Practice Note: Implementation of Retirement Reform Changes

Implementation of Retirement Reform Changes December 2015 | PN No. 28

A decision was made last week by the National Assembly in Parliament not to postpone the introduction of certain retirement reform provisions any further. The Taxation Laws Amendment Bill 2015 was passed by the National Council of Provinces on 1 December 2015 and sent to the President for signature. The implementation of these changes will take effect 1 March 2016.

Changes to be implemented on 1 March 2016:

Uniform Tax Deductions for All Retirement Fund Members
Members of all retirement funds (i.e. pension funds, provident funds and retirement annuity funds) will be entitled to a single tax deduction for the total contributions made to retirement funds.

Contributions made to all retirement funds by employers on behalf of members will be taxed as a fringe benefit in the hands of the member. However, both member and employer contributions will be regarded as the member’s contributions and will therefore be eligible for deduction. Previously, only member contributions were taken into account for the member’s deduction where employers contributed to pension funds and provident funds, and the employers’ contributions were not regarded as a fringe benefit (within certain limits). Employers’ contributions to retirement annuity funds on employees’ behalf are however already taxed as fringe benefits.

The maximum deduction members will be entitled to for contributions to all retirement funds (employee contributions plus employer contributions) is 27.5% of the greater of remuneration or taxable income, capped at R350 000 a year.

All contributions exceeding the abovementioned percentage and monetary limits will be carried over to the following year of assessment and may be eligible for deductions in that year, subject once again to the abovementioned limits. At retirement, any contributions that have not been deducted previously may be set off against any lump sum taken at retirement, or compulsory annuity incomes.

Compulsory Annuity Requirement for Provident Fund Members
Currently there is no requirement for provident fund (or provident preservation fund) members to purchase an annuity when retiring from that fund. The full value of the fund may be taken as lump sum at retirement, subject to tax.

There will be alignment to the restrictions currently applicable to pension funds (and pension preservation funds) and retirement annuity funds at retirement. Any lump sum requested from a provident fund at retirement will therefore be limited to a maximum of 1/3 of the fund value, with the balance being used to purchase a compulsory annuity, unless the value falls below the de minimus amount (see below).

Certain exemptions will however apply: