Budget Speech 2011
Possibilities
Nancy Andrews
Agenda
1. Budget Proposals for 2012
2. Taxation Laws Amendment Bill – 2011: Impact for
Retirement Funds
Budget Proposals for 2012
Deductible contribution limit :
Advantages / Disadvantages
Compulsory Annuitisation – Provident Funds
Retirement Fund Considerations
What should we be tell clients i.e. members,
funds etc
What exactly was said by Pravin Gordhan?
“Changes to the tax treatment and administration of contributions
to retirement funds are also proposed. These will simplify
administration and improve the fairness of the system. There
will be extensive consultation on the matter. The proposals
include treatment of employer contributions as a fringe benefit,
limits on tax deductible contributions and alignment of the tax
treatment of provident and pension funds.
From March 2012, an employer’s contribution will be treated as
a taxable fringe benefit, and employees will be allowed to deduct
up to 22.5 per cent of taxable income for contributions to
approved retirement funds. A maximum of R200 000 a year will
be deductible. With a view to protecting workers’ savings, it is
proposed that the one-third lump-sum withdrawal limit applicable
to pension and retirement annuity funds should also apply to
provident funds.”
In summary then…proposed from 1 March 2012
 Employer contributions taxable in hands of
employee as fringe benefit
 Tax deductible employee contribution limited to
lower of:
 R200,000 pa
 22,5% of taxable income
 Lump sum retirement fund benefits from provident
funds limited to 1/3rd of fund value
Single tax deductible contribution limit
 Currently 3 different regimes in operation:
Pension
Provident
RA
Member
7.5% of retirement
funding income
0%
15% of non
retirement funding
income
Company
10% (in practice up
to 20%)
10% (in practice
up to 20%)
N/A
Total max tax
deductible
27.5%
20%
15% of non-ret
funding income
 Proposal for uniform single deductible contribution of
22,5% of taxable income for employees
 Employer contributions taxable as a fringe benefit
Single tax deductible contribution limit
Advantages:
 Provides consistency and simplicity – across all
retirement funding vehicles
Disadvantages:
 Retirement funding deductions seldom exceed 22,5%
 But, …. some have higher contribution rates – limited to
maximum allowable deduction
Single tax deductible contribution limit
Proposed 22.5% an issue in:
 DB funds: may require higher (tax deductible)
contribution rate if in financial difficulty or has an ageing
member profile (particularly if the fund is closed).
 Are risk benefit costs included in the 22.5%?
Technically it is only really approved GLA included in
the 22.5% limit (with the changes to 11(w)). We may
need rule changes, as many rules would specify a
contribution inclusive of the separate benefits like PHI.
Single tax deductible contribution limit
22.5% is based on TAXABLE INCOME:
 Who calculates the taxable income, and what does
it comprise? Does it include variable earnings –self
employed or commission earners?
 How do administrators record contributions as pre or
post tax when taxable earnings may only be known
sometime after the tax year?
 What is a higher base off which to contribute? If
members are not using their non-retirement funding
RA allowance would the result change?
Contribution limit maximum
 Proposed R200 000 annual maximum limit
 Proposed up to R12 000 minimum deductible
 Implies that earning between R53 333 p.a. and R888 888
within 22.5%
 Lower limit may be intended to raise the average
contribution rates for lower income earners - do tax
incentives work for this group?
Contribution limit maximum
More Disadvantages:
Maximum contribution ceiling may exclude many Rbn of
contributions pa, improve tax revenues but it could also be that:




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Contributions cease as long-term saving contributions find their
way into discretionary, shorter-term investment vehicles.
Excess contributions could be invested outside South Africa;
Some of the amount could be consumed rather than saved;
Where administration fees are charged as a percentage, there
will be a reduction in cross subsidy if higher earners limit their
contributions to the cap. It will be worse if they do not
participate at all. Even if the fee is switched to rand per
member per month this impacts the lower paid employees.
It affects the cross subsidy of risk benefits;
May signal adequate levels of retirement contribution to
taxpayers, based on the limit.
Compulsory Annuitisation – Provident Funds
 Proposed that provident fund lump sum withdrawals
subject to one-third limit applying to pension and
retirement annuities
 More preservation necessary but some individuals have
planned on different basis
 Expect practical difficulties with this proposal, given the
history of provident funds in South Africa
 Problem with current situation: Taxpayer should be in a
neutral position when choosing between lump-sums and
income provision which is not the case at present
Compulsory Annuitisation – Provident Funds cont…
 Provident Funds – employees may have planned their
financial affairs taking into account a lump sum
retirement benefit.
 Members of provident funds are currently not entitled to
deductions for their contributions to provident funds.
Their tax relief is obtained through a reduction in the
value of the taxable lump sum. The full benefit of this
deduction can only be felt if the full lump sum is
accessible. A restriction of the lump sum benefit may
deny the provident fund member tax-relief offered for
non-deductible contributions, especially if the member
contribution rate was high relative to the company rate
Considerations for Retirement Fund
Future role of the employer
 Concern if the employer’s role is reduced and without
provision for compulsory contributions or membership
employers may close funds
 If the Employer is able to take this into account for PAYE
purposes the employee’s cash flow/take home pay is not
negatively impacted
 Governance framework is still such that the employer
remains involved. We should be advocating an elevated
role for the employer in a DC environment, as part of the
outcomes based governance approach.
Considerations for Retirement Fund cont….
 Employers invest time, and money, in the running of many
funds, and may find this investment does not generate
sufficient return on the employee benefit spend if their
strategic role is limited to payroll deductions.
 Concept of employer sponsored, or co-contribution, is
ingrained in the culture and it may be difficult to implement a
pure member contribution fund due to the perceptions.
 Given the choice, most members simply do not save for
retirement, either due to more pressing immediate needs or
simply due to apathy and lack of education.
Considerations for Retirement Fund cont….
 Based on consumer behaviours, employers may seek to
compete for staff on a net cash salary basis by making
contributions flexible, even down to zero
 May provide employers with an opportunity to reduce
benefit funding costs overall. This would be to the detriment
of retirement fund members and society at large.
 Where employers have more than one occupational fund
and are now considering having just one fund to reduce
costs, the uncertainty of legislation makes it difficult to
provide consulting advice.
Considerations for Retirement Fund cont….
Restructuring of Funds
Restructure is probable, perhaps inevitable, but this brings
with it several issues:

