There are a number of personal tax changes relating to employment and retirement, that were announced by Finance Minister Tito Mboweni (the Minister) in the National Budget Speech in February.
Employers and employees alike should take note of important new changes with regard to personal income tax brackets, long service awards as a fringe benefit, employment tax incentive abuse, and changes to the tax treatment of retirement funds.
Personal income tax
One of the main proposals for the 2021/22 fiscal year is the 5% increase in personal income tax brackets and rebates, which is notably higher than inflation. According to the Minister, this proposal will provide ZAR 2.2 billion in tax relief by ensuring that inflation does not automatically increase the individual tax burden, targeting mostly lower and middle-income households. In other words, if a person earns above the new tax-free threshold of ZAR 87 300, such person will have an additional ZAR 756 in pocket after 1 March 2021. Of course, this adjustment will decrease tax revenue by ZAR 2.2 billion, which, the Minister reasoned, will be offset by a corresponding increase in excise duties on tobacco and alcohol.
In addition, the 2021 Budget includes the following policy proposals in relation to individuals, employment and savings:
Nature of long-service awards for fringe benefit purposes to be reviewed
An employer is currently allowed to treat a long-service award to an employee (in cash or in the form of an asset) to the value of ZAR 5,000 as a no value fringe benefit. However, employers recognise long service through awards in various forms that could be considered non-cash benefits in terms of the Income Tax Act, and it is proposed that the current provisions of the Act be reviewed to consider other awards, within the same limit, granted to employees as long-service awards.
Abuse in the employment tax incentive to be curbed
The employment tax incentive (ETI) is aimed at reducing the cost of hiring youth between the ages of 18 and 29 years, allowing employers to reduce their pay-as-you-earn (PAYE) liability to SARS for the first two years in which they employ qualifying employees, with a monthly remuneration of ZAR 6,500 or less. Some taxpayers use training institutions to claim the ETI for students who in fact never work for the employer. To curb the abuse, the definition of an "employee" will be changed in the Employment Tax Incentive Act to specify that work must be performed in terms of an employment contract that adheres to record-keeping provisions, in accordance with the Basic Conditions of Employment Act. This amendment will take effect on 1 March 2021.
The 2021 Budget also proposes the following changes in relation to the retirement provisions.
Allowing members to use retirement interest to acquire annuity on retirement
To increase flexibility for a retiring member, who may receive an annuity on retirement, which is to be provided with the balance of the member's retirement interest following commutation, it is proposed that the amount of retirement interest that may be used to acquire annuities be expanded. Currently, the retirement fund can provide the annuity by paying it directly to the member, or purchasing it from a South African registered insurer in the name of the fund, or in the name of the retiring member. If a member opts to receive an annuity, the full value of their retirement interest following commutation must be used to provide either of the abovementioned annuities.
Applying tax on withdrawals of retirement interest when an individual ceases to be a tax resident
Retirement funds are not always subject to withdrawal tax under the Income Tax Act when an individual ceases to be a South African tax resident. When an individual ceases to be a South African tax resident, but retains his/her investment in a South African retirement fund, and only withdraws from the retirement fund when he/she dies or retires, the amount is deemed to be from a South African source and thus taxable in South Africa, despite the individual no longer being a South African tax resident.
When the individual ceases to be a South African tax resident before he/she retires and becomes a tax resident of another country and that individual withdraws from the retirement fund due to the application of the tax treaty between South Africa and the resident country, the retirement fund interest will be subject to tax in the resident country thus resulting in South Africa forfeiting its taxing rights. To address this anomaly, it is proposed that the legislation be changed as follows:
When the individual ceases to be a South African tax resident, the retirement fund interest will form part of the assets that are subject to retirement withdrawal tax. The individual will be deemed to have withdrawn from the fund on the day before he/she ceases to be a South African tax resident.
If the individual ceases to be a South African tax resident but leaves his/her investment in a South African retirement fund and only withdraws from the retirement fund when he/she dies or retires from employment, then the retirement withdrawal tax (including associated interest) payment will be deferred until payments are received from the retirement fund or as a result of retirement. When the individual eventually receives payments from the fund, the tax will be calculated based on the prevailing lump sum tables or in the form of an annuity. A tax credit will be provided for the deemed retirement withdrawal tax as calculated when the individual ceased to be a South African tax resident.
Transfers between retirement funds by members who are 55 years or older
In terms of the Income Tax Act, any transfer by a member of a pension, provident or retirement annuity fund, who has opted for early retirement, into a similar fund is considered a taxable transfer. The policy in this regard is not intended to tax transfers from a less to a more restrictive fund or between similar funds and as such it is proposed that this anomaly be addressed by allowing transfers into more or similarly restrictive funds by members who have already opted to retire to be tax free.
Clarifying the calculation of the fringe benefit in relation to employer contributions to a retirement fund
Currently (effective 1 March 2016) all employer contributions to a retirement fund on behalf of employees are considered taxable fringe benefits in the hands of the employees. If the contribution contains a defined benefit component, the fringe benefit is calculated as prescribed in the Seventh Schedule to the Income Tax Act and the employer must provide the employee with a contribution certificate. An anomaly arises in instances where a retirement fund provides both a retirement benefit in relation to the defined contribution component and a self-insured risk benefit. The current interpretation of the legislation results in the classification of the total contribution to the fund as a defined benefit component, because self-insured risk benefits are not considered a defined contribution component. It is therefore proposed that self-insured risk benefits be classified as a defined contribution component to ensure that retirement funds that provide both defined contribution component retirement benefits and self-insured risk benefits can provide the fringe benefit value based on the actual contribution.
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