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TAXATION
AT A GLANCE?
The
following table compares the taxation concessions of both
pension and provident funds.
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PENSION
FUNDS (1/3rd cash; 2/3rd pension) |
PROVIDENT
FUNDS
(cash
lump sum) |
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Tax
concessions on contributions: |
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Employee:
section l1(k) of the Income Tax Act |
1.
Current contributions the greater
of:
(a)
R1 750 per annum OR)
(b)
7,5% of remuneration derived
from
retirement funding income.
2.
Contributions for past service up
to
R1 800 per annum. |
No
tax relief. |
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Employer:
section 11(1) of the Income Tax Act |
Total
deductible from taxable income:
-
Minimum
of 10% of employee's approved remuneration
i.r.o. pension and provident funds and
medical aid schemes is deductible on a
cumulative basis
-
In
practice, SARS allows a cumulative deduction
up to 20%
-
Single
premiums may be spread over a few years or
deducted as a lump sum.
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As
for pension funds. |
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Tax-free
portion of lump sum benefits: |
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On
retirement - Second Schedule to the Income Tax
Act |
First
R300,000 tax free
Next
R300,000 18% tax
Next
R300,000 27% tax
Balance
taxed at 36%
PLUS
Own
contributions not previously allowed as a deduction.
LESS
Any
tax-free lump sum benefits previously received from other approved
funds.
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As
for pension funds. |
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On
death - Second Schedule to the Income Tax Act,
par. 5 (2) |
As
for retirement but with a minimum tax-free amount which is the
greater of:
1.
R60 000 OR
2.
2 X salary (limited to a maximum
salary
of R60 000) in the 12 months prior to death.
PLUS
Own
contributions not previously allowed as a deduction
LESS
Any
tax-free lump sum benefits previously received from other approved
funds. |
As
for pension funds. |
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On
withdrawal - Schedule to the Second Income Tax
Act, par. 6 |
The
greater of:
1.
R1 800 plus any amount
transferred
to another approved pension, provident or retirement annuity fund,
OR
2.
An amount equal to member's
own
contributions not deducted from taxable income in past. |
As
for pension funds. |
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Notes:
-
Annuities
(pensions) are taxed as income, at the member's
marginal tax rate.
-
On
retirement or withdrawal, any lump sum in excess of
the tax-free portion will be taxed at the member's
average rate of tax applicable in the year of
retirement / withdrawal or the previous tax year,
whichever is the higher rate. On death, the tax rate
will be that applicable in the year of death.
-
From
March 2003, the net rental and gross interest income
accruing to a fund is taxed at 18%.
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WHAT
WILL
THE SOUTH AFRICAN REVENUE SERVICE DO IF A FUND DOES NOT
COMPLY WITH THE REQUIREMENTS OF THE INCOME TAX ACT?
If
the conditions for approval of a fund as described in the
Income Tax Act are breached at any time, the South African
Revenue Service has no option but to withdraw the fund's
approval and therefore also the right to tax concessions.
Tax concessions previously enjoyed could possibly be
reclaimed.
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MAY
WHAT IS "RETIREMENT FUNDING INCOME"?
Firstly
we have to examine "retirement funding
employment" which is, in essence, the employment of
or holding of an office by someone who is a member of or
contributes to an approved pension or provident fund.
The
definition of "retirement funding income"
includes only income derived from pensionable emoluments
earned by an employee or "office holder", from
the firm, organisation or body which has instituted such
pension or provident fund.
With
effect from 1 January 1995, so much of a member's
travelling allowance which is taken into account for
purposes of determining contributions to the fund, forms
part of retirement funding income. That part of a
travelling allowance which is not retirement funding
income, less expenses claimed and allowed as a deduction,
remains non-retirement funding income.
Therefore,
only the remuneration which is taken into account in order
to determine the contributions by a member or an employer
to a pension or provident fund will be regarded as
"retirement funding income". This will include a
non-contributory fund where only the employer contributes
on behalf of the member.
"Non-retirement
funding income" is that part of a member's
remuneration which is not remuneration in respect of which
the member's or his employer's percentage retirement fund
contribution is calculated. Non-retirement funding income
includes lump sum benefits payable in terms of pension,
provident, retirement annuity and deferred compensation
schemes.
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ARE
EMPLOYERS CONTRIBUTIONS TO PENSION OR PROVIDENT FUNDS FOR
A MEMBER CONSIDERED A FRINGE BENEFIT?
