, any contribution by an employer for the benefit of any employee to any pension fund, provident fund or retirement annuity fund will constitute a taxable benefit under the Seventh Schedule to the Income Tax Act.
The proposed new rules also set out new valuation rules which provide for the calculation of the taxable value of contributions made by employers to retirement funds for purposes of determining the taxable fringe benefit amount to be included in the employee’s remuneration. In terms of the proposed new valuation rules, as they currently read, the value of the taxable benefit arising in respect of contributions made by an employer to a retirement fund must be determined based on the “fund member category” (as defined), and the nature of the retirement benefits to which each category of fund members is entitled. The retirement benefits are classified into a defined benefit component, a defined contribution component, an underpin component and risk benefits.
In this regard, where the benefits payable to members in respect of a fund member category of a pension, or a provident or retirement annuity fund consist solely of defined contribution components (as defined), the value of the taxable benefit will be the value of the amount contributed by the employer for the benefit of the employee who is a member of that fund.
However, where the benefits payable to members in respect of a fund member category of a pension, or a provident or retirement annuity fund consist of components other than only defined contribution components, the value of the taxable benefit must be determined based on a formula. In this case, the pension fund is required to calculate the “fund member category factor”, as specified in the regulations to be issued by the Minister of Finance, and provide a contribution certificate to the employer of the employees who are members of the fund. Draft regulations were issued on 16 October 2014 regarding the determination of the fund member category factor and the information to be contained in these contribution certificates.
In terms of the proposed new rules, no value must be placed on the taxable benefit derived from employer contributions for the benefit of a member of that fund who has retired from that fund or in respect of the dependants or nominees of a deceased member of that fund.
To the extent that a taxable benefit arises in respect of employer contributions to a retirement fund, the amount of the taxable benefit would be included in the remuneration of the employee and would be subject to employees’ tax. In determining the employees’ tax payable in respect of the taxable benefit, the employer may take into account the tax deduction to which the employee may be entitled in respect of his or her retirement fund contributions. Accordingly, the employees’ tax liability arising in respect of the taxable benefit that is attributable to the employer contributions may be offset to the extent that the employee qualifies for a tax deduction in respect of the aggregate retirement fund contributions.
Deductibility of contributions
The current position is that the tax deductions that may be claimed by an individual in respect of contributions that were made to a pension fund, a provident fund or a retirement annuity fund are determined separately for each type of retirement fund.
Proposed new rules
The proposed new rules introduce a consolidated tax deduction provision for individuals in respect of the aggregate contributions to all pension funds, provident funds and retirement annuity funds. Thus, with effect from 1 March 2016, it is proposed that a deduction may be claimed for any amount contributed during a year of assessment to any pension fund, provident fund or retirement annuity fund in terms of the rules of that fund, by a person that is a member of that fund, subject to certain limitations.
The total deduction allowable in respect of a year of assessment may not exceed the lesser of R350 000 or 27,5% of the higher of the person’s remuneration (as defined) or taxable income.
Any employer contributions that have been taxed in terms of the Seventh Schedule, as outlined above, would be included in the employee’s contributions to the relevant retirement fund for the purposes of calculating the tax deduction that may be claimed by the employee.
In light of the proposed changes anticipated to come into effect next year, retirement funds should assess their obligation to provide contribution information to participating employers in respect of the fund member categories of the fund. Where the members of a retirement fund have flexibility regarding the amount of contributions to be made to the fund, the tax changes should be communicated by employers to their employees to enable them to consider their aggregate contributions across all the retirement funds in which they participate.
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