Significant costs will be incurred

↑Workload for FSB in terms of rules, valuations,
registration of funds etc – do they have the capacity.

Member perceptions need to be managed– labour
action in some instances, costing the economy as a
whole

Collective bargaining issues

Risk issues on moving investments and administration

Risk benefit and expenses cross subsidy

Employment contracts and pay slips to change

Rule changes
Considerations for Retirement Fund cont….
Administrator’s of Funds
 Administration record-keeping: The impact on
administration of the 22.5% could be bigger – how will the
administrators know what the persons taxable income is?
 Initial reason for having separate funds falls away:
Consider ring-fencing the pre 28 Feb 2012 provident
fund monies and running down this fund.
Amounts transferred to a pension fund (subject to
there being the facility to treat the pre 28 Feb 2012
monies as “provident fund” monies.
There may be differences in benefit structure,
consider whether to “equalise” or have one fund with
different categories.
Considerations for Retirement Fund cont….
 If consolidation is done, looking at the risk benefits
and policies to ensure these are aligned and any
additional categories of members included where
appropriate, and take account of cross subsidies
 Member communication setting out how this all
works will be key to avoid “opt outs”.
 Expect that labour will argue some points
aggressively
 Compulsory preservation on withdrawal?
What Treasury said now when releasing tax bill…..
“The 2011 Budget Review also contains proposals on the
retirement contribution base and the tax treatment of
contributions to retirement funds which includes proposed
thresholds for tax deductions up to 22.5 per cent and
limited to R 200 000 per annum. In addition, statements
pertaining to the imposition of the 1/3rd lump sum/ 2/3rd
annuity split for provident funds are also made. Given the
need for further consultation, these issues will first be
addressed in discussion documents for public comment,
after which legislation will be considered, either in late 2011
or in 2012. These discussion documents will be published
in July 2011. “
So what is latest and what do we tell clients?
 Discussion at industry level with different stakeholders giving input.
 Cap may be increased and hence the R200k is not necessarily fixed at
this stage. Appears that there is likely to be some form of cap.
 It is difficult to give advice in the absence of a definite structure
 Should not be making changes at this stage based on the existing draft
proposals given that there may be a number changes prior to
implementation.
 Trustees AND Employers need to be involved in discussions
 Expect discussion docs in July and legislation on these issues will
only be considered late 2011 or in 2012. - in the Retirement Bill
 Based on discussion docs, there will be a consulting approach
document drafted and distributed
Draft Taxation Law Amendment Bill – Impact for Retirement Funds
 Renaming living annuities : RIDDA’s
 Membership period for umbrella funds
 Retrenchment and preservation benefits
 Transfers from preservation funds to retirement
annuity funds
Renaming of Living Annuity
 Definition of Living Annuity introduced into ITA in
2008
 Now called “Retirement Income Drawdown
Account”
 Definition expanded to include criteria previously in
Notice in the Gazette
Elective membership period for umbrella funds
 Definitions of pension and provident funds allows
12 month period for employees to elect to
participate in the fund
 12 months from date fund is established
 New amendment:
 12 months from date employer joins the fund for
umbrella funds
Retrenchment benefits and preservation funds
 Beneficial regime for “qualifying retrenchments”
 Taxed as retirement benefits
 Amendment to legislation in 2010 allows tax-free
transfers to preservation funds
 Problem with definition of preservation funds
 Previously: Does not allow funds to accept such
transfers
 Amendment: Now allows preservation funds to receive
such transfers
Transfers from preservation funds to RAF
 RF 1/2011 replaced RF1/98
 Additional approval criteria for pension preservation
funds
 RF1/2011 allows transfers from pension
preservation funds to RAF, but legislation does not !!
 Amendment: Transfers from preservation funds to
RAF allowed