Nancy Andrews

Budget Speech 2011 Possibilities

1. Budget Proposals for 2012

2. Taxation Laws Amendment Bill – 2011: Impact for Retirement Funds

Agenda

Deductible contribution limit :

Advantages / DisadvantagesCompulsory Annuitisation – Provident FundsRetirement Fund Considerations What should we be tell clients i.e. members,

funds etc

Budget Proposals for 2012

“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.”

What exactly was said by Pravin Gordhan?

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

In summary then…proposed from 1 March 2012

Currently 3 different regimes in operation:

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

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

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?

Single tax deductible contribution limit

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:

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.

Contribution limit maximum

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

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

Compulsory Annuitisation – Provident Funds cont…

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

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?

Considerations for Retirement Fund cont….

“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. “

What Treasury said now when releasing tax bill…..

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

So what is latest and what do we tell clients?

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

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

Elective membership period for umbrella 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

Retrenchment benefits and preservation funds

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

Transfers from preservation funds to RAF