New tax rules for employer contributions to retirement funds in 2015
25 June 2014
Posted by: Author: Jenny Klein
Authors: Jenny Klein and Liesl Visser (Tax ENSight)
The 1st of March 2015 will bring into effect new tax provisions which were introduced into the Income Tax Act, 1962 ("the Act”) by the Taxation Laws Amendment Act of 2013. Currently, employer contributions to pension and provident funds in respect of employees are not taxable benefits, although employer contributions to the retirement annuity funds of employees are taxable. One of the new tax provisions contained in the Seventh Schedule to the Act introduces a taxable benefit in respect of employer contributions to all retirement funds. This article will consider these new rules and some of the complexities surrounding this taxable benefit provision which may be relevant to employers.
In terms of the new paragraph 2(k) of the Seventh Schedule, a taxable benefit will arise if an employer has made any contribution for the benefit of any employee to any pension fund, provident fund or retirement annuity fund.
The valuation of the taxable benefit arising in respect of such contributions made by employers to retirement funds is determined in terms of paragraph 12D of the Seventh Schedule and depends on whether a retirement fund constitutes a "defined contribution component” ("DC component”) or a "defined benefit component” ("DB component”) or a combination of both components.
The cash equivalent of the value of the taxable benefit where an employer contribution is in respect of a DC component is the value of the amount contributed by the employer for the benefit of the employee that is a member of the fund.
The cash equivalent of the value of the taxable benefit where an employer contribution is made in respect of a DB component of a fund is based on a formula contained in paragraph 12D.
The DC component and DB component of a fund are defined in paragraph 1 of the Seventh Schedule. A DC component is defined in relation to how the value of the retirement benefit that the employee will receive as a member of the fund is calculated, and broadly refers to retirement benefits which are calculated with reference to the member’s share/interest in the fund. A DB component means a component of a pension fund, provident fund or retirement annuity fund other than a DC component of a fund.
In addition, the employer contribution or payment to a fund in respect of risk benefits provided by the fund directly or indirectly for the benefit of a member of the fund is deemed to be a contribution made in respect of a DC component of that fund.
Regulations may be prescribed by the Minister of Finance regarding the manner in which a fund must determine the DC and DB components of a fund and the formula for valuing employer contributions in respect of a DB component.
No value must be placed for the purposes of the Seventh Schedule on the taxable benefit derived from employer contributions for the benefit of a member of that fund that has retired from that fund or in respect of the dependants or nominees of a deceased member of that fund.
In addition to the taxable benefit which will arise in respect of employer contributions to retirement funds, the new rules provide that, to the extent that the amount has been included in the income of the employee as a taxable benefit in terms of the Seventh Schedule, the employer contribution will be deemed to have been contributed by the employee for the purposes of claiming a tax deduction for contributions to a retirement fund in terms of the new section 11(k) of the Act.
In determining the employees’ tax (PAYE) payable in respect of the taxable benefit, the employer may take into account the allowable deduction which the employee may claim under section 11(k) of the Act.
There may be a number of potential issues for employers surrounding the application of these fringe benefit provisions once they come into effect, depending upon the rules of the specific retirement fund. For example, would a taxable benefit arise if additional discretionary contributions are made by an employer to a retirement fund without any allocation of such contributions to specific members? Furthermore, the question arises whether an allocation from an employer’s surplus account to a member’s individual account would constitute a taxable benefit under these provisions.
Where an employer is obliged, in terms of the rules of the fund, to make additional "top-up” payments to the fund to provide for an increased retirement benefit for a specific member prior to that member’s retirement from the fund, the resultant taxable benefit could give rise to practical difficulties in terms of the PAYE which must be deducted or withheld in respect of that taxable benefit. Depending on the extent to which a deduction under section 11(k) of the Act is available to the employee and the amount of the taxable benefit arising, the other remuneration of the employee may not be sufficient to allow the deduction of the required PAYE.
Accordingly, employers will need to consider the rules of the specific retirement funds concerned and the PAYE implications of employer contributions to such funds in respect of their employees once the new provisions come into effect.
The above comments are based on the tax provisions currently contained in the Act. However, it is important to note that, on 10 June 2014, National Treasury released draft amendments to paragraph 12D of the Seventh Schedule and Draft Regulations in terms of paragraph 12D(5)(a) of the Seventh Schedule for public comment. The draft changes are based on the concept of a "fund member category” and would require the fund to separate the benefits to which members of the fund are eligible into defined benefit, defined contribution, underpin and risk components. Accordingly, these tax provisions may be subject to change before their effective date.
This article first appeared on ensafrica.com.