Edition: Dec 2014 - Feb 2015
EXPERT OPINION

T-day delayed. What remains?

There’s much for trustees to review. Ashlene van der Colff, divisional director (operations) at Liberty Corporate, explains.

Van der Colff . . . through the quagmire

The signing into law of the 2013 Taxation Laws Amendment Act (TLAA) has been widely commented and reported on. Despite some concerns around what the changes actually mean, there are generally positive sentiments that these changes represent positive steps for retirement-funding savings in South Africa.

National Treasury released a media statement on 17 October 2014 with the revised 2014 Taxation Laws Amendment Bill (TLAB), confirming a delay in the implementation date of a significant component of the retirement tax-reform changes that were to be effective from 1 March 2015 (T-day).

The new effective targeted date for implementation is 1 March 2016, but may change depending on the agreement between National Treasury and the National Economic Development & Labour Council (Nedlac). This development has been received with mixed reaction and certainly came as an anti-climax to some in the retirement fund industry.

Liberty noted with concern the deferral of the effective date for these retirement tax-reform changes. We have previously voiced our support of these changes as we view them as largely beneficial to the average South African trying to build an appropriate retirement-funding reserve.

The deferral particularly affects provident fund members, who now remain unable to claim a tax deduction for their contributions toward retirement savings. In addition, the delay hampers the much-needed incentivisation towards a greater retirement-savings culture.

We are of the view that there has been extensive engagement with the industry in the years leading up to the changes. However, the deferral provides a further opportunity that will be best used to communicate and clarify the various aspects of the overall Retirement Fund Reform considerations to all stakeholders.

Trustees of retirement funds can play a vital role in promoting awareness for members of funds to understand the difference between preservation of their savings before retirement and preservation at retirement. The latter would have been affected by the T-day changes. Members should not resign toaccess their retirement savings, as the proposed T-day changes do not affect pre-retirement preservation.

What should Trustees of retirement funds be considering in light of this deferral? What remains relevant and imminent? The following changes remain effective from 1 March 2015, of which only point ii) directly affects retirement funds:

i) Premiums for Income Disability Benefits will no longer be tax deductible, but benefits received will be tax free

Employee: Employer:
  • Employer paid income disability policy premiums will continue to be taxed as fringe benefits in the hands of the employee
  • These premiums will no longer be deductible in the hands of the employee
  • The employee will effectively be taxed on the value of the fringe benefit
  • Benefits paid out from such policies will be tax free
  • No change – Employers may still claim a deduction for premiums paid on behalf of the employee

Currently, these benefits are included in the member's taxable income, resulting in members receiving the lower benefit, which is net of tax. The following are the main implications of these changes:

  • Premiums: Members will no longer have a corresponding deduction against the fringe benefit value. This will have the impact of reducing take-home pay for certain members. The exact impact depends on each member's taxable income, tax rate and monthly income disability policy premium. The Liberty Corporate tax calculator can be used to estimate this impact.
  • Benefits: Members will now receive the gross income disability benefit that they are insured for, without a deduction for tax.

    This change is arguably one of the more technically difficult changes promulgated by the TLAA. Should no changes be made to the level of cover members currently have, members will effectively be left with lower take-home earnings as premiums remain the same but the tax relief falls away. We are of the view that the current flat benefit will no longer be appropriate for all members from 1 March 2015. Each member's benefit must reflect his or her tax status in order to ensure that the take-home pay after disability is in line with the pre-1 March 2015 benefit.

ii) Retirement fund accrual date can be elected by member.
The release of the TLAB introduces the ability for members of occupational retirement funds to elect when to receive their retirement benefit from the fund. This means that the retirement benefit will no longer be deemed to accrue when the member retires from his or her employer.

There are a number of implications to be considered with implementation of deferral of the retirement benefit beyond normal retirement age (NRA). Should members elect to defer accrual of their retirement benefit beyond the NRA, trustees will have to think about, among other things:

  • Fund rules may have to be revised to align with this change. Defined-benefit fund rules should clearly set the benefit payable at retirement and the growth thereon where members defer receipt of their retirement benefit;
  • Is the member allowed to continue contributing to the fund? The proposed wording in the TLAB is not prescriptive on this issue and does not refer to ongoing contributions for deferred retirement members;
  • Trustees will have to review fund expenses in relation to these types of members;
  • Trustees may have to revise the fund's investment strategy in respect of members who defer receiving their retirement benefit;
  • Trustees have to engage with administrators of the funds to ensure that system functionality allows for the effective administration of this change;
  • Trustees should engage with employers and members to collate member data that will enable these members to be serviced effectively post the employment relationship. The industry can ill-afford to exacerbate the unclaimed benefits issue.

iii) Tax-free savings vehicle
The TLAA also includes a provision for the exemption of amounts received or accrued in respect of tax-free investments. While this exemption is aimed at incentivising non-retirement savings, i.e. outside of retirement fund vehicles, members may consider more aggressive use of this tax incentive given the delay in the other TLAA changes, which would have provided for greater tax-free retirement savings in most cases.

Trustees may want to consider creating increased member awareness of this benefit as a supplement to retirement savings.

Looking forward

Liberty remains committed to retirement-reform initiatives and will continue to communicate any developments as these happen. The key drivers to ensuring that these retirement tax-reform initiatives come to fruition by 2016 are meaningful collaboration among all stakeholders and clear communication to those affected.

For further details on the 1 March 2015 changes, please visit our website