National Treasury and the South African Revenue Service (Sars) have published, for public comment, the draft bills and regulations that will give effect to the tax proposals announced in the 2023 Budget.
The 2023 draft Taxation Laws Amendment Bill includes two amendments that will affect certain members of retirement funds.
First, National Treasury is proposing to amend the Income Tax Act to allow members of retirement funds who have reached normal retirement age and who opt not to retire to transfer their retirement interest to a more restrictive retirement fund tax-free.
The second amendment clarifies the amount of an employer’s contribution to a retirement fund that is tax-deductible.
Transfers between retirement funds by members who are 55 years or older
The context
Paragraph 2(1)(c) of the Second Schedule to the Income Tax Act regulates the amount to be included in gross income for a year of assessment. This is any amount transferred for the benefit of a retirement fund member on or after normal retirement age (as defined in the rules of the fund) but before retirement date (as defined in section 1(1) of the Act), less any deductions allowed under paragraph 6A of the Second Schedule to the Act.
Before 1 March 2022, paragraph 6A of the Second Schedule permitted the following deductions when calculating the retirement fund lump-sum benefit to be included in gross income:
- Transfers from a pension fund into a pension preservation fund, a provident preservation fund, or a retirement annuity (RA) fund; and
- Transfers from a provident fund into a pension preservation fund, a provident preservation fund, or an RA fund.
With effect from 1 March 2022, transfers into a similar fund by a member of a pension preservation fund or a provident preservation fund (who has reached normal retirement age but who has opted not to retire from the fund) were also included in the ambit of paragraph 6A of the Second Schedule.
As a result, any individual transfers between preservation funds where the transfer is between similar funds and the member has reached normal retirement age but has not yet opted to retire from the fund are tax-free.
Reasons for the amendment
There are still instances where active contributing pension and provident fund members who have reached normal retirement age and chosen not to retire are subject to involuntary transfers to another pension or provident fund, and these transfers are taxed.
To address this issue and ensure parity among members of retirement, it is proposed that the following changes be made to the Income Tax Act:
- Members of pension or provident funds who have reached normal retirement age as stipulated in the fund rules but have not yet opted to retire from the fund, and are subject to an involuntary transfer, can have their retirement interest transferred from a less restrictive to a more restrictive retirement fund without incurring a tax liability.
- The value of the retirement interest, including any growth thereon, will remain ring-fenced and preserved in the receiving pension or provident fund until the member elects to retire from that fund. This means these members will not be entitled to the payment of a withdrawal benefit in respect of the amount transferred.
The proposed amendments will come into operation on 1 March 2024 and apply in respect of the years of assessment starting on or after that date.
Clarifying the tax-deductible amount of an employer contribution
The context
Section 11F(4) of the Income Tax Act – read with paragraphs 2(h), 2(l), 12D, and 13 of the Seventh Schedule to the Act – provides for contributions made by an employer to a retirement fund, on behalf of an employee, to be regarded as an amount equal to the cash equivalent of the value of the taxable fringe benefit and taxable in the employee’s hands.
In accordance with section 11F(4), amounts paid or contributed by an employer to a retirement fund on behalf of an employee are deemed to have been contributed by the employee and are therefore taken into consideration when determining the employee’s allowable deduction in terms of section 11F.
Reasons for the change
Currently, section 11F(4) does not have a requirement that the cash equivalent (calculated as employer contributions to a retirement fund on behalf of an employee) be included in the employee’s income when determining the allowable deduction in terms of section 11F. As a result, even if an employer’s contribution to the retirement fund is not subject to fringe benefit tax, because the employee’s remuneration qualifies for income tax exemption in terms of section 10(1)(o)(ii), the employee may be entitled to a deduction in terms of section 11F.
This anomaly creates a scenario where an employee may be entitled to a deduction of the employer contribution in terms of section 11F, even though the employee was not subject to fringe benefit tax on that contribution.
Furthermore, if all their income is tax exempt, the employer contribution may be carried forward to retirement or withdrawal from their respective retirement fund and be allowed as a deduction against the employee’s lump sum or annuity, again without the employee paying tax on the employer’s contribution.
The above anomaly goes against the policy rationale of the Act’s provisions. As is evident in sections 6A and 6B (which deal with the allowable medical tax credits), the intention is for a deduction or tax credit to be afforded only to amounts included in the taxpayer’s income (in other words, a deduction or tax credit should not be available for tax-exempt amounts).
To address this anomaly and ensure parity with other provisions of the Act, it is proposed that changes be made to section 11F(4) so that the deduction in terms of this section applies only to the extent that the cash equivalent (calculated as employer contributions to a retirement fund on behalf of an employee) is included in the employee’s income as a taxable benefit in terms of paragraphs 2(l) and 12D of the Seventh Schedule to the Act.
The proposed amendments will come into operation on 1 March 2024 and apply in respect of the years of assessment starting on or after that date.
Comments on the proposals must be submitted to Treasury’s tax policy depository at 2023AnnexCProp@treasury.gov.za and Sars at acollins@sars.gov.za by close of business on 31 August.
Click here to download the 2023 draft Taxation Laws Amendment Bill.
