The South Africa Revenue Service (SARS) has agreed to allow you to buy years of membership of a retirement fund for the purposes of determining the number of years you have been a member of a fund. This affects the amount you can claim as a deduction from a lump-sum payout from your fund before you are taxed on it.
In pension and retirement annuity funds, you can claim a tax deduction equal to the number of years you have been a member of a fund multiplied by R4 500. So the longer your period of membership, the more of your payout you will get tax-free.
The change will be to the advantage of people who were previously excluded from fund membership, mainly on the basis of race.
In a guidance note to the industry, SARS says it "accepts a provision in the rules of a retirement fund for the purchase of years of past service for the purposes of determining the number of completed years in symbol 'N' as defined in the Second Schedule to the Income Tax Act".
But SARS says that, in the case of a defined benefit arrangement, the number of years of service "purchased" must be actuarially sound in relation to the cost and not the result of a manipulation for tax purposes.
In other words, you must buy back membership at the proper price and it should not merely be a tax dodge.
Defined contribution funds
In the case of a defined contribution fund, SARS will only accept the buy back of extra years under the following conditions:
- The total number of years of past service, including years of service transferred into the fund, must relate to an actual past period of employment during which the member was not a member of the fund but was employed by the participating employer or a previous employer;
- The total number of years of "pensionable service" for the purposes of determining the "period of employment" may not exceed the sum of:
- the number of years of actual contributory membership of the fund;
- the number of years of past service associated with an amount transferred from another fund into the fund; and
- the number of years of past service as calculated by this formula:
Y = (A / B) x C,
where:
- Y
is the number of years of past service;
- A
is the amount of past service retirement benefit contributions paid by or in respect of the member (excluding amounts transferred into the fund);
- B
is the amount of current retirement benefit contributions (that is, excluding past service contributions and amounts transferred into the fund) paid by or in respect of the member, subject to a minimum of 10 percent of the member's current pensionable salary multiplied by the member's actual period of membership of the fund; and
- C
is the period of actual contributory membership while in the service of the participating employer at the time of the member becoming entitled to benefits from the fund.
SARS will not accept the number of years of past service if they were in any way funded by contributions that would otherwise have been designated as normal current contributions.
SARS will not accept years of past service prior to the age of 16 years.