Employers, are you ready for the changes that need to be made in your payroll systems for the retirement reform legislation? In terms of this legislation, contributions made to pension and provident funds by employers on behalf of their employees will be taxed as a fringe benefit, currently effective 1 March 2016.

Determining the value of this fringe benefit may, however, not be as straightforward as you think. It is vital that you check with your fund as to whether you have a Defined Contribution (DC) fund or a Defined Benefit (DB) fund.

The difference between a DC fund and a DB fund

Simply put, the differences between the types of funds are:

  • In the case of a DC fund the rules of the fund determine the contribution percentage. However the benefit at retirement is not guaranteed.
  • In the case of a DB fund the rules of the fund determine the guaranteed benefit at retirement. The amount of the contribution is determined by the fund’s actuary.

Calculation of the fringe benefit

  • For a DC fund the value of the fringe benefit is the amount of the employer contributions.
  • In the case of a DB fund you will need to apply a formula to calculate the value of the fringe benefit as follows:

X = (A x B) – C where

‘X’ represents the amount to be determined

‘A’ represents the fund member category factor (this will be included in the Contribution Certificate which should be obtained from the fund) for that employee

‘B’ represents the amount of retirement funding income of the employee

‘C’ represents the sum of the amounts contributed by the employee to the fund in terms of the rules of the fund, excluding any additional voluntary contributions and any buyback

It would be advisable to request the Contribution Certificate from your fund as soon as possible, should you have a DB fund, so that you can update your payroll system accordingly.

Employee allowable deductions

The other change brought about by this legislation is that the employee will be allowed a deduction in regard to their contributions towards pension, provident and retirement annuity funds subject to the following:

The lesser of

27.5% of the higher of remuneration or taxable income

or

R350 000

limited to the employee’s actual contributions.

An important point to note is that the fringe benefit value is deemed to be the employee’s contribution and so is added to the employee’s actual contributions when calculating the allowable deduction.

Chantal Bald

Senior Tax Consultant, Durban