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An update on the 2015 Taxation Laws Amendment Bill

December 9, 2015

The 2015 Taxation Laws Amendment Bill was recently passed by Parliament, effectively bringing into effect T-day (date for introduction of the new tax regime for retirement funds) with effect from 1 March 2016.

Some background

The ‘T-day’ changes were proposed in 2013, and were originally supposed to take effect on 1 March 2015. The first draft of the Taxation Laws Amendment Bill 2015 (‘TLAB’ 2015) was released earlier this year.

This Bill clarified some issues on the annuitisation requirements for provident funds. Extensive comments were submitted to National Treasury (‘NT’) on the first draft of TLAB 2015. On the 15th of October 2015 NT and SARS briefed the Parliamentary Standing Committee on Finance on TLAB 2015.

At the briefing session, NT explained Labour’s opposition to the annuitisation of provident funds in isolation to the release of the comprehensive Social Security Paper. On 26 November 2015, TLAB 2015 was passed by the National Assembly, and was then passed by the National Council of Provinces on 1 December 2015. Both Houses of Parliament have now passed TLAB 2015, which now only requires the signature of the President.

Tax changes – effective from 1 March 2016

Capping of contribution deductions

  • Employer contributions to pension and provident funds will constitute a fringe benefit in the hands of employees and will also be regarded as employee/member contributions for purposes of the new regime.
  • Currently, contributions to provident fund do not qualify for a tax deduction. The new provisions relating to the capping of the contribution deduction will also apply to provident funds from 1 March 2016.
  • The fringe benefit of employer contributions to defined benefit schemes not allocated to a specific member will be calculated based on a formula. A draft notice has been issued to set out how the tax deductibility caps will apply in defined benefit funds. This is still to be finalised.

Increase in de minimus retirement fund lump sum amount

  • Currently, a retirement benefit of R75, 000 or less is not subject to annuitisation.
  • TLAB 2015 says that from 1 March 2016 this de minimus amount will be increased to R247, 500.
  • This means that on retirement where two thirds of the retirement benefit is less than R165, 000, the full amount may be commuted to cash.

Annuitisation of provident funds

  • Currently, for provident funds, the entire retirement lump sum amount is available to be taken in cash. The new law will allow a maximum of one third of this amount to be cashed out as a lump sum, with the remaining two thirds to be annuitised.
  • Vested rights will be protected; that is, members of 55 years or older, on 1 March 2016, will not be required to annuitise.
  • Members younger than 55 years will be subject to the two thirds annuitisation requirement, but only once their retirement benefit exceeds the de minimus threshold (R247,500).

The effect of the changes

  • Simplifies the tax treatment of retirement funds
  • Provident fund members will benefit from a tax deduction on their contributions
  • Pension funds and retirement annuities will be unaffected by the change to the law with regard to annuitisation, but will benefit from the 27,5% tax deduction (limited to R350,000 per annum)
  • The increased tax deduction on retirement contributions encourages saving
  • The tax deduction for employee/member contributions to provident, pension and retirement annuity funds will be limited to the greater of 27,5 per cent of taxable income or “remuneration”.
  • An overall annual tax deductible limit of R350,000 will be applied to contributions regardless of the contribution rate.

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