Posted on August 3rd, 2011 in Industry News
Proposed changes to the way retirement fund contributions are taxed are causing growing concerns among members and trustees. In a nutshell:
- Employer and member contributions are to be treated as a fringe benefit taxable in the hands of the member.
- Tax Deductible contributions are to be limited to 22.5% of taxable salary per annum
- Tax deductible contributions are to be limited to R200,000 per annum per member
These limits are to apply across all retirement arrangements a member may have, on a cumulative basis.
These changes, outlined in the 2011 budget for March 2012 implementation, did however not materialise in the Draft Taxation Amendment Bill issued in June. The question arises: were these scrapped? The answer is no.
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The reason why the Taxation Amendment Bill did not incorporate these changes is mainly because of a number of valid concerns raised by various industry bodies. These concerns are unlikely to lead to a scrapping of the proposals, but they did make government realise that more work will be required to cater for a number of special cases.
Probing deeper
In order to understand the various objections, we need to understand how the proposed new arrangements differ from what is happening currently.
- Tax treatment of contributions: Currently, a distinction is made between employer and member contributions.
- Limit on contributions as a percentage of salary: Currently there are technically some limits on the level of contributions, but in practice the SARS has not enforced these limits. The new limit of 22.5% is lower than what is currently permitted (some funds have contribution rates of over 50% of salaries).
- R200,000 p.a. limit on contributions: there is currently no upper ceiling on tax deductible contributions.
Problems with the proposals
These proposed changes are aimed to increase transparency of tax deductions, prevent abuse of the deductions and limit subsidies for the very wealthy, allowing the government to focus more on the poor. This appears to be in line with the intentions of the Retirement Fund Reform.
However, any solution creates more problems. The challenge now is to amend the proposals to eliminate some of these emerging problems, which include:
Reduction in savings levels and cover: Many funds are likely to amend their rules to limit contributions to those that are deductible. For high income individuals, this may also reduce other benefits, such as risk cover. The contributions no longer flowing into retirement funds may not be redirected to savings – they may simply increase spending in a country that already suffers from very low savings rates.
DB Funds: While there are not many Defined Benefit (DB) funds left in South Africa, these funds do not easily fit into the new tax system. Take, for example, a fund with a large deficit (which is possible in the DB space). Such a fund may easily have to contribute more than 22.5% of members’ salaries each year to make up the deficit – it seems unfair to penalise this with additional taxation. Similar concerns apply to aging funds where the cost of funding increases with age.
Workers with irregular incomes: Some people, for example entrepreneurs, have income that fluctuates from year to year, or even disappears for a few years at a time. Other people start earning an income late in life and would need to contribute more than 22.5% of salaries to secure a decent pension. The limits proposed in the 2011 budget do not cater for such cases very well.
Way forward
The above issues, and many others, need to be taken into consideration before a formal Taxation Amendment relating to retirement fund contributions can be expected. Government is working on these proposals – whether the 1 March 2012 deadline can still be seen as a target date is unclear, though. The next step is an expected August paper which is likely to focus on retirement contribution taxation proposals.
We will keep you posted on developments. In the meantime, do not hesitate to contact me if you would like to discuss these issues further!
