Important amendments to retirement funds come into effect from 1 March 2015, in preparation for the 2016 tax year. But what exactly are these amendments and how do they affect current savings arrangements?
“The South African government encourages employees to prepare for retirement by offering tax incentives when saving for this purpose, therefore reducing both financial dependence and vulnerability in old age”
Nevertheless, approaching retirement often presents a number of daunting questions. What will I do with all my free time? What will my position in society be? Will I be able to afford the same lifestyle I currently enjoy? Changes to how retirement funds are worked out may have an impact on your future, but how are these changes worked out?
As illustrated in the table, different rules apply to the amount of contributions deducted from different funds. And this may not produce an equitable result. To ensure there is a better balance a more consistent method was introduced regardless of the type of retirement fund.
Amendment effective from 01 March 2015 (for the 2016 tax year) The amount of income tax deducted will be the same for all retirement fund contributions.
This will be limited to:
• the lesser of R350,000 or 27.5% of the higher of
• Remuneration (excluding lump sums); or
• Taxable income (excluding lump sums) before this deduction.
Excess contributions may be carried forward to the following year of assessment where they may rank for deduction.
Employer contributions will be included as a fringe benefit in the taxable income of the employee and will be deemed to have been made by the employee for the purpose of determining the deduction for income tax purposes.
The above contribution limits will include the risk benefit and administration cost component of the contributions.
What does it all mean?
Remuneration is comprised of your income earned from employment (albeit salary, commission, bonus, fee etc), 80% of your travelling allowance, 80% of your company car fringe benefit plus all other taxable allowances and fringe benefits.
Taxable income is comprised of your income after exemptions and allowable deductions.
Deduction for employer contributions to retirement annuity, pension or provident funds This will be determined in accordance with section 11(l) of the Income Tax Act. This stipulates that any contribution made by an employer to an approved South African retirement fund will be deductible if it is for the benefit of any employee or former employee or for the dependent or nominee of a deceased employee or former employee
However, any contributions effected by an employer will be taxed as a fringe benefit of the member. The value of the fringe benefit will be dependent on whether the contributions are made to a defined benefit fund (a fund where the benefits are not based on the members contributions over the years, but are mostly determined by the final salary at retirement, the years of service and an accrual rate) or a defined contribution fund (a fund where the contribution can be directly linked to the benefit).
i. Defined contribution fund – the cash value of the contribution will represent the amount of the taxable fringe benefit.
ii. Defined benefit fund – the value of the fringe benefit will be determined by the use of a formula.
The case of Ms Jinx
Ms Jinx is a member of a provident fund. Her total cost to company is R276,000 which is comprised of a salary of R180,000, a travelling allowance of R60,000 and her employer provident fund contributions of R36,000. Her remuneration is R264,000 (R180,000 plus R60,000 x 80% plus the employer contributions of R36,000 which must be brought into her taxable income as a fringe benefit). Ms Jinx effects no employee contributions to the provident fund.
In addition she earns rental income. Her net rental profit for the year was R64,000. She pays R6,400 independently into a retirement annuity find. If we apply a traveling deduction of R50,000 it results in a taxable income of R290,000 before considering any deduction for her retirement fund contributions.
Ms Jinx’s deduction will be limited to
• the lesser of R350,000 or 27.5% of the higher of
• Remuneration R264,000 x 27.5% = R72,600 or
• Taxable income before this deduction R290,000 x 27.5% = R79,750.
Accordingly her full contributions of R42,400 (R36,000 plus R6,400) will be deductible for income tax purposes
Contributed by Vicky Taylor from
Posse Management
Important amendments to retirement funds come into effect from 1 March 2015, in preparation for the 2016 tax year. But what exactly are these amendments and how do they affect current savings arrangements?
“The South African government encourages employees to prepare for retirement by offering tax incentives when saving for this purpose, therefore reducing both financial dependence and vulnerability in old age”
Nevertheless, approaching retirement often presents a number of daunting questions. What will I do with all my free time? What will my position in society be? Will I be able to afford the same lifestyle I currently enjoy? Changes to how retirement funds are worked out may have an impact on your future, but how are these changes worked out?
As illustrated in the table, different rules apply to the amount of contributions deducted from different funds. And this may not produce an equitable result. To ensure there is a better balance a more consistent method was introduced regardless of the type of retirement fund.
Amendment effective from 01 March 2015 (for the 2016 tax year) The amount of income tax deducted will be the same for all retirement fund contributions.
This will be limited to:
• the lesser of R350,000 or 27.5% of the higher of
• Remuneration (excluding lump sums); or
• Taxable income (excluding lump sums) before this deduction.
Excess contributions may be carried forward to the following year of assessment where they may rank for deduction.
Employer contributions will be included as a fringe benefit in the taxable income of the employee and will be deemed to have been made by the employee for the purpose of determining the deduction for income tax purposes.
The above contribution limits will include the risk benefit and administration cost component of the contributions.
What does it all mean?
Remuneration is comprised of your income earned from employment (albeit salary, commission, bonus, fee etc), 80% of your travelling allowance, 80% of your company car fringe benefit plus all other taxable allowances and fringe benefits.
Taxable income is comprised of your income after exemptions and allowable deductions.
Deduction for employer contributions to retirement annuity, pension or provident funds This will be determined in accordance with section 11(l) of the Income Tax Act. This stipulates that any contribution made by an employer to an approved South African retirement fund will be deductible if it is for the benefit of any employee or former employee or for the dependent or nominee of a deceased employee or former employee
However, any contributions effected by an employer will be taxed as a fringe benefit of the member. The value of the fringe benefit will be dependent on whether the contributions are made to a defined benefit fund (a fund where the benefits are not based on the members contributions over the years, but are mostly determined by the final salary at retirement, the years of service and an accrual rate) or a defined contribution fund (a fund where the contribution can be directly linked to the benefit).
i. Defined contribution fund – the cash value of the contribution will represent the amount of the taxable fringe benefit.
ii. Defined benefit fund – the value of the fringe benefit will be determined by the use of a formula.
The case of Ms Jinx
Ms Jinx is a member of a provident fund. Her total cost to company is R276,000 which is comprised of a salary of R180,000, a travelling allowance of R60,000 and her employer provident fund contributions of R36,000. Her remuneration is R264,000 (R180,000 plus R60,000 x 80% plus the employer contributions of R36,000 which must be brought into her taxable income as a fringe benefit). Ms Jinx effects no employee contributions to the provident fund.
In addition she earns rental income. Her net rental profit for the year was R64,000. She pays R6,400 independently into a retirement annuity find. If we apply a traveling deduction of R50,000 it results in a taxable income of R290,000 before considering any deduction for her retirement fund contributions.
Ms Jinx’s deduction will be limited to
• the lesser of R350,000 or 27.5% of the higher of
• Remuneration R264,000 x 27.5% = R72,600 or
• Taxable income before this deduction R290,000 x 27.5% = R79,750.
Accordingly her full contributions of R42,400 (R36,000 plus R6,400) will be deductible for income tax purposes
Contributed by Vicky Taylor from
Posse Management
