Reform on the taxation of pension funds

One of the most significant amendments effected by the Taxation Laws Amendment Act, 25 of 2015, and the Tax Administration Laws Amendment Act, 23 of 2015, was how retirement type funds will be taxed in future.  This includes both the taxation of proceeds from funds, as well as the extent to which the amounts contributed to funds throughout will be deductible for income tax purposes.

It is important to distinguish between 3 types of funds, being pension funds, provident funds and retirement annuity funds.  Historically, in terms of the Income Tax Act, 58 of 1962 (‘the Income Tax Act’), contributions made to pension funds were deductible, limited to 7.5% of the individual’s particular annual pensionable salary.  Whereas pension funds are designed to allow for the accumulation of wealth of salaried individuals towards retirement, retirement annuity funds aim to provide for non-salary income to be saved towards retirement.  To this end, 15% of non-pensionable income (e.g. income from an own business) contributed to a retirement annuity fund were previously allowed as income tax deductions.

Both retirement annuity and pension funds however had certain limitations imposed on them which restricted access to the capital accumulated in these funds only until after retirement, and even then not all capital would have been accessible as a lump sum withdrawal:  realization would generally take place through monthly annuities received from such funds.  In this sense, provident funds differed and capital accumulated in such funds were accessible even before retirement.  To discourage use of such funds though (and to encourage a long term savings culture), no income tax deductions were allowed for provident fund contributions.

The new amendments now seek to harmonize the tax treatment of these 3 types of funds, and specifically as relates the differentiation on the tax treatment of contributions, as well as access to the fund capital together with the tax consequences of lump sum withdrawals.  The single, encompassing provision now dealing with fund contributions is section 11(k) of the Income Tax Act.   Section 11(k) now allows for a deduction of any fund contributions up to 27.5% of the higher of an individual’s i) remuneration received from an employer or ii) his or her taxable income for the year in question.  The deduction is limited though to R350,000, meaning that individuals earning more than R1,272,727 will effectively have a lesser rate apply to them.  (Note that the 27.5% will include contributions made by an employer on an employee’s behalf, which amount is also included as part of the individual’s remuneration for income tax purposes in the form of a fringe benefit.)

Significantly, access to the capital of all funds will now be what had effectively been the regime previously for pension funds, i.e. that a capital amount is available for withdrawal at retirement, but the majority is annualized and only receivable in the form of monthly annuities being paid out going forward.  This has particularly infuriated the trade unions who have publicly condemned government for this move, and it remains to be seen how, if it all, Treasury will react to said criticism.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Salary sacrifice schemes – latest judgment by the supreme court of appeal

Salary sacrifice schemes are popular in practice. Typically, they involve employers paying a decreased salary to their employees, with an added fringe benefit to make up for the lost ‘cost to company’ sacrificed by the employee to obtain the benefit.  For example, an employee may prefer to enter into a salary sacrifice with his/her employer in exchange for being allowed to use an employer provided motor vehicle or accommodation.

From both the employer and employee’s perspective, the income tax and PAYE consequences linked thereto are very often unchanged.  The decreased salary paid by the employer is deductible for income tax purposes as well as such expenditure incurred to provide the benefit to the employee, whilst the employee is subject to income tax on both the decreased cash amount received as a salary as well as the fringe benefit provided by the employer.  The employer is also liable to withhold PAYE as calculated on the total remuneration paid to the employee (which would include both the decreased salary amount as well as the fringe benefit provided).  (See the Seventh Schedule to the Income Tax Act, 58 of 1962.)

The salary sacrifice scheme of Anglo Platinum Management Services (Pty) Ltd recently came under scrutiny.  After having lost in the Tax Court, Anglo Platinum appealed to the Supreme Court of Appeal (Anglo Platinum Management Services (Pty) Ltd v CSARS [2015] ZASCA 180 (30/11/2015)).  In essence, the appeal involved a salary sacrifice scheme implemented by Anglo Platinum whereby it would purchase motor vehicles – selected by its employees – for use by its employees, in exchange for the employees agreeing to a salary sacrifice equal to the value of the benefit.  The vehicles would remain the property of Anglo Platinum until enough has been sacrificed by the respective employees to equate to the purchase amount of the vehicles plus interest calculated thereon.