The
Seventh Schedule of the Income Tax Act does not include
employer contributions to a pension fund or provident fund
as being a taxable fringe benefit. Thus, fringe benefit
tax is not levied.
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CAN
ONE PARTLY RETIRE?
In
a pension fund or provident fund one cannot partially
retire. "Retire" means to retire from employment
and is thus a question of fact. One cannot
"retire" from a fund and not retire from
employment.
The principal objective of partial retirement would be to
mitigate the tax payable on any lump sum by deferring the
pension into a subsequent tax year, and would be
considered to be tax evasion by the South African Revenue
Service.
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IS
VAT PAYABLE ON FEES CHARGED TO CLIENTS BY BROKERS AND
AGENTS?
In
terms of the VAT Act, the provision or management of a
fund was deemed to be a financial service and exempt from
VAT. Any fees charged in the course of providing or
managing a fund were therefore exempt.
From
1 October 1996 all fees charged for managing a fund are
subject to VAT.
Where
advice is provided, for which a separate fee is charged
and where commission is paid to brokers, VAT is also
payable. The fees, including VAT are deductible in terms
of section 11 (I)
of the Income Tax Act as part of the employer's
contribution to an approved fund.
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ARE
RETIREMENT FUNDS SUBJECT TO CAPITAL GAINS TAX?
The
Minister of Finance announced in his 2001 Budget Speech
that the tax dispensation applicable to retirement funds
would be reviewed holistically and indicated that the
review would take approximately three years to complete.
As a result of this review, the Minister announced that
retirement funds would not
be subject to Capital Gains Tax.
In
his 2004 Budget Speech the Minister indicated that this
review was still ongoing and retirement funds therefore
continue not being subject to Capital Gains Tax.
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WHAT
ARE THE INCOME TAX IMPLICATIONS OF A PENSION THAT IS
RECEIVED FROM AN OVERSEAS SOURCE?
What
are the income tax implications of a pension that is
received from an overseas source?
The
basis of taxation in South Africa changed from a source
basis to a residence basis of taxation with effect from 1
January 2001.
Briefly,
this means that South African residents will be taxed on
the income that they earn from all sources, including
overseas sources. Initially this meant that pensioners
earning a pension from an overseas source would be taxed
on the overseas pension, despite the fact that the pension
would already have been taxed in the overseas country.
This may well have led to double taxation in many
instances. However, pensioners could have claimed a tax
credit if there was a Double Taxation Agreement with the
overseas country from which the pensioner was receiving
the income.
However,
as a result of the fact that the South African Revenue
Service is reviewing the tax dispensation applicable to
retirement funds, overseas pensions will not be subject to
income tax in South Africa for the duration of the review
of the tax dispensation. In
his 2004 Budget Speech the Minister indicated that
this review was still ongoing and the status quo therefore
remains.
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WHAT
IS AN UNCLAIMED BENFIT?
A
benefit, which has within a period of at most six (6)
months not been paid to a member for any cause not
attributable to the fund for withholding the benefit or
where the member's beneficiary has for some reason failed
to claim the benefit within six (6) months after the
benefit had accrued.
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WHEN
DOES AN UNCLAIMED BENEFIT ACCRUE FOR TAX PURPOSES?
Unclaimed
benefit accrues for tax purposes when the benefit is six
(6) months or older. Applicable
on:
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Withdrawal
benefits: the six (6) months commences on the day
after the resignation, retrenchment or dismissal.
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Death
benefits: the six (6) months commences on the day
before the member died.
Retirement
benefits: For lump sum pension and provident funds the six
(6) months commences on the day after the member has
retired.
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WHEN
MUST EMPLOYEE TAX BE DEDUCTED?
In
respect of lump sum benefits, the fund or the
administrator of the fund will apply for the tax directive
at SARS when the fund pays the benefit or becomes liable
for payment of the benefits and that is when the benefit
has accrued to the member or the member's dependants in
the case of the death.
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WHAT
ARE THE TAX IMPLICATIONS FOR ANY GROWTH ON FUTURE
UNCLAIMED BENEFITS?
Where
interest as accrued or is deemed to have accrued to the
beneficiary of an unclaimed benefit, the fund or the fund
administrator must issue and In (b) in respect of each
year of assessment.
