One of the most significant amendments effected by the Taxation Laws Amendment Act, 25 of 2015, and the Tax Administration Laws Amendment Act, 23 of 2015, was how retirement type funds will be taxed in future. This includes both the taxation of proceeds from funds, as well as the extent to which the amounts contributed to funds throughout will be deductible for income tax purposes.
It is important to distinguish between 3 types of funds, being pension funds, provident funds and retirement annuity funds. Historically, in terms of the Income Tax Act, 58 of 1962 (‘the Income Tax Act’), contributions made to pension funds were deductible, limited to 7.5% of the individual’s particular annual pensionable salary. Whereas pension funds are designed to allow for the accumulation of wealth of salaried individuals towards retirement, retirement annuity funds aim to provide for non-salary income to be saved towards retirement. To this end, 15% of non-pensionable income (e.g. income from an own business) contributed to a retirement annuity fund were previously allowed as income tax deductions.
Both retirement annuity and pension funds however had certain limitations imposed on them which restricted access to the capital accumulated in these funds only until after retirement, and even then not all capital would have been accessible as a lump sum withdrawal: realization would generally take place through monthly annuities received from such funds. In this sense, provident funds differed and capital accumulated in such funds were accessible even before retirement. To discourage use of such funds though (and to encourage a long term savings culture), no income tax deductions were allowed for provident fund contributions.
The new amendments now seek to harmonize the tax treatment of these 3 types of funds, and specifically as relates the differentiation on the tax treatment of contributions, as well as access to the fund capital together with the tax consequences of lump sum withdrawals. The single, encompassing provision now dealing with fund contributions is section 11(k) of the Income Tax Act. Section 11(k) now allows for a deduction of any fund contributions up to 27.5% of the higher of an individual’s i) remuneration received from an employer or ii) his or her taxable income for the year in question. The deduction is limited though to R350,000, meaning that individuals earning more than R1,272,727 will effectively have a lesser rate apply to them. (Note that the 27.5% will include contributions made by an employer on an employee’s behalf, which amount is also included as part of the individual’s remuneration for income tax purposes in the form of a fringe benefit.)
Significantly, access to the capital of all funds will now be what had effectively been the regime previously for pension funds, i.e. that a capital amount is available for withdrawal at retirement, but the majority is annualized and only receivable in the form of monthly annuities being paid out going forward. This has particularly infuriated the trade unions who have publicly condemned government for this move, and it remains to be seen how, if it all, Treasury will react to said criticism.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)