During this period, Anglo Platinum withheld PAYE on both the salaries paid to its employees, as well as the value of the fringe benefit derived by the employees in using Anglo Platinum’s motor vehicles.  This is hardly contentious, and SARS did not dispute this treatment.  What was in dispute however was whether there really was a salary sacrifice, and whether PAYE should not also have been withheld on the sacrificed amount (and the employees therefore taxed on this amount too).  SARS argued that the scheme, although valid, was incorrectly implemented.  In essence, so the argument went, the employees were still receiving their full salaries, and amounts withheld from their salaries were in essence payments made to the employer to facilitate funding for the acquisition of the vehicles.  SARS cited two main indications in support of this, being that the employees were ostensibly responsible for insurance payments on the vehicles, and that notional accounts with payments, interest and related vehicle expenses were kept:  employees would be responsible to pay any shortfall amounts on these accounts, and similarly be entitled to access any credits available on excess amounts withheld.

The Supreme Court of Appeal upheld Anglo Platinum’s appeal, largely based on the evidence of Anglo Platinum’s Mr Broodryk who testified on behalf of the taxpayer and who devised and implemented the scheme.  It is clear that the court placed great emphasis on the implementation of the scheme to objectively consider whether the scheme in implementation reflected a true salary sacrifice by employees.

The legal matters in the case are not contentious.  At issue is the implementation which is what so often goes awry where tax related advice is concerned.  Our clients should take note of this:  it is not good enough to have a positive tax opinion as regards a proposed structure or transaction.  It is necessary, if not essential, to involve your tax experts in implementation too, be it in salary sacrifice matter, or any other transaction.  Had Anglo Platinum not heeded this principle, the judgment by the Supreme Court of Appeal may very well have gone in SARS’ favor.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Short term insurance: Consequences of being over or underinsured

Some people believe in short term insurance, others don’t. If you do believe in taking out short term insurance, make sure that your assets are not over or underinsured. If your assets are overinsured, it means you pay unnecessary premiums for insurance cover you will not be able to claim for. If you are underinsured, you think you are covered for a certain amount while in actual fact you are not covered as well as you think you are.

Overinsurance

Let’s look at Mary’s case:

Ten years ago, Mary bought and insured her car at its then market value of R50 000. Although the market value of her car decreased over time, she never informed her insurance company.

Yesterday she had an accident and wrote off her car. She puts in a claim at her insurance company for R50 000 because that’s the amount her car was insured for.

As the car was insured at market value, the insurance payout is based on the current market value of the car. At the time of the accident, the car’s market value was only R10 000.

Mary is very unhappy because she paid premiums on a market value of R50 000 and now she only received R10 000 from the insurance company.

What happened here?

Mary was overinsured because her car was insured for more than its market value. It was her responsibility to contact her insurance company from time to time to adjust the insured value of her car downwards as its market value had decreased over the years. As the car’s insurance premium was based on its market value, her premium would have reduced every time she informed her insurance company to adjust the market value of her car downwards, and she wouldn’t have paid for more than the amount she was insured for.

Underinsurance

Now let’s look at John’s case:

He originally bought his house for R50 000 and insured it at its then market value of R50 000. Ten years later disaster struck and the house burnt down. At the time of the fire, the house is worth R100 000. However, John never let the insurance company know that the market value of his house increased over the years.

John puts in a claim at his insurance company for R100 000 but the insurance company pays out only R25 000 to settle his claim of R100 000.

What happened here?

The insurance company calculated the ratio between the value John insured his house for and what it was worth at the time it burnt down as follows:

Value insured / Current market value = R50 000/R100 000 = 50%

The ratio of 50% means that the house was insured for only half of its market value of R100 000 at the time of the fire.

Then the insurance company applied the pro rata ratio of 50% to the amount actually insured to calculate the amount of the insurance payout as follows:

Amount insured x Ratio underinsured = R50 000 x 50% = R25 000

If John contacted his insurer from time to time to increase the insured amount of the house to the actual market value, the insurance cover on his house would have been in line with its actual market value of R100 000 when his house burnt down. His premiums would have increased over time to reflect the increase in the insured amount.

Both the above scenarios illustrate the same point: it is crucial that your insurance company have accurate and up to date information on which to determine the amount of your insurance cover and premiums. Ultimately it is your responsibility to keep an eye on the market value of your assets and inform your insurer of any changes in market value that would require an adjustment in the insured value of an asset.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Reference List:

Accessed on 18 September 2015

  • SAIA Consumer Education Booklet written by Denis Beckitt

Nwanda Internal News (April 2016)

Awesome Rewards awarded to:

Nicole Pretorius for obtaining a Bcompt Accounting degree

Brett Beetge for passing Board I exam

Proffessor Mafela for passing Board I exam

Farewell to staff member:

We bid farewell to Danielle Fynn

Congratulations to Samantha Goodrich on the birth of her baby girl on 19 April.

Congratulations to Carmen and Paul Maroun, they were married on 9 April.

Carmen wedding photo

Best of luck to all those studying for the May/June exams.