LEGAL UPDATE ISSUE 06

Budget Speech: 2012

False job terminations
False job terminations take place where employees withdraw from their retirement fund without actually resigning from their employer purely to gain access to the funds. Employees cannot withdraw their funds from their employer’s retirement scheme before retirement unless that employee terminates employment with that employer. Funds that are found guilty of such a practice will cause SARS to withdraw their tax approval.

Taxation of retirement contributions
The following amendments will be implemented as from 1 March 2014:
• Both employer and employee contributions to pension, provident and retirement funds will be tax-deductible by individuals (employer contribution will be treated and taxed as a fringe benefit).
• Individual deductions of 22.5% for those below 45 years and 27.5% for 45 years and above, of the higher of cost of employment or taxable income (as was recommended last year) will be allowed.
• Annual deductions will be limited to R250 000 for taxpayers below 45 years and R300 000 for those above 45 years Budget Speech: 2012 Executive Summary
• Confirmation that false job terminations, where employees withdraw from their retirement fund purely to gain access to the funds, is not permitted.
• As from 1 March 2014 both employer and employee contributions to pension, provident and retirement funds will be deductible by individual employees, with different levels of deduction for individuals below / over 45 years of age (see detail below).
• Retirement funds exempted from dividend withholding tax.
FINANCIAL SERVICES (PTY) LTD (up from R200 000 proposed last year).
• Non-deductible contributions (in excess of these thresholds) will be exempt from income tax if they are taken as part of the lump sum or as annuity income at actual future retirement.

It was also indicated that a “roll-over dispensation” will be followed for those individuals with fluctuating income (similar to retirement annuities), e.g. if the full 22.5% is not utilised in any given tax year, then the “additional capacity” can be used in the next tax year.

Taxation of retirement benefits
The tax tables applicable to the taxation of lump sum withdrawal and retirement benefits have been left unchanged.

The secondary tax on companies will however no longer apply as from 31 March 2012 and a withholding tax on dividends will be implemented on 1 April 2012. This will align South Africa’s tax treatment of dividends with that of most other countries. Pension funds will benefit from this transition as they are exempt from the dividend withholding tax. The dividend withholding tax will be introduced at 15%, which is 50% higher than the 10% that was initially expected.

Other matters currently under review
The following matters are under review and further details will follow:
• Taking up to one third of retirement funds in cash at retirement continues to apply to pension and retirement annuity funds (not provident funds). It has been indicated that accrued benefits will not be influenced.
• Non-preservation of benefits, i.e. “leakage” from funds (this has been identified as a major area of concern).
• Anomalies that exist with 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 nonresident receives the payout) to be addressed.
• The introduction of a national fund for domestic workers and farm workers by the Department of Labour.
• The possible introduction of tax exempt short term savings products

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