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WHAT
IF THE BENEFICIARY CLAIMS THE UNCLAIMED BENEFIT AND ELECTS
TO TRANSFER TO ANOTHER FUND?
The
second schedule of the Income Act provides a deduction in
respect of a transfer to another qualifying fund and this
deduction is only available in the year of assessment in
which the benefits accrued. If the beneficiary failed to
transfer to another fund in the year of assessment when
the benefit accrued, the deduction falls away.
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WHAT
HAPPENS IF A MEMBER WISHES TO TRANSFER HIS/HER BENEFITS TO
A PRESERVATION FUND?
Under
normal circumstances, when transferring to a Preservation
Fund, the transfer is tax free, except in the case of
Pension to Provident transfers where the member's
contributions are taxable. Where the member now wishes to
transfer to a Preservation fund he/she must do so within
six (6) months from the date of withdrawal. If the
transfer takes place after the six (6) months from the
date of withdrawal, the transfer will be subject to
unclaimed benefit tax due to the fact that the benefit
accrued to the member at the time at which he/she withdrew
from the fund. He/she must transfer the net benefit, but
the unclaimed benefit tax will not be reversed, thus he
will have lost the opportunity to transfer the benefit
tax free.
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WHAT
ARE THE LEGAL REQUIREMENTS AND PROCEDURES THAT HAVE TO BE
FOLLOWED WHEN OUTSOURCING PENSIONERS?
Should
a fund wish to purchase a compulsory purchase annuity in
the name of the retiring member, thereby terminating its
liability in respect of that member, it must comply with
the following requirements:
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If
the rules do not already provide for the outsourcing
of pensioners, a rule amendment will be required to
allow the fund to do so. The rules must reflect that,
on purchase of the annuity, the fund's liability
towards the member will cease;
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The
retiring member must be the owner, life assured and
annuitant of the policy;
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The
capital remaining after the deduction of a
commutation, if any, must be used to purchase the
annuity, which must be non-commutable;
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If
more than one annuity will be purchased at retirement,
the following requirements must be complied with the
rules of the fund must allow for the purchase of more
than one annuity;
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One
of the annuities purchased must produce an income in
excess of R150 000 per annum at all times during its
existence;
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None
of the annuities purchased may have a capital value of
less than R25 000;
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Not
more than four annuities may be purchased;
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The
retirement fund must inform the member's regional
Revenue Office if more than one annuity is going to be
purchased and must provide the Revenue Office with the
annuitant's full names, income tax number, identity
number, physical address, postal address, date of
retirement, minimum annual income of each annuity,
capital value of each annuity, name and postal address
of the insurance companies from which the annuities
are purchased and;
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If
all the information required cannot be provided, the
fund will not be allowed to purchase more than one
annuity.
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WHAT
ARE THE ESTATE DUTY CONSEQUENCES FOR PENSIONS PROVIDED BY
PENSION, PROVIDENT AND RETIREMENT FUNDS?
A
pension or annuity that becomes payable as a result of a
member's death, whilst being a member or pensioner of a
pension, provident or retirement annuity fund, is exempt
from estate duty. If, for example, a member died prior to
retirement, any spouse's or orphans' pension provided by
the fund will be exempt from estate duty.
If
a member died after retirement, any annuity provided by a
pension, provident or retirement annuity fund as a result
of the member's death, will be exempt from estate duty,
e.g. a survivor pension in respect of a joint and survivor
pension.
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WHAT
ARE THE ESTATE DUTY CONSEQUENCES FOR LUMP SUMS PROVIDED BY
PENSION, PROVIDENT AND RETIREMENT FUNDS?
All
lump sum benefits which are due and payable by pension,
provident and retirement annuity funds as a result of a
member's death, are subject to estate duty.
However,
if the lump sum is bequeathed to the deceased member's
spouse, it will be estate duty tax-free in terms of
section 4(q) of the Estate Duty Act.
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DOES
WHAT IS THE IMPACT OF THE STATUS OF A SECTION 21 COMPANY
ON RETIREMENT FUND BENEFITS, IF ANY?
A
section 21 company is a non-profit organisation and
therefore these companies do not pay income tax.
The
retirement fund of such a company will be placed in the
Untaxed Policyholders' Fund in terms of the Four Fund
approach and the gross interest and net rental income
which is generated by these retirement funds will be
subject to 18% retirement fund tax. It therefore has no
effect on the benefits payable to members from the fund.
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