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Income tax does not compel fund membership

27 June 2016 Muvhango Lukhaimane, Pension Funds Adjudicator
Muvhango Lukhaimane, Pension Funds Adjudicator.

Muvhango Lukhaimane, Pension Funds Adjudicator.

It is not true that the Income Tax Act compels all employees to be members of a fund which the employer contributes into, the Pension Funds Adjudicator has ruled.

Muvhango Lukhaimane said the Income Tax Act only regulates the treatment of contributions and benefits once a person joins such a fund.

Ms Lukhaimane was commenting following a complaint brought by TM Ramodula against the Free State Municipal Provident Fund (first respondent), Alexander Forbes Financial Services (Pty) Ltd (second respondent) and Mangaung Metro Municipality (third respondent).

The complainant was employed with the third respondent from August 2012. He voluntarily became a member of the first respondent on 1 January 2015.

On 4 September 2015, he requested a benefit statement from the third respondent. The benefit statement reflected his provident fund contributions in the amount of R6 060 instead of an amount of R7 575 as reflected on his pay slip.

The complainant further submitted that his provident fund contributions for January 2015, did not appear on the benefit statement. However, he was advised by the third respondent that provident fund contributions for January 2015 were paid.

The complainant said he was advised that he could not withdraw his membership while he remained in service. He submitted he had not received any policy documents confirming that his membership of the first respondent was a condition of employment and, therefore, compulsory.

The first respondent submitted that both employee and employer contributions were payable to the first respondent. The complainant contributed an amount of R1 515.06 and the third respondent contributed an amount of R6 060.22. The total monthly contributions received by the first respondent in respect of the complainant was an amount of R7 575.28.

However, certain deductions were made from the third respondent’s contributions. These included risk benefits, insurance, administration and consulting fees, ad hoc fees and funeral insurance.

The remainder of the third respondent’s contribution together with the complainant’s contributions were allocated and used towards the complainant’s retirement funding.

The first respondent further asserted that the complainant joined as its member on 1 January 2015. An administrative error occurred which led to contribution for January 2015 not being allocated to the complainant’s record. This has since been rectified.

It attached a copy of the complainant’s amended benefit statement in support of its submissions.

The first respondent further submitted that membership of the first respondent was compulsory since the conditions of employment required him to be a member of the fund in which his employer participated.

Therefore, since membership of the first respondent was a condition of employment and the complainant remained in service of the third respondent, he could not exit the former, the first respondent said.

The third respondent submitted that hard copies of benefit statements were distributed to members of the first respondent. Further, the complainant was remunerated on a total cost to company basis, which has the effect that the total provident fund contribution deduction to the first respondent is effected from his remuneration package.

The third respondent used the same payroll system for all employees, hence, the contributions for all employees were shown as “employer contribution” and “employee contribution”. It submitted that employee contributions were 4.5% and employer contributions were 18.0% of pensionable salary.

The third respondent submitted that compulsory employee membership arose from the definition of pension fund and provident fund in the Income Tax Act 58 of 1962. This is a requirement of the South African Revenue Services (“SARS”). Further, that while a member remains in service, he is not allowed to withdraw from membership.

In her determination, Ms Lukhaimane said the complainant’s conditions of employment provided that he may elect to become a member of the first respondent from the date on which he commenced employment. According to his contract of employment, membership of the first respondent was not compulsory.

“The facts in this matter indicate that the complainant’s contract of employment does not make it compulsory for him to join the first respondent as this is not set as a condition of his service.

“The third respondent is also misguided in its assertion that the Income Tax Act makes it compulsory for all employees to be members of a fund the employer contributes in.

“The Income Tax Act only regulates the treatment of contributions and benefits to and from a retirement fund once a person who qualifies to be a member of a retirement fund joins such a retirement fund.

“In the complainant’s instance, he is not compelled by his conditions of service to become a member of the first respondent. In addition to this, the complainant is remunerated on a total cost to employer basis.

“This meant that all the contributions made to the first respondent, were made by him and none can be attributed to the third respondent.

“The third respondent has so much as admitted that the only reason that the complainant’s contributions are classified into employer and member contributions is owing to the fact that the complainant’s remuneration aspects are managed on the same payroll system as that of its employees that are compelled to be members of the first respondent.

“Therefore, for administrative purposes of the payroll system, the third respondent has taken upon itself to regard a certain portion of the complainant’s remuneration package as employer contributions which is manifestly unlawful.”

Ms Lukhaimane said it was a practice of local authorities to appoint skilled individuals to specific positions on a contract basis normally spanning a period of up to five years.

These individuals enter into an employment contract with the local authorities which is based on a cost to employer package.

“As in the instance of the complainant, it was not a requirement for the third respondent to contribute to his retirement benefit. The first respondent’s Rules exclude part-time employees or employees appointed for a limited period from membership.

“It is the responsibility of the third respondent to ensure that its employees are well informed about their participation in a fund that would accommodate their remuneration structure and employment conditions.

“It is further the responsibility of the local authorities to ensure that employees appointed on a contract basis are provided with the appropriate fund in which their contributions will be invested for their benefit thereby, avoiding financial prejudice associated with defined benefit funds where membership is for a limited period of time.

“The third respondent must take the necessary precaution to ensure that its employees join a fund that is in line with their employment contracts.”

Ms Lukhaimane ordered the third respondent to refund the complainant the total amount of all the contributions made on his behalf; i.e. both deemed employer and employee/member contributions.

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