Deductibility of Retirement Fund Contributions
There are substantial changes to the tax deductibility of retirement fund contributions for both employees and employers from 1 March 2016 (T-day)
From 1 March 2016 ('T-day') the following important changes will affect all employers, retirement fund members and retirement funds:
Click here to view the deductibility of retirement fund contributions table.
Employer contributions will be treated as fringe benefits
All employer contributions to retirement funds will be reflected as fringe benefits in the hands of employees.
HOWEVER, employees will be able to claim a corresponding 'deduction' against that fringe benefit. This corresponding deduction will take place monthly on the payroll system
The value of the fringe benefit for tax purposes will depend on whether the contributions are made to a defined benefit fund or a defined contribution fund.
It is key to note that fringe benefit tax will only become payable should the value the employer contributions exceed the new deductibility limits.
The deductible limits for member/employee contributions will change
Members will be able to deduct both their and the employer's contributions to a pension, provident or retirement annuity fund up to 27.5 % of their 'remuneration' or 'taxable income', whichever is greater. There will be a rand cap of R350 000 on the total amount the member may deduct from his/her taxable income in any tax year.
Employers must automatically 'deduct' both their contribution and the employee's contribution (up the revised limits) against the value of the fringe benefit.
The new deductibility limits effectively entitle most members to a bigger tax deduction than they had before.
Non-deductible member/employee contributions will roll-over
If in a particular year a member contributes more than 27.5% of their 'remuneration' or 'taxable income' or more than R350 000, the non-deductible portion will be rolled over to the next year. The member will be able to claim a deduction for the amount rolled over in that following year.
Should the member's contributions be less than the limit in the next year they will be able to claim that rolled over amount as a deduction, subject to the revised deductible limits.
At retirement, the Rand value of the non-deductible contributions will be applied to the lump sum and/or annuity benefits as a tax-exempt amount i.e. a portion of the lump sum or annuity will be exempt from tax up to the value of the non-deductible contributions.
Employer contributions to all retirement funds will be fully deductible in the Employers' hands
Special consideration must be given to Defined Benefit and Hybrid Funds, which have additional obligations in terms of the calculation of the value of the fringe benefit on the contributions.