Edition: Jun - Aug 2014


An easy guide through a complex and wide-ranging piece of legislation is provided by Arno Loots, Head of Umbrella Fund Solutions at Liberty Corporate.

Arno Loots
Loots . . . trustees, be prepared

The Taxation Laws Amendment Act 2013 ("the Act") was signed into law in December 2013. It introduces tax changes to become effective on 1 March 2015.

These changes will have a significant impact on the retirement-fund industry and support the South African government's initiative to promote a culture of saving. This is vital because statistics show that only 6% of South Africans – those who've provided adequately – will be able to retire comfortably.

The five main changes to be effective from 1 March 2015 are:

i) IPP (PHI) premiums will no longer be tax deductible, but benefit payments will be tax free.

Contributions to income protection policies (also known as permanent health insurance) will no longer be tax deductible and all proceeds (benefit payments) from such policies will be tax free. All employer contributions to these types of policies will remain subject to fringe-benefit tax.

ii) Deductibility of retirement fund contributions (tax harmonisation).

Employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees. As a result, employees may deduct up to 27,5% of total remuneration in respect of contributions (employer and employee) to pension, provident and retirement annuity funds, subject to an annual cap of R350 000.

The retirement-fund deduction is determined as 27,5% of the higher of 'remuneration' (as defined in the Income Tax Act) or 'taxable income'; subject to an annual cap of R350 000. As an employee's 'taxable income' is only determined at the end of the tax year i.e. on assessment, an employer will not be able to ascertain the employee's retirement-fund deduction with reference to the employee's 'taxable income'.

However, an employer will know what the value of the employee's 'remuneration' will be; and, in particular, the employee's 'fund salary' as defined in the fund rules. As a consequence, the employer will be in a position to determine the employee's deduction with reference to the employee's 'remuneration' but not the employee's 'taxable income'.

Employers will be able to claim unlimited deductions on their contributions compared to the current limit of 20%.

Special mention needs to be made in respect of the changes affecting defined-benefit (DB) funds:

Employer contributions to defined-benefit funds will also be subject to fringe-benefit tax and have to be calculated based on a formula provided in the Act. The value of the taxable benefit will be determined through the application of a special formula, the components of which will require information from the fund valuator.

The fringe-benefit value will be determined through the application of a formula approximating the increase in value of the annuity and lump-sum benefit of the member for one additional year of service, based on the retirement benefit to which that the member will be entitled.

iii) Provident fund alignment with pension funds and retirement annuities.

Provident funds will align with pension and retirement annuity funds, all of which will be subject to the same taxation regime. At retirement, one third of the fund value can be taken as a lump sum, while two thirds must be used to buy retirement income (regardless of whether it is a provident or pension fund). This will, however, only apply to contributions paid after 1 March 2015 on provident funds and will not apply to the value a member has in the provident fund at 1 March 2015 (plus future growth on this value).

This value may still be paid as a lump sum going forward. It will not be subject to the one-third limit that applies to contributions after 1 March 2015. Members of provident funds above the age of 55 at 1 March 2015 will still enjoy full access to their full benefit at retirement.

iv) Increase in commutation amount.

The commutation threshold upon retirement will be increased from R75 000 to R150 000 for all retirement funds. This means that, if the retirement benefit of a member is R150 000 or less, the member will be allowed to take the entire benefit as a cash lump sum.

The member will not be required to buy a pension with at least two thirds of this benefit.

v) Tax-free portability of retirement funds.

Fund benefits will be capable of being transferred tax-free between all retirement and preservation funds. In particular, tax-free transfers from pension funds to provident funds will be allowed.

Trustees or management boards of retirement funds should be considering:

  • How the definitions of "pensionable salary" or "fund salary" in the rules of the fund will have to be reviewed;
  • How the rules of the fund will have to be revised to allow for all transfers to and from all retirement and preservation funds;
  • Due to employers being able to claim unlimited deductions on their contributions, whether employers might elect to increase contributions or even to restructure the benefit structure to only have employer contributions;
  • That separate accounts will have to be maintained for all provident funds in order to separate pre-1 March 2015 fund balances and post 1 March 2015 fund balances;
  • A possible need to provide separate accounts for members older than age 55 at 1 March 2015;
  • The impact on Pension Funds Act section 14 transfers, especially in respect of provident fund members whose transfer value must provide the splits of pre- and post- 1 March 2015 balances;
  • General member communication and information provided to members, including member benefit statements;
  • Whether these changes provide opportunity for employers to consolidate pension and provident funds into one;
  • Whether or not to consolidate pension and provident funds where they operate as a hybrid arrangement.