National Treasury will table the Tax Laws Amendment Bill next week following a meeting yesterday with the labour caucus within the National Economic Development and Labour Council (Nedlac) to discuss its proposal to break the deadlock over changes to the tax deductions for contributions to retirement funds and the obligation to buy a pension at retirement.
Treasury’s deputy director-general of tax and financial sector policy, Ismail Momoniat, confirmed the bill will be tabled with the two proposals it outlined in Parliament earlier this month.
If the bill is adopted, earlier amendments to the Income Tax Act, which will take effect on March 1 next year, will apply to all retirement funds except provident funds, while one of the two proposals for provident funds is likely to be adopted.
Momoniat says Treasury will table the bill despite the fact that the financial services industry has indicated that it will not be ready to implement one of the two proposals for provident fund members.
The labour caucus in Nedlac is objecting to the introduction, from March 1 next year, of a uniform tax deduction of up to 27.5 percent of remuneration or taxable income, whichever is higher, for contributions to retirement funds. The introduction of a uniform tax deduction will also require members of provident funds to buy a pension (annuity) with contributions made after March 1. However, their right to withdraw all their savings made with contributions before March 1 next year will be protected.
Currently, the Income Tax Act provides that you do not have to buy an annuity if your retirement savings are R75 000 or less when you reach retirement. The tax law will be amended so that, on March 1, the amount will increase to R150 000.
One of Treasury’s proposals to break the deadlock with the trade unions is to increase the amount even further, although the increase has not yet been disclosed. A higher amount would mean that most lower-income members of provident funds would not have to buy an annuity at retirement.
Treasury’s second proposal is to introduce a partial tax deduction for members of provident funds and delay for a year or two implementing the requirement that members of provident funds must buy a pension.
Momoniat told Parliament two weeks ago that the partial deduction would be between 10 and 15 percent of remuneration or taxable income, whichever is higher. It would include a minimum deduction of R30 000 to ensure that lower income-earners were not adversely affected and a maximum deduction of R125 000 to ensure the deduction for higher earners was limited.
Currently, provident fund members cannot deduct their contributions to these funds, but there is a tax deduction of up to 20 percent of an employee’s remuneration for contributions made by an employer.
In terms of the tax amendments due to take effect in March next year, your employer’s contributions to your retirement fund will be added to your income as a taxable fringe benefit, but you will be able to deduct these contributions, as well as your own, up to 27.5 percent of your remuneration or taxable income, whichever is higher. The maximum allowable deduction will be R350 000 a year.
The proposal to introduce a lower tax deduction and limit the maximum deduction as an interim measure for provident fund members as long as they are not obliged to buy an annuity at retirement is intended to ensure that the employer’s contributions are offset by the deduction.
Fiona Renton, the head of legal services at Alexander Forbes, says the financial services industry is very concerned about Treasury’s second proposal and does not believe it can be implemented by March 1 next year.
Renton, who was speaking at an Alexander Forbes briefing session for retirement fund trustees, says limiting the tax deduction to between 10 and 15 percent could reduce the percentage of contributions going to the savings of members and ultimately their pension benefit.
She says many employers pay the contributions of employees on a salary-sacrifice basis (employees forfeit a portion of their salary in exchange for contributions by their employer), because an employer can deduct contributions of up to 20 percent of a provident fund member’s pensionable income from its (the employer’s) taxable income.
Renton says that limiting the tax deduction to between 15 percent and 20 percent could result in a reduction in contributions to provident funds.
Momoniat says the limits on the tax deduction are necessary to ensure that high-income earners do not continue to structure their salary packages to benefit more (in proportion to low-income earners) from the tax deduction without committing to buying an annuity.
He says some high-income taxpayers structure 30 percent of their salary package as an employer contribution to a provident fund, and they receive this as non-taxable fringe benefit.
Renton says it will be “incredibly difficult to implement” a separate tax deduction for provident fund members by March 1 next year. It will require changes to payroll and reconciliation systems, and the South African Revenue Services will have to adapt its systems.