Proposed retirement reforms for 2016
Allowable deduction for fringe benefit of employer contributions to defined benefit retirement funds:
Section 11(k)(iii) of the Income Tax Act, 1962 (‘the Act’) inadvertently limited the allowable deduction for the fringe benefit of employer contributions to retirement funds to the actual value of the employer contribution. Clause 2 of the Revenue Laws Amendment Bill, 2016 however provides for a correction of the value of the fringe benefit in respect of employer contributions to defined benefit retirement funds that must be deemed to be the employee contribution. It makes provision for the deemed employee contribution to be equal to the value of the fringe benefit under paragraph 12D of the Seventh Schedule to the Act even if such value is greater than the actual contribution paid by the employer.
Passive income deduction:
Before 1 March 2016, taxpayers were able to deduct retirement annuity contributions against their passive or non-trading income up to a certain limit. The current wording of section 11(k) of the Act, which introduces the harmonised tax regime for retirement contributions from 1 March 2016, does not allow for contributions to any retirement fund to be set off against passive income. It is proposed that section 11(k) of the Act be amended to allow for retirement contributions to be deducted against passive income, subject to the available limits.
Rollover of excess contributions prior to 1 March 2016:
It is proposed that, in order to rectify an oversight, section 11(k) of the Act be amended to allow for the rollover of excess contributions to retirement annuity funds and pension funds accumulated up to 29 February 2016.
Order of allowable deductions:
To correct the ordering rule for calculating allowable deductions in the determination of taxable income, it is proposed that the allowable deduction under section 11(k) of the Act be determined before the allowable deduction under section 18A (donations).
Valuation of contributions made to defined benefit retirement funds:
Paragraph 12D of the Seventh Schedule of the Act only makes provision for contributions actually made by the employer or employee to certain retirement funds, and excludes contributions made on behalf of the employer or employee (for example, by the retirement fund). It is proposed that paragraph 12D of the Seventh Schedule be amended to include all contributions made for the member’s benefit. Other technical amendments to paragraph 12D include clarifying that retirement fund income is the full amount used to determine the employer’s contribution, not only remuneration as defined in paragraph 1 of the Fourth Schedule. A potential issue of double counting for retirement funds with a hybrid structure (having both defined benefit and defined contribution elements) will be removed. It will also be made clear when actuaries can provide an updated contribution certificate.
Vested rights for provident fund members – divorce order settlements:
From 1 March 2018, provident fund members may be required to purchase an annuity using a portion of contributions made after that date. However, all contributions made before 1 March 2018 will not be subject to annuitisation (generally referred to as vested rights). To allocate this vested right fairly in the case of a divorce, it is proposed that the withdrawal of retirement benefits arising from divorce order settlements be proportionally attributed as a reduction against both the vested right and non-vested right portions of the retirement fund savings.
Vested rights for provident fund members – mandatory transfer:
From 1 March 2018, provident fund members above the age of 55 will be able to continue contributing to that provident fund without being required to purchase an annuity upon retirement. However, if they transfer to another retirement fund, then any future contributions to that fund would not be exempt from annuitisation. It is proposed that forced transfers (through the closure of a retirement fund) will not affect the member’s ability to take contributions made from 1 March 2018 onwards as a lump sum. Further technical corrections are required to ensure that all contributions to provident funds or pension funds with lump sum benefits made before 1 March 2018 are included in the vested rights provisions, in line with the policy intent. Specifically, the vested rights provision inadvertently excluded transfers made to pension funds, as defined under paragraph (c) of the definition of ‘pension fund’ in section 1 of the Act, and to preservation provident funds.
Foreign pension contributions, annuities and payouts:
When the residence-based taxation system was introduced in 2001, section 10(1)(gC) was added to the Act to exempt foreign pensions derived from past employment in a foreign jurisdiction (i.e. from a source outside of South Africa). The question of how contributions to foreign pension funds and the taxation of payments from foreign funds should be dealt with raises a number of issues, which require a review.