Retirement benefit savings changes – interpretation of how to apply the R350,000 cap

Retirement benefit savings changes – interpretation of how to apply the R350,000 cap

Payroll / eTorQue

Editor’s note: This article is really to illustrate the unintended consequences of the new legislation and to remind clients that while we always strive to get payroll and systems as accurate as possible, different interpretations and lack of guidance by SARS can lead to quite different results for employers and employees.

As with any new major legislation the practical implementation of the legislation can lead to real differences depending on interpretation. The application of the R350,000 cap in the retirement benefit savings legislation is a case in point and could impact an employee working at more than one employer during the period.

Looking at this in more detail:
The new legislation allows for a deduction of the lesser of a percentage cap (27.5% of remuneration) or R350,000. This is specifically set out in the legislation as:
“The total deduction to be allowed in terms of this paragraph must not in the year of assessment exceed the lesser of –
(aa) R350 000; or
(bb) 27,5% of…”

Interpreting the act, one could calculate this in two ways as an employer (without further guidance from SARS):

  1. Fully utilise the monetary cap limit as quickly as possible during the tax year until the R350 000 is exhausted, or
  2. ‘Spread’ or ‘average’ the R350 000 monetary cap limitation equally over the tax year (i.e. R350 000 ÷ 12 to get a monthly cap)

If an employee works at two employers during the period then use of the first method could result in that employee taking advantage of the R350,000 cap at both employers and then having to pay additional tax under assessment. Not really an outcome that is intended by the legislation.