A set of legislative changes implemented through the Taxation Laws Amendment Act came into effect on March 1. They were designed to harmonise the tax treatment of different types of retirement funds and encourage retirement saving that would secure people an income stream into retirement.
Part of government’s broader aim is to push for more effective financial security for individuals and to manage the burden on the national social security system.
After pressure from trade union federation Cosatu, the annuitisation of retirement benefits paid from provident funds has been postponed for two years through legislative amendments passed by the National Assembly on March 15 2016.
The changes relating to the tax treatment of the contributions paid to funds have come into effect.
Employers must understand these changes. Retirement and risk benefits (including medical aid) are often the biggest component of employee benefits suites. How contributions are taxed and benefits paid from different retirement funds usually influences the structure of pay packages.
Getting PAYE and fringe benefit tax right
Employers administer tax consequences on employee contributions by deducting and paying tax. Getting the PAYE and fringe benefit tax right is a compliance issue with consequences for employers and their relationship with the South African Revenue Service.
The new provisions for the deduction of contributions in funds allow for employers to claim the employer contribution as a deductible business expense, as before.
But the employer contribution is now considered a taxable fringe benefit in the hands of the employee, as the employee derives value from this. This means the employer contribution is deemed to be made by the employee, which then increases the employee’s taxable income. This should not disadvantage employees because they will still be able to claim a tax deduction on any amount regarded as a fringe benefit.
Its purpose is to improve transparency about contributions made and who derives the value.
To record employees’ fringe benefits and deduct PAYE correctly, employers are largely dependent on the information in the contribution certificates received from funds, which are reliant on their administrators and valuators.
Given this dependency, employers need to manage any potential liability flowing from incorrect calculations in these certificates.
Another key change is a single aggregated tax deduction rate that applies across all the funds to which an employee contributes. Thus, employees are notionally able to add together all their fund contributions and claim a deduction in respect of all these amounts.
The total deduction is limited to the lesser of R350 000 or 27.5% of the higher of remuneration or taxable income. This might cause employees to look holistically at the retirement fund arrangements and reconsider how best to maximise this deduction.
New changes allow more flexibility
Previously the choice of which fund to contribute to was driven by where the maximum tax deduction would be. Now there is more flexibility.
For lower-income earners, this could prompt more saving in retirement funds to maximise the tax deduction — the outcome government was hoping for.
High-income earners who contribute more toward retirement saving than the R350 000 a year cap could possibly restructure their retirement arrangements and their compensation packages at work.
Employers must make sure such requests are managed in the bounds of the law. Employers and employees must understand the implications of restructuring compensation packages to maximise tax deductibility.
For example, an employee seeking to stay under the R350 000 contribution cap may want to restructure pay into a smaller basic salary and higher “allowances”. This might reduce the rand amount of the contribution, which is calculated only on the basic salary and not allowances. But it could also have the consequence of reducing risk benefits calculated on the basic salary.
Employers also need to be mindful that the R350 000 contribution cap might affect higher- and lower- income earners differently. For example, having risk benefits paid through the fund gives one the tax deduction on those premiums.
Although higher-income earners may prefer to use their tax deduction for retirement saving rather than risk benefits, lower-income earners may want these benefits offered through the fund to maximise their use of the R350 000 tax deduction.
However employers choose to restructure pay packages, they must be aware such decisions have implications for pension and risk benefits, tax and employment relations.
Now that annuitisation has been postponed, tax-free transfers from pension to provident funds won’t be allowed. Employers must be mindful of this if they plan to restructure.
Also among the new changes is an increase in the minimum benefit that triggers annuitisation in pension and retirement annuity funds from R75 000 to R247 500. This makes it likely that more retirement annuity members will be able to take their retirement benefits in cash as opposed to annuities.
It will also be possible for the first time for an employer to receive tax deductions if it contributes to a retirement annuity fund in the name of an employee. This could be an option for employers in future. – David Geral & Tashia Jithoo
David Geral is partner and Tashia Jithoo is counsel in Bowman Gilfillan Africa Group’s pension and financial services regulation team.