Tax Reforms: complexities still need to be addressed

Craig Aitchison, MD of OMAC Actuaries & Consultants

The Finance minister confirmed that government intends reforming the taxation of retirement funds, with the aim of simplifying the system. The proposals are summarized as:

According to Craig Aitchison, MD of OMAC Actuaries & Consultants, contributions funding administrative costs and risk benefits are included in the above amounts. “There will be some flexibility on claiming deductions to allow for contributions on fluctuating incomes. The complexities of implementing this system with defined benefit funds still need to be addressed,” he says.

The targeted date for implementation is 1 March 2014.

Dividends Tax: Slight increase in investment related income

According to Aitchison, currently companies pay a tax of 10% on dividends they declare (Secondary Tax on Companies), however this tax will be abolished and dividends will be taxed in the hands of those who receive the dividend. “The new dividend withholding tax rate is proposed to be 15%, which is higher than the expected rate of 10%. Retirement funds are exempt from Dividends Tax, and so should expect a slight increase in investment related income.”

Aitchison says a rough calculation assuming a retirement fund with 60% of its assets invested in dividend earning equity, and a average dividend yield of 3% would result in a increased investment return of 0.18%, assuming companies did not change the level of dividends they declared.

The new dividend withholding tax will come into effect on 1 April 2012.

Retirement Reform: Greater clarity for members

“The Minister seemed to confirm government’s commitment to progressing retirement reforms, with a green paper due to be released for comment in April. This is good news as it should give greater clarity to members and funds about what impact the intended reforms will have on them,” says Aitchison.

Aitchison says the government seeks to encourage higher savings, better retirement provision and reform the social security system.

He says key reform proposals seem unchanged and include:

- A national social security fund which provides a range of social benefits, including retirement and risk benefits

- Compulsory preservation and portability of retirement savings. The 30% limit on lump sum benefits at retirement for pension funds and retirement annuity funds is noted and could form the basis for a similar arrangement on withdrawal.

- Consolidation of social security arrangements and institutions

- Encouragement for high income earners to contribute to approved supplementary and insurance plans, over and above their national social security fund contributions