Changes to tax treatment of retirement fund contributions
The Minister announced the implementation of a number of measures announced in 2011 such as, aligning the taxation of pension funds, provident funds and retirement annuities, and introducing a cap on deductible contributions.
The following measures will take effect from 1 March 2014 and are designed to encourage South Africans to save for retirement.
Contributions by employees and employers to pension, provident and retirement funds will be tax deductible by individual employees.
Individual taxpayer deductions will be set at 22.5%, for those below 45 years and 27.5% for 45 years and above, of the higher of employment or taxable income (as was recommended last year).
Annual deductions will be limited to R250 000 and R300 000 for taxpayers below 45 years and above 45 years respectively (up from R200 000 proposed last year). This will effectively mean that maximum contributions on income in excess of R1 111 million and R1090 million, respectively, will not be deductible. A minimum monetary threshold of R20000 will apply to allow low-income earners to contribute in excess of the prescribed percentages.
Some assistance will be offered to those who contribute in excess of the threshold. Non-deductible contributions (in excess of the thresholds) will be exempt from income tax if, on retirement, they are taken as either part of the lump sum or as annuity income. Measures to address some of the complexities of defined benefit pension schemes will be considered.
A rollover dispensation similar to the current retirement annuity contributions will be adopted to allow flexibility in contributions for those with fluctuating incomes.
Contributions towards risk benefits and administration costs within retirement savings will be included in the maximum percentage allowable deduction.
Not included in this budget
The Minister did not announce the integration of provident funds into pension funds or the compulsory preservation of withdrawal benefits. These matters are subject to consultations with interested parties.
We welcome the way in which the cap on deductible retirement fund contributions has been formulated. We are particularly pleased that taxpayers over 45 years and above will continue to be entitled to deduct 27.5% of remuneration. The proposed thresholds are at a level where only a small percentage of retirement fund members will be negatively affected. Over time these thresholds may become onerous if they are not adjusted for inflation annually. In this budget for example the minister neglected to adjust the retirement / death and withdrawal tax tables.
Personal income tax relief
Government proposed to reduce personal income tax by R9.5 billion to compensate partially for inflation. Most of the relief is provided to taxpayers in lower income brackets.
Income tax brackets will be adjusted to offset the effect of bracket creep. Income tax thresholds have been raised from R59 740 to R63 556 for below 65’s and from R95 150 to R99 056 for 65’s and older. For 75’s and older the threshold will increase from R104 261 to R110 889.
The interest income exemptions have not been increased. Government proposes to replace the tax free interest dispensation with tax preferred savings and investment accounts by 2014. Returns generated within these savings and investment vehicles (including interest, capital gains and dividends) and withdrawals will be tax exempt. Aggregate annual contributions could be limited to R30 000 per year per taxpayer, with a lifetime limit of R500 000. A discussion document will be published by May 2012 to facilitate consultation and refine these proposals.
The primary rebate for individuals will be increased from R10 755 to R11 440 and the secondary rebate (for 65’s and older) from R6 012 to R6 390. A third rebate for those older than 75 has been increased to R2 130.
Medical scheme contributions
Monthly tax credits will be increased from R216 to R230 for the first two beneficiaries and from R144 to R154 for each additional beneficiary with effect from 1 March 2012. From that date onwards (apart from those with disabilities), where medical scheme contributions in excess of four times the total allowable tax credits plus out-of-pocket medical expenses combined exceed 7.5% of taxable income, they can be claimed as a deduction against taxable income.
To ensure improved equity of the tax system and to help curb increases in health costs, additional medical deductions will be converted into tax credits with effect from 1 March 2014.
Social old age grants for the aged will increase by R60 to R1200 from 1 April 2012. For pensioners over age of 75 the old age grant will increase by a further R20 to R1220 per month.
Child grants will be increased from R260 to R280 per month in April 2012.
False job terminations
Employees cannot withdraw funds from employer-provided retirement schemes before retirement unless an employee terminates employment with that employer. In some instances, employees terminate their employment solely to gain access to employer-provided retirement funds. Some employees quit employment only to be rehired by the same employer shortly thereafter. Access to withdrawal under these artificial circumstances will no longer be permitted.
Taxation of payouts from South African or foreign retirement funds
There are currently a number of anomalies in the tax treatment of lump sum and annuity payouts from South African or foreign retirement funds, depending on whether a South African resident or a non-resident receives the payout. An important factor is whether the services that relate to the payout were rendered in South Africa or elsewhere. The issue will receive due consideration during the course of 2012 and 2013.
Taxation of divorce order-related retirement benefits
The “clean-break” principle was introduced to private-sector funds in 2007 so that divorcing spouses could fully separate their pension interests without any ongoing connection. This principle will also form part of the Government Employees Pension Fund (GEPF). The National Treasury proposes that the taxation of retirement interests paid out as a result of divorce orders for the GEPF should roughly mirror private-sector funds.
Although the introduction of the “clean-break” principle in private-sector funds has been largely successful, the Minister feels that there are still some anomalies that result in continued engagement. It is proposed that these anomalies be addressed so that the overall tax treatment of all divorce-order retirement benefits paid out as a result of a divorce order will fully apply the clean-break principle from 1 March 2012.
The minister announced that a series of discussion papers will be released this year on promoting household savings and reforming the retirement industry. Consultation with the industry, employers and trade unions will take place on these reforms. Among the issues are improved governance over pension funds, including more effective interventions to eliminate corruption and fraud and ways to improve preservation of retirement fund assets to ensure higher levels of income in retirement.
National Health Insurance will be phased in over a 14 year period beginning in 2012/13. It is expected that an additional revenue source will be needed in 2014/15 amounting to about R6 billion in that year. Until then general taxes will remain the primary funding mechanism.
Capital gains tax inclusion rate will increase from 25% to 33.3% in respect of individuals, which means that the maximum effective rate increases to 13.3%. This increase reinforces the tax efficiency of retirement funds as a savings vehicle.
A revised Financial Sector Charter code will be gazetted shortly for public comments.
A dividend withholding tax will come into effect on 1 April 2012, replacing Secondary tax on Companies. Pension Funds are exempt from income tax and will receive their dividends tax- free. The Minister announced that this tax will be introduced at 15% and not 10%.
Government will investigate the feasibility of including derivatives in the base of Security Transfer Tax.
In respect of high net-worth individuals the minister observed that there is room for improvement in the service offered to this segment as well as their level of compliance. This will be a focus area for SARS in the coming year.