Retirement funds (Pension, Provident and Retirement Annuity funds) have their own unique tax and administration rules. This makes their administration unnecessarily complex, and prone to mistakes being made by all parties.
Going back to the 2011 and 2012 budgets, proposals were made to harmonise the different tax rules into one standard rule, and the current rules for retirement annuity funds is the intended direction.
- Employer-paid contributions to all retirement funds will be taxed as a fringe benefit in the hands of the employee. The fringe benefit will give rise to a deemed contribution to the fund by the employee.
- Employees will be permitted a deduction in respect of employer plus employee contributions to retirement funds up to 27.5% of the greater of employment or taxable income. For equity reasons, deductible contributions will be limited to R350 000.
- A rollover dispensation similar to the one currently applying to retirement annuity contributions will be adopted to allow flexibility for those with fluctuating incomes (non-deductible contributions will be rolled forward and not lost).
- Contributions towards risk benefits plus the administration costs will be included in the maximum percentage allowable deduction
The changes are planned to be made effective from March 2014, but there are some difficult areas that need to be addressed:
- The concepts of taxable and employment income must be defined.
- Defined benefit funds pose some areas of difficulty.
- Provident funds, being fundamentally different in nature from pension and retirement annuity funds, need special attention.
In addition to this “standardisation” process, there is a National Retirement Fund in the planning stage, and attention will also be given to the taxation and administration of cross-border pensions.