The new retirement reforms were planned to come into effect as from 1 March 2015 (effectively for the 2016 tax year). However, in the Draft Response Document from National Treasury and SARS, it has been noted that it was decided to postpone the implementation date of all the tax related retirement reforms to 1 March 2017, with a chance that it may be brought forward to 1 March 2016. A decision in this regard should be made by 31 July 2015.

The basic intention of the retirement reforms is to achieve a consistent treatment across all retirement savings products, such as pension funds, provident funds and retirement annuities. A further intention is to encourage the protection of retirement savings by forcing the annuitisation of retirement benefit payouts.

Impact on your monthly payroll

Currently, any contribution made by your employer to a provident fund does not have any impact on your taxable income for the purposes of determining your PAYE liability. However, as from the implementation of the reforms, any contribution made by an employer to a provident fund on behalf of his/her employee will be treated as a fringe benefit and tax would be calculated thereon. However, as you will be taxed on the fringe benefit, SARS will deem the contribution that your employer made to be a contribution made by you and it would be deductable from taxable income for the calculation of your PAYE.

Similarly, any contribution made by your employer to a pension fund will also become a taxable fringe benefit, but there will be the related deduction from taxable income when arriving at the PAYE liability.

The result of these changes should effectively have no impact on the employee’s monthly position on the basis that the retirement fund contributions are within the allowable limits.

Allowable deductions for retirement savings

Currently you are allowed a deduction of up to 7.5% of your retirement funding remuneration as a pension fund deduction if you contribute to a pension fund. You can also deduct up to 15% of your non-retirement funding remuneration as a retirement annuity fund deduction if you contributed to a retirement annuity fund.

With the change in legislation, members making retirement savings contributions will receive a uniform deduction for contributions to a pension, provident and retirement annuity fund. The deductible contributions will be limited to the lesser of:

  1. R350 000; or
  2. 27.5% of the greater of “remuneration” or “taxable income” (excluding retirement lump sums, withdrawal and severance benefits).

 

Income Protection policy

Another change in the legislation that was planned to become effective on 1 March 2015 is the treatment of contributions to an Income Protection policy. However, it is unclear whether or not this would still be the effective date due to the postponement of the implementation of the retirement reforms. We believe this date will be clarified once the new Tax Law Amendment Bill is issued.

Currently, any contribution made by your employer on your behalf is treated as a taxable fringe benefit. However, as you are taxed on the fringe benefit, SARS deems the contribution to be made by you and a deduction in that regard is allowed in the payroll for PAYE purposes. This will leave you with a nil tax effect.

As from the effective date of this change there will no longer be any deductions allowed in respect of contributions made to an Income Protection policy. An employee would however still be taxed on a fringe benefit in respect of any premiums paid on such a policy. This will result in a slight reduction of your net pay each month.

The corresponding relief in this regard is that payouts from the Income Protection policy will no longer be taxable.

Closing

 If you are concerned that you may be adversely affected by any of these changes, we advise you to speak to your tax advisor, financial planner and/or your employer in order to determine the impact the changes in the legislation will have on you.

Engela Crocker

Tax Manager, Johannesburg