HR departments in South Africa are going to have a busy start to 2016 in terms of their South African payrolls. In the second installment of her two-parter on the retirement reforms in South Africa, to be implemented this March, Sharon Tayfield continues with her summary of the expected changes and looks at some typical scenarios.
In the first article, Sharon dealt with the limit on the amount which can be taken as a cash lump sum on retirement from provident funds.
The limit below which a full cash benefit is allowed
When the legislation was first tabled the limit which was tabled for the ‘de minimis threshold’ was R150,000. This has now been increased to R247,500. This means that members of provident funds who have less than R247,500 in their ‘annuity bucket’ will be able to take the full benefit in cash. (Remember that the ‘annuity bucket’ consists of all contributions made to the fund after 1 March 2016 plus ‘investment’ returns on those contributions).
This benefit of a ‘cash’ payment is also being allowed for pension fund and retirement annuity members and, whilst currently the limit is set at R75,000, this will change to R247,500 with effect from 1 March 2016. This will have the effect of allowing members with very small fund values not be forced to purchase an annuity, where the monthly income from the annuity may be very small in comparison to the costs associated with the annuity.
Again, there is no direct impact on payroll. Employees should be briefed to ensure they understand the changes and where funds which have the current R75,000 de minimis limit specified in their rules, these rules should be amended to the new limit. It may be helpful to include wording to align the limit to follow legislation and thus alleviate the need to constantly update the rules of the fund.
Tax deductibility of contributions All individual taxpayers who contribute towards a retirement fund, whether that is a pension, provident or retirement annuity fund will, from 1 March 2016, qualify for a deduction from taxable income of up to 27.5 per cent of the greater of taxable income or remuneration, up a maximum annual limit of R 350,0000. It is important to note that this is a combined contribution of employer and employee contributions.
Currently employees’ contributions to provident funds do not qualify for a tax deduction whilst employees’ contributions to pension funds are limited to the greater of 7.5 per cent of ‘fund salary’ or R1,750.
Retirement annuity fund members currently receive a tax deduction, to a maximum of the greater of 15 per cent of non-retirement funding income or R3,500 less deductions to a pension fund or R1, 750.
The change in legislation from 1 March 2016 seeks to create an alignment of the way in which contributions are dealt with from a tax perspective.
A further significant change is that contributions made by the employer will be deemed to have been made by the employee. (The employer contribution will be added to the taxable income of the employee.)
The new percentage rate of 27.5 per cent might at first appear to be a substantial increase, but when taking the deeming provision into account, it may not be that substantial an increase for some employees. Any contributions which do not qualify for a deduction in one year can be carried over to subsequent years, and/or added to the member’s tax free portion on retirement.
With contributions now being tax deductible up to 27.5 per cent, some members will be able to make higher contributions to their funds, on a tax efficient basis, provided the rules of the employers fund makes provision for such contributions. Employers should be exploring these options with their employees.
Examples
Jane is a member of a Provident Fund and assume Jane is younger than 55 years. Her total remuneration (cost to company) is R300,000, including a basic salary of R180,000
Pursuant to the fund’s rules:
Employer’s contribution = 20 per cent of Jane’s basic salary
Jane’s contribution = 5 per cent of basic salary
Employer contributes R36,000 p.a. (R3,000 per month) to the fund on behalf of Jane
Jane contributes R9,000 (R750 per month) to the fund.
|
Results Provident Fund |
Tax year ending Feb 2016 (current legislation) |
Tax year ending Feb 2017 (new legislation) |
|
Employer contribution taxed as a fringe benefit |
Not applicable = zero |
R 36,000 |
|
Jane’s 11(k) deduction : 2017 tax year end Total contributions = (R36,000+ R9,000)= R45,000 but limited to: 27.5 per cent of R 300,000 = R82,500 Therefore Jane is entitled to a full deduction of R45,000 |
Not applicable = zero |
R 45,000 |
Pension Fund
Using the same scenario as above but the fund is a pension fund in this example.
|
Results Pension fund |
Tax year ending Feb 2016 (current legislation) |
Tax year ending Feb 2017 (new legislation) |
|
Employer contribution taxed as a fringe benefit |
Not applicable = zero |
R 36,000
|
|
Jane’s 11(k) deduction: 2016 tax year end Total employee contributions = R9,000 but limited to: 7 per cent of fund salary R180,000 = R12, 600 Therefore Jane is entitled to a full deduction of R9,000 Jane’s 11(k) deduction: 2017 tax year end Total contributions = (R36,000+ R9,000)= R45,000 but limited to: 27.5 per cent of R 300,000 = R82,500 Therefore Jane is entitled to a full deduction of R45,000 |
R 9,000 |
R 45,000 |
So, after a long wait the reforms finally have an implementation date. The delay in implementation has created many doubts in the minds of employees and it is critical that employers ensure that the legislation is clearly communicated to their employees.
Employers will need to be aware of these changes and the impact they will have on take home salary of employees. For employees who currently contribute towards a provident fund, they should generally see an improvement in their ‘net pay’ but for high income earners contributing towards pension funds they may find that they have reached the maximum threshold, and will therefore see a reduction in their net pay. The examples below may be helpful in explaining the concepts to employees.
Sharon Tayfield is a senior manager, with extensive experience in global outsourcing and a special interest in payroll. She has undertaken senior management roles at a range of multinational companies, including a wholly-owned subsidiary of Anglo America where she was financial director. Prior to her current role, Sharon was chief operating officer for a payroll service company specialising in outsourced services to Africa and the UK.
