Legal Update Issue 13

Executive Summary
Main implications of tax changes:
1. Employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees.
2. Employees may deduct up to 27,5% of remuneration or taxable income, subject to an annual cap of R350 000.
3. Changes to payment of provident fund benefits at retirement (see below for detail).
4. The commutation threshold upon retirement increased to R247 500.

We can now confirm that the Taxation Laws Amendment Act, 2015 was passed by both Houses of Parliament and was sent to the President to be signed into law. Tax changes introduced by the Taxation Laws Amendment Act, 2013 will. therefore come into effect on 1 March 2016.

The Taxation Laws Amendment Act ( “TLAA "), 2013 introduced tax changes with effect on 1 March 201, which was later postponed until 1 March 2016. The proposed changes entail the harmonisation of the tax deductibility of contributions to all types of retirement funds, as well as compulsory annuitisation of at least two thirds of provident fund retirement benefits, subject to vested rights to full commutation (i.e. being able to take the full benefit as a cash lump sum).

Main implications of tax changes
The main provisions that will apply from 1 March 2016 are briefly the following:
• Employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees. Thus for tax purposes employer contributions will be deemed to have been made by the employees. Employers must ensure that their payroll systems are aligned with these new requirements.
• Employees may deduct up to 27 ,5% of remuneration or taxable income, in respect of contributions (by employer/employee) to pension, provident and retirement annuity funds, subject to an annual cap of R350 000. This may result in an increase in employees' take-home pay.
• Not more than one-third of the retirement benefit from a provident fund may be taken as a lump sum. However, this restriction does not apply to pre-1 March 2016 contributions (and growth thereon). Provident fund members who are 55 years or older on 1 March 2016 will still be allowed to take the full retirement benefit as a cash lump sum, including contributions made on or after 1 March 2016 (and growth thereon) to the provident fund of which he/she was a member on 1 March 2016.
• The commutation threshold upon retirement, sometimes referred to as the de minimis amount, increased. If the threshold is not exceeded, the full retirement benefit may be taken as a cash lump sum. The threshold will be R247 500 (i.e. not R150 000 as previously suggested), which is more than three times the current threshold of R75 000. In calculating whether the threshold is exceeded, amounts in respect of contributions and growth prior to 1 March 2016 are not taken into account.
• There will be tax-free portability between all tax-approved funds, including pension to provident fund transfers.

Practical implications
• Employers will have to make changes to their payroll systems effective 1 March 2016, to:
a. show the employer contributions on employee's payslips,
b. apply fringe benefit tax on the employer contribution,
c. ensure that employee's benefit from the full tax deductibility of their total retirement funding contributions, i.e. employer and employee contributions combined to a maximum of 27 .5% or R350 000 of taxable income, before applying the normal SITE and PAYE tax to salaries.
• The above could, except for very high earners, result in an increase in employees' take-home pay due to a decrease in their taxable income.
• The protection of vested rights and a higher de minimis amount of R24 7 500 (i.e. the amount below which you are not required to annuitise) mean that most, if not all, low income earners approaching retirement in at least the next two to five years (and probably much longer for lower income earners), will not be affected by the annuitisation requirement.

Latest press release by National Treasury
National Treasury published a press release, which is attached for more information. We have extracted the following paragraph addressing the possible myths and false statements:

Dispelling the myths and false statements
a) Pension and provident funds will remain under control and management of boards' trustees and Government cannot touch those funds;
b) Government has no intentions of introducing preservation "through the back door". The law has not changed to prevent members of provident and pension funds from accessing their retirement savings upon resignations, including dismissals or retrenchments.
c) Government has increased the tax deduction on retirement contributions to encourage, and not force, workers to save.
d) Government remains committed to releasing the social security paper despite its complexity. Even with the advent of social security, retirement funds will still need to be improved to ensure that the outcome for members is better than at present.
e) Government is currently working on various reforms to lower charges on annuities and assist members with accessing suitable annuities to deal with their various concerns.
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