Parliament’s standing committee on finance will decide next week whether to adopt proposed amendments to the Taxation Laws Amendment Bill that will result in changes to how provident fund contributions are taxed and in the ability of members of these funds to withdraw all their savings as cash at retirement.
The committee has received and heard submissions on the proposals, and it has to decide whether to leave the Income Tax Act as it is or adopt the amendments. If the Income Tax Act is not amended, from March 1 next year a tax deduction of up to 27.5 percent of the higher of your taxable income or remuneration – with an annual cap of R350 000 – will apply to contributions made to any retirement fund.
In addition, members of provident funds, who can currently withdraw all their savings at retirement, will be required – as are members of pension funds – to buy an annuity, or monthly pension, with two-thirds of their savings at retirement – commonly referred to as annuitisation.
However, this will not apply to provident fund members over the age of 55 on March 1, 2016, and members will be able to withdraw all their savings accumulated before March next year.
The bill provides that anyone with a fund balance of less than R150 000 at retirement will be able to take the full amount as a lump sum. One of the amendments that National Treasury has proposed is that this amount be raised to R247 000. If this amendment were adopted, it would be many years before most provident fund members would contribute enough from March 1 next year to accumulate savings that would be large enough to require that they buy a pension.
At this week’s meeting of the finance committee, the Association for Savings and Investment South Africa (Asisa) indicated that it is in favour of this proposal being adopted.
Cosatu repeated its rejection of this or any other proposal, saying it wants National Treasury to release a comprehensive discussion document on reforms to the social security system before it will agree to reforms on how retirement funds are taxed.
Cosatu’s deputy parliamentary co-ordinator, Matthew Parks, said the implementation of the bill should be delayed until there is agreement within the National Economic Development and Labour Council (Nedlac) on the matter. He said workers should be given more time to engage on the proposals. If the issues are not communicated properly, more of them could resign to access their retirement savings, which would be an “unmitigated disaster”.
National Treasury’s alternative proposal is that the tax deductions come into effect on March 1 next year without provident fund members being required to buy a pension with their contributions made after that date.
However, if contributions to provident funds made from March 1 next year, as well as the growth thereon, do not have to be annuitised, the tax deduction for provident fund members will, from March 1, 2017, decrease from 27.5 percent to the highest of 10 percent of taxable income, or remuneration, or R125 000. This proposal includes a minimum tax deduction for provident fund members of R30 000.
Asisa’s senior policy adviser, Rosemary Lightbody, told the finance committee that there is not enough time for retirement funds and payroll administrators to create systems to accommodate this proposal by March 1, 2016.
Most funds and administrators have built systems in line with the changes that the Income Tax Act provides will come into effect on March 1 next year, and these would have to unbuilt, Lightbody said.
Treasury’s deputy director-general of tax and financial sector policy, Ismail Momoniat, said it was unhelpful for Cosatu to demand that no changes to retirement fund tax be implemented until the social security paper is released. The issue has been with Nedlac for some time without resolution.
He emphasised that many fund members would be denied a lower tax rate if the amendments were not implemented. There would be costs if implementation of the measures in the Income Tax Act were delayed further.
If the law was amended to increase to R247 000 the minimum amount required before provident fund members would have to buy an annuity, it would be years before anyone was affected, and amendments could be made to accommodate any issues that arose before then, Momoniat said.
Treasury officials said they remained committed to releasing the social security discussion document, but the issues were complex and required actuarial modelling, which had resulted in the document taking longer than expected to finalise.
Olano Makhubela, the chief director of financial investments and savings at National Treasury, assured the committee that the tax amendments would ultimately be consistent with social security policy.