New Retirement Fund Taxation Legislation

After many deliberations, postponements, amendments and a lot of confusion, the new taxation rules for retirement funds are set to come into effect on 01 March 2016.

Last week was touch and go when yet another postponement of the legislation was being discussed but the minister of Finance understood the need to continue with the implementation of the planned changes. The only contentious issue was the annuatisation of provident fund payouts upon retirement. When you retire, only a third may be paid out as a lump sum while two thirds of the fund must be paid out as a monthly pension.

This section of the legislation is set to be postponed until March 2018 to allow further consultation with the parties who are opposed to this change.

In the meantime, employers must still prepare their payslip calculations to agree with the new method of taxing these contributions from March 2016.

The new rules that must be applied to your payroll calculations can be explained as follows:

 

  1. Any contribution paid by the employer towards an employee’s retirement fund – whether a pension, provident or retirement annuity – will now be taxed as a fringe benefit in the hands of the employee.
  2. The calculation of the fringe benefit value will depend on whether the retirement fund is classified as a Defined Contribution (DC), Defined Benefit (DB) or Hybrid fund.
  3.  For a DC fund, the fringe benefit value is equal to the amount paid by the employer.
  4. For a DB or Hybrid fund, the fringe benefit value is calculated as (X*Y)-Z
    1. X is a contribution factor that will be provided to the employer in the form of a fund contribution certificate
    2. Y is the taxable remuneration portion of the employee’s income used to determine the fund contribution or RFI
    3. Z is the retirement fund contribution amount paid by the employee
  5. The contributions made towards a retirement fund will also result in a tax deductible portion, which is calculated as the employee contribution plus the fringe benefit portion, limited to the lesser of R350 000 per year or 27.5% of remuneration.

 

I am sure that the implementation of the new rules are not as easy as following these 5 steps since there are a lot of questions about the different fund types, the contribution factor, the meaning of RFI and the