National Treasury is considering keeping the original March 2015 date on which to introduce the new tax deductions for retirement fund members.
The draft Taxation Laws Amendment Bill proposes the deductions take effect on March 1, 2015, and this week Treasury, in response to a request from a member of Parliament’s standing committee on finance, agreed to consider adhering to this implementation date rather than postponing it as the retirement fund industry requested.
Amendments aimed at standardising the tax treatment of retirement funds and improving the preservation of retirement savings when members change jobs were proposed in the Budgets in February last year and February this year.
The draft Taxation Laws Amendment Bill, which was published in July, contains amendments to the Income Tax Act that will change the tax deductions you can claim for retirement fund contributions and requires many members of provident funds to convert at least two-thirds of their retirement savings to an annuity (monthly pension) on retirement. (Currently, provident fund members can take their entire retirement benefit as a cash payout.) The rights of existing members on savings already made will be protected.
The bill proposes that you will be able to deduct from your taxable income both your contributions and those of your employer to a pension fund, provident fund or retirement annuity (RA) fund up to 27.5 percent of your remuneration or taxable income, whichever is greater. The maximum contribution that will qualify for a tax deduction in any tax year will be R350 000.
Currently, the deduction is capped as a percentage of income, and different limits apply to how much you can deduct for contributions to a pension fund or RA fund. Employee contributions to a provident fund are not tax-deductible.
In terms of the amendments, the contributions your employer makes to your retirement fund will be added to your taxable income as a fringe benefit, but you will be able to include these contributions in the 27.5 percent of income you can claim as a deduction. Currently, your employer’s contributions are not regarded as a fringe benefit.
A formula has been proposed to calculate the value of the employer contributions to defined benefit and hybrid retirement funds for fringe-benefit purposes. Treasury has undertaken to make changes to this formula in line with some of the submissions on the bill.
Treasury has labelled as “T-Day” the date on which the changes to the taxation of contributions and the limit on provident fund withdrawals will take effect.
To date, no amendments to legislation giving effect to the proposals relating to the compulsory pre-retirement preservation of retirement savings have been published.
This week, Treasury provided Parliament’s finance committee with feedback on the public comments it has received on the draft Taxation Laws Amendment Bill.
The comments were to the effect that changes to the taxation of retirement fund contributions should be implemented only after the proposals to make it compulsory to preserve retirement savings have been introduced, because there would be administrative difficulties in implementing these proposals separately.
In its response document, Treasury says it agrees with this argument, and therefore proposes postponing the implementation of both the tax proposals and the preservation proposals to 2016.
But DA Member of Parliament David Ross said the tax changes could benefit retirement fund members and encourage people to save for retirement and therefore the advantages of the original 2015 implementation date should be weighed up against the disadvantages.
Ismail Momoniat, Treasury’s deputy director-general, said Treasury will reconsider the implementation date and report back to Parliament.
Beatrie Gouws, Treasury’s director of personal income tax and savings, told the finance committee that the final version of the Taxation Laws Amendment Bill will protect the existing rights of provident fund members to take their retirement savings as a lump sum.
However, contributions made to retirement funds after T-Day will be subject to the new rules – that is, when savings from this date and the growth thereon are taken at retirement, two-thirds will have to be taken as an annuity, unless the member is older than 55 on T-Day.
Contributions to an existing provident fund by these over-55-year-olds will be subject to the old rules (no annuitisation).
Gouws says the legislation will be amended to preserve the vested rights of these members, even if their savings in a provident fund are moved to a different retirement fund after T-Day.
She says if you are 55 on T-Day and 58 when you leave your provident fund, you will still have the right to withdraw all your savings in that provident fund and the growth thereon at retirement, even if you transfer the amount to another fund and retire later.
The final version of the Taxation Laws Amendment Bill is expected to be tabled in Parliament in early October.