After much debate and uncertainty the Taxation Laws Amendment Act, 2015 was promulgated on 8 January 2016. T-Day will therefore be implemented with effect from 1 March 2016. The Act introduces the following key measures:
1. The harmonisation of the tax deductible contributions to pension, provident and retirement annuity funds
T-Day is good news for most members because they will be able to make greater tax deductible contributions to retirement funds and they will effectively enjoy contribution flexibility for the first time.
Most members who run a retirement calculator and discover that they are under provided for are not in a position to increase their contributions at present primarily because tax legislation does not allow it outside a total cost to company remuneration approach. From 1 March 2016 any member will be able to request an increase in contributions and will enjoy a tax deduction up to the new threshold (assuming the fund rules allow additional voluntary contributions).
T-Day may be less good news for fund members who earn more than R1 270 000 pa. They also will be entitled to the same tax deduction but will be effected by the new rand cap of R350 000 pa if they make a contribution of 27.5%. This is a cumulative maximum for all retirement fund contributions. Higher income earners will therefore have to aggregate their contributions, including those to retirement annuity funds and decide on a strategy going forward. There are alternatives, but none as effective as making deductible contributions. Members who are in this situation will require special advice. They must for example make sure that the percentage contribution is based on remuneration not PEAR as most fund contributions are currently calculated.
To facilitate these measures, the following structural tax changes were made. From 1 March 2016, all employer contributions to a retirement fund will be taxed in the hands of the member as a fringe benefit. Each member will however be able to deduct employer and own contributions to a pension fund, provident fund or retirement annuity fund in an amount equal to 27.5% of remuneration or taxable income, whichever is greater, subject to a rand cap of R350 000 per year. With the exception of those affected by the rand cap, members will not be out of pocket as a result. In fact, retirement annuity and provident fund members could be better off. Contributions in excess of this amount may be rolled over to future years when the maximum percentage or rand cap is not exceeded. The nominal value of amounts not rolled over will be available to be set off against any lump sum or annuity benefit at retirement.
Defined benefit funds have an inherent element of cross-subsidisation across members where the value of actual contributions do not exactly match up with the benefits that a member receives. A special valuation method is therefore required to determine the value that a defined benefit fund member becomes entitled to in respect of an employer contribution. Funds with DB benefits and funds that offer benefits with a DB underpin will be required to provide the employer with a contribution certificate by the end of January 2016. The contribution certificate will enable the employer to process the appropriate deductible contribution via the payroll system in accordance with the PAYE requirements.
2. Provident funds subject to annuitisation requirements
New contributions to a provident fund from T-Day onward (and growth thereon) will be subject to the same annuitisation rules as pension funds, namely at least two-thirds of the savings must be used to purchase a pension at retirement.
In order to protect members current rights:
- balances in provident funds as at 1 March 2016 (and any subsequent growth thereon) can still be taken in cash at any future date; and
- members 55 years of age or older will be exempt from these provisions if the member remains in the same provident fund until retirement.
Retirement fund administrators will have to record and maintain the protected lump sum benefit data of provident fund members, i.e. the fund will require separate accounts for each members pre-1 March 2016 balance (and growth) and post-1 March 2016 balance (and growth). Provident fund members 55 and older will be exempt and their benefits will therefore be in only one account, as long as they remain in the same fund.
De minimis exception
To accommodate the concerns of the union movement and others the current threshold for the de minimis exception is increased from R75 000 to R247 500 for all retirement funds. As a result, every member of a pension, provident and retirement annuity fund may receive their entire retirement benefit (excluding the protected amount) in the form of a lump sum, as long as the amount of the benefit does not exceed R247 500. This exception applies separately in respect of a members benefit in each retirement fund and is therefore available each and every time a member retires from a retirement fund.
3. Free portability between retirement funds e.g. pension funds to provident funds
Due to the alignment of the mandatory annuitisation requirements between all retirement funds (including preservation funds), the transfer of retirement savings to provident and provident preservation funds from other funds will henceforth be free from tax in all instances (e.g. pension fund benefits can be transferred tax-free to provident funds). Any transfers of provident fund members who are 55 years or older should be avoided as their rights to take the full retirement benefit in a lump sum will be affected by a transfer.
4. Public sector pension funds must also annuitise
The requirement to purchase an annuity on retirement will also apply to paragraph (a) and paragraph (b) pension funds i.e. public sector funds, from 1 March 2016. However it will not (yet) apply to the Government Employees Pension Fund.
5. Closing an estate duty loophole
Retirement fund contributions that did not qualify for a tax deduction will be included in the dutiable part of a deceased members estate for estate duty purposes. This measure will apply from 1 January 2016, in respect of the estate of a person who dies on or after that date in respect of retirement fund contributions made on or after 1 March 2015.