Changes to retirement contribution regime will hit the wealthy hard
As South Africa plods along the road to a fully-fledged welfare state the rich have nowhere to hide. Finance minister Pravin Gordhan made sure, during his 23 February 2011 Budget Speech, that big earners would contribute a bit more to the fiscus. Apart from relying heavily on the traditional “bracket creep” technique, to push higher earners further up the marginal income tax rate ladder, he revised the treatment of employer retirement contributions.
With effect from March 2012, employer contributions towards an employee’s retirement funding will be treated as a taxable fringe benefit. You will still be able to “deduct” up to 22.5% of your taxable income for your and your employers’ contributions to pension, provident and retirement annuity funds – provided you earn less than R888, 000 per annum. That’s because the employer contribution will now be viewed as part of your remuneration, AND the deduction limit set at a minimum of R12 000 and a maximum of R200 000 per year. “At first glance, a deduction of R200 000 sounds significant, but is it really beneficial to all taxpayers?” asks Andrea Brickett, Senior Tax Consultant for Deloitte, Port Elizabeth. She investigates further...
The before and after of retirement contributions...
To get a better understanding of the situation, let’s consider the tax treatment in the 2010/11 tax year. “Currently, provident fund contributions made by an employer to a non-contributory fund are not taxable in the employee’s hands and such contributions are normally made on a salary sacrifice basis,” observes Brickett. “The employee normally also contributes directly to a pension fund and such pension fund contributions can be claimed as a deduction limited to 7.5% of his/her taxable income.” And – you can claim further deductions for contributions to retirement annuity funds… In 2010/11 SARS allowed taxpayers to deduct 15% of their non-retirement funding employment income, R3 500 less pension fund contributions or R1 750, whichever the greater. This structure was of particular benefit to self-employed individuals.
Under these conditions a popular employee benefit structure was for employers to contribute 15% to a non-contributory provident fund, with the employee contributing 7.5% to a pension fund – making the 22.5% limit referred to in the budget. The new legislation could force a rethink.
Brickett comments: “Under the proposed legislation, the contributions made by the employer to the non-contributory provident fund will be included in the employee’s taxable income as a taxable fringe benefit and will be taxed in full. A deduction of up to 22.5% of the employee’s taxable income can be claimed in respect of contributions to pension, provident and retirement annuity funds – BUT this deduction is now limited to R200 000!”
A tough break for high flyers!
Brickett illustrates the impact of Gordhan’s decision on corporate high flyers with the following example. If you earn R1.5 million per annum then the limit (set at R200 000) is going to make a difference to your take-home pay. Let’s say your employer contributes 15% (R195 652) of your retirement-funding employment income to a provident fund and you contribute 7.5% (R97 826) to a pension fund. The taxable income under the proposed legislation is significantly higher than that under the current legislation and although a total contribution of 22.5% (7.5% to the pension fund, 15% to the provident fund) of your earnings is being made, you cannot “claim” the full R285 326 contributed as a deduction! In fact – once the dust has settled your taxable income would come in at R1.3 million (under the new legislation) versus R1.206 million under the old. And that makes quite a difference in the tax bill – around R37 600 at the top marginal rate!
“This proposal will have a negative tax effect on the higher income earning individuals and goes against the idea of promoting saving for retirement”, says Brickett. Cobus Strydom, Head of Consulting: Absa Consultants and Actuaries, agrees: “The proposed R200 000 upper deduction limit in respect of retirement fund contributions may have a severe and adverse effect on high-income earners. Specifically, it will limit those earning more than R888 000 per annum from utilising the full 22.5% of their salary as a tax deduction.” Lower income earners will be less affected – and there is a suggestion they will benefit from the R12 000 minimum even if their total contributions are less than that amount.
Small changes with limited impact
There were a couple of smaller tweaks to the retirement and savings environment. Gordhan announced the tax-free lump sum benefit upon retirement would be increased from R300 000 to R315 000. And Hendrik Van Deventer, Manager for Tax at Ernst & Young observes: “In a continued attempt to stimulate savings, the Minister announced an increase in the interest and foreign dividend exemption from R22 300 to R22 800 for under 65s – and from R32 000 to R33 000 for persons over the age of 65.” This concession, combined with the slightly higher threshold for paying income tax and higher rebates for over 65s, means a pensioner can earn R93 150 without paying any tax. Additional tax relief for over 75s was also announced.
Editor’s thoughts: In the past financial advisers have urged their clients to take advantage of SARS’ retirement funding concessions. Will the abovementioned retirement taxation changes have a significant impact on how you “sell” retirement annuities?Add your comment below, or send it to [email protected]
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