Government encourages South Africans to save for their retirement through tax incentives when making these contributions. The aim of these tax incentives is therefore to encourage income–earners to save for their retirement so as to reduce their financial vulnerability in their old age.
Currently the deduction for income tax purposes is determined as follows:
Pension fund contributions:
- Current contributions: Limited to the greater of:
a) R1,750; or
b) 7.5% of pensionable remuneration
- Arrear contributions: R1,800
Retirement annuity fund contributions
- Current contributions: Limited to the greatest of:
a) 15% of net income, excluding income used to determine pension and provident fund contributions;
b) R3,500 less deductible current pension contributions; or
c) R1,750
Note provident fund contributions made by an individual employee are not deductible.
As can be seen from the above there are different rules pertaining to the deductibility of contributions for the different funds which may not produce an equitable result. A consistent treatment, regardless of the type of retirement fund, is therefore preferred, which has led to the following changes.
Amendment effective from 1/3/2015 (2016 tax year)
The basis will be the same for determining the deduction for income tax purposes for contributions to all types of retirement funds. The annual deduction for income tax purposes will be limited to
- the lesser of
o R350,000; or
o 27.5% of the higher of
- Remuneration (excluding lump sums); or
- Taxable income (excluding lump sums) before this deduction.
Any excess contributions may be carried forward to the following year of assessment where they may rank for deduction. Employer contributions will be included as a fringe benefit in the taxable income of the employee and will be deemed to have been made by the employee for the purpose of determining the deduction for income tax purposes.
The above contribution limits will include the risk benefit and administration cost component of the contributions.
Remuneration is comprised basically of your income earned from employment (albeit salary, commission, bonus, fee etc), 80% of your travelling allowance, 80% of your company car fringe benefit plus all other taxable allowances and fringe benefits.
Taxable income is comprised of your income after exemptions and allowable deductions.
Deduction for employer contributions to retirement annuity, pension or provident funds will be determined in accordance with section 11(l) of the Income Tax Act which provides that any contribution made by an employer to such approved South African retirement fund for the benefit of any employee or former employee or for the dependent or nominee of a deceased employee or former employee made in terms of the rules of that fund will be deductible.
However any contributions effected by an employer will be taxed as a fringe benefit in the hands of the member. The value of the fringe benefit will be depend on whether the contributions are made to a defined benefit fund (being a fund where the benefits are not based on the members contributions effected over the years, but are mostly determined by the final salary at retirement, the years of service and an accrual rate) or a defined contribution fund (being a fund where the contribution can be directly linked to the benefit).
- Defined contribution fund – the cash value of the contribution will represent the amount of the taxable fringe benefit.
- Defined benefit fund – the value of the fringe benefit will be determined by the use of a formula.
Example
Ms Jinx is a member of a provident fund. Her total cost to company is R276,000 which is comprised of a salary of R180,000, a travelling allowance of R60,000 and her employer provident fund contributions of R36,000. Her remuneration is R264,000 (being R180,000 plus R60,000 x 80% plus the employer contributions of R36,000 which must be brought into her taxable income as a fringe benefit). Ms Jinx effects no employee contributions to the provident fund.
In addition she earns rental income. Her net rental profit for the year was R64,000. She pays R6,400 independently into a retirement annuity find. Let us assume a traveling deduction of R50,000 resulting in her taxable income of R290,000 before considering any deduction for her retirement fund contributions.
Ms Jinx’s deduction will be limited to
- the lesser of
o R350,000; or
o 27.5% of the higher of
- Remuneration R264,000 x 27.5% = R72,600 or
- Taxable income before this deduction R290,000 x 27.5% = R79,750.
Accordingly her full contributions of R42,400 (R36,000 plus R6,400) will be deductible for income tax purposes.