Contribution allocation towards retirement savings
New Tax Laws as from 1 March 2016: Harmonisation of tax treatment of contributions
This is primarily intended to allow for tax harmonisation of contributions and benefits in respect of different types of retirement fund, and it introduces a cap on contributions for tax purposes.
Employer contributions to retirement funds are now taxed as a fringe benefit in the hands of employees.
Excess contributions will be taxed if they exceed the LOWER of:
- 27.5% of gross remuneration for the tax year (or the total taxable income, if it is higher);
- R 350 000 per annum.
This limit applies to combined employee and employer contributions - any excess contributions will be taxed monthly via the PAYE system.
Here is a summary of the new tax regime:
| Pension Fund / Provident Fund / Retirement Annuity | |
|---|---|
| Definition of income | Higher of “gross remuneration” and “taxable income” |
| Member and employer contributions | 27.5% of income is tax deductible, subject to a maximum contribution of R350 000 per annum |
| Employer contributions | Taxed as fringe benefits in the hands of the member |
| Death and disability benefit contributions: | |
| Benefits provided by the fund | Included in the member and employer contributions – this applies to the death-in-service benefit provided for POBPF members |
| Benefits provided outside the fund | Premiums are tax separately in the member’s hands – this applies to the funeral, disability and spouse’s death benefits provided for POBPF members |
| Fund expenses | Included in the member and employer contributions |
| Roll-over provisions | Amounts over the limits are carried forward to subsequent tax years |
| Non-deductible contributions | Members will be entitled to receive part of any lump sum taken at retirement free of tax, to the extent that this represents contributions that were paid on an after-tax basis (i.e. were in excess of the tax limits) |
Disclaimer
In providing the material that follows, the Fund has tried to reflect the tax treatment of contributions and benefits accurately at the time of writing, but the Income Tax Act is very complicated and is subject to regular changes. In the event that the following material conflicts with the Income Tax Act, the Act will apply. Because the Income Tax Act is so complicated, it is very important that you seek specialist advice if you have questions about taxation of your retirement benefits and when you have to make decisions, for instance about the form of the benefit that you take after you leave office.