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Employer Retirement Contributions To Become Taxable… But Only From 1 March 2012

30 April 2011   (0 Comments)
Posted by: Author: Andrea Brickett
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Employer Retirement Contributions To Become Taxable… But Only From 1 March 2012

With effect from 1 March 2012, employer contributions in respect of employees' retirement will be treated as a taxable fringe benefit, and an employee would been titled to claim as a deduction, an amount of up to 22.5% of their taxable income for all contributions to pens ion, provident and retirement annuity funds.

Deduction limits of a minimum of R12 000 and a maximum of R200 000 have been set.At first glance, a deduction of R200 000 sounds significant, but is it really beneficial to all taxpayers?Currently, provident fund contributions made by an employer to a non-contributory fund are not taxable in the employee's hands,and such contributions are normally made on a salary sacrifice basis.

The employee normally also contributes directly to a pension fund, and such pension fund contributions can be claimed as a deduction, limited to 7.5% of the employee’s taxable income.A further deduction for contributions to retirement annuity funds of the greater of 15% of non-retirement funding employment income,R3 500 less pension fund contributions, or R1 750 is also allowed from taxable income.

It is common practice for the employer to contribute 15% to anon-contributory provident fund,and for the employee to contribute7.5% to a pension fund, thus the 22.5% limit referred to in the budget. Receipts from the funds upon retirement, however, would be taxed in the employee's hands.

Under the proposed legislation,the contributions made by the employer to the non-contributory provident fund will be included in the employee's taxable income as a taxable fringe benefit, and will be taxed in full. A deduction of up to 22.5% of the employee's taxable income can be claimed in respect of contributions to pension, provident and retirement annuity funds However, such deduction is limited to the maximum annual deduction of R200 000.

High income earners will be negatively affected by the limit of R200 000, as their deductions,which were previously only based on a percentage of their taxable income, are now limited to the maximum of R200 000.The impact of the proposed changes is illustrated in the following example: An individual earns a cost-to-company "package”of R1 500 000 per annum, from which their employer contributes15% (R195 652) of retirement funding employment income to a provident fund, and the employee contributes 7.5% (R97 826) to a pension fund. Assuming that the package and retirement-funding components remain unchanged, the impact of the proposed changes is illustrated in the table appearing on Page 3.

The taxable income under the proposed legislation is significantly higher than that under the current legislation, and although a total contribution of 22.5% (7.5% to the pension fund, 15% to the provident fund) of their earnings is being made to the pension and provident fund, the individual cannot claim the full R285 326 contributed as a deduction because of the new deduction limit of R200 000.

This proposal will have a negative tax effect on the higher income earning individuals, and goes against the idea of promoting"saving for retirement”.For the lower earners, however,it is not all doom and gloom—although it is not clear what the deduction would be for an individual contributing less than R12 000 per annum to a retirement fund. It seems possible that they may be entitled to benefit from the minimum deduction of R12 000,despite their actual contributions being less than R12 000. However, the details of how this will work have yet to be released.

Budget 2011


Current legislation
Proposed legislation
salary income reduced by salary sacrifice of provident fund contribution (R1500 000-R195 625)
R1 304 348
R1 304 348
Fringe benefits- Employer contribution
0
R195 162
Gross income
R1 304 348R1 500 000
Pension Deduction( 7.5% retirement funding income)
R 97 826
0
Retirement fund deduction -22.5 % of taxable income (R337 500)but limited to (R200 000)
0
R200 000
Taxable income
R1 206 552
R1 300 000

 Source: By Andrea Brickett (Tax breaks)

 


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