HR departments in South Africa are going to have a busy start to 2016 in terms of their South African payrolls. In the second installment of her two-parter on the retirement reforms in South Africa, to be implemented this March, Sharon Tayfield continues with her summary of the expected changes and looks at some typical scenarios.
In the first article, Sharon dealt with the limit on the amount which can be taken as a cash lump sum on retirement from provident funds.
The limit below which a full cash benefit is allowed
When the legislation was first tabled the limit which was tabled for the ‘de minimis threshold’ was R150,000. This has now been increased to R247,500. This means that members of provident funds who have less than R247,500 in their ‘annuity bucket’ will be able to take the full benefit in cash. (Remember that the ‘annuity bucket’ consists of all contributions made to the fund after 1 March 2016 plus ‘investment’ returns on those contributions).
This benefit of a ‘cash’ payment is also being allowed for pension fund and retirement annuity members and, whilst currently the limit is set at R75,000, this will change to R247,500 with effect from 1 March 2016. This will have the effect of allowing members with very small fund values not be forced to purchase an annuity, where the monthly income from the annuity may be very small in comparison to the costs associated with the annuity.
Again, there is no direct impact on payroll. Employees should be briefed to ensure they understand the changes and where funds which have the current R75,000 de minimis limit specified in their rules, these rules should be amended to the new limit. It may be helpful to include wording to align the limit to follow legislation and thus alleviate the need to constantly update the rules of the fund.
Tax deductibility of contributions All individual taxpayers who contribute towards a retirement fund, whether that is a pension, provident or retirement annuity fund will, from 1 March 2016, qualify for a deduction from taxable income of up to 27.5 per cent of the greater of taxable income or remuneration, up a maximum annual limit of R 350,0000. It is important to note that this is a combined contribution of employer and employee contributions.
Currently employees’ contributions to provident funds do not qualify for a tax deduction whilst employees’ contributions to pension funds are limited to the greater of 7.5 per cent of ‘fund salary’ or R1,750.
Retirement annuity fund members currently receive a tax deduction, to a maximum of the greater of 15 per cent of non-retirement funding income or R3,500 less deductions to a pension fund or R1, 750.
The change in legislation from 1 March 2016 seeks to create an alignment of the way in which contributions are dealt with from a tax perspective.
A further significant change is that contributions made by the employer will be deemed to have been made by the employee. (The employer contribution will be added to the taxable income of the employee.)
The new percentage rate of 27.5 per cent might at first appear to be a substantial increase, but when taking the deeming provision into account, it may not be that substantial an increase for some employees. Any contributions which do not qualify for a deduction in one year can be carried over to subsequent years, and/or added to the member’s tax free portion on retirement.
With contributions now being tax deductible up to 27.5 per cent, some members will be able to make higher contributions to their funds, on a tax efficient basis, provided the rules of the employers fund makes provision for such contributions. Employers should be exploring these options with their employees.
Examples
Jane is a member of a Provident Fund and assume Jane is younger than 55 years. Her total remuneration (cost to company) is R300,000, including a basic salary of R180,000
Pursuant to the fund’s rules:
Employer’s contribution = 20 per cent of Jane’s basic salary
Jane’s contribution = 5 per cent of basic salary
Employer contributes R36,000 p.a. (R3,000 per month) to the fund on behalf of Jane
Jane contributes R9,000 (R750 per month) to the fund.
|
Results Provident Fund |
Tax year ending Feb 2016 (current legislation) |
Tax year ending Feb 2017 (new legislation) |
|
Employer contribution taxed as a fringe benefit |
Not applicable = zero |
R 36,000 |
|
Jane’s 11(k) deduction : 2017 tax year end Total contributions = (R36,000+ R9,000)= R45,000 but limited to: 27.5 per cent of R 300,000 = R82,500 Therefore Jane is entitled to a full deduction of R45,000 |
Not applicable = zero |
R 45,000 |
Pension Fund
Using the same scenario as above but the fund is a pension fund in this example.
|
Results Pension fund |
Tax year ending Feb 2016 (current legislation) |
Tax year ending Feb 2017 (new legislation) |
|
Employer contribution taxed as a fringe benefit |
Not applicable = zero |
R 36,000
|
|
Jane’s 11(k) deduction: 2016 tax year end Total employee contributions = R9,000 but limited to: 7 per cent of fund salary R180,000 = R12, 600 Therefore Jane is entitled to a full deduction of R9,000 Jane’s 11(k) deduction: 2017 tax year end Total contributions = (R36,000+ R9,000)= R45,000 but limited to: 27.5 per cent of R 300,000 = R82,500 Therefore Jane is entitled to a full deduction of R45,000 |
R 9,000 |
R 45,000 |
So, after a long wait the reforms finally have an implementation date. The delay in implementation has created many doubts in the minds of employees and it is critical that employers ensure that the legislation is clearly communicated to their employees.
Employers will need to be aware of these changes and the impact they will have on take home salary of employees. For employees who currently contribute towards a provident fund, they should generally see an improvement in their ‘net pay’ but for high income earners contributing towards pension funds they may find that they have reached the maximum threshold, and will therefore see a reduction in their net pay. The examples below may be helpful in explaining the concepts to employees.
Sharon Tayfield is a senior manager, with extensive experience in global outsourcing and a special interest in payroll. She has undertaken senior management roles at a range of multinational companies, including a wholly-owned subsidiary of Anglo America where she was financial director. Prior to her current role, Sharon was chief operating officer for a payroll service company specialising in outsourced services to Africa and the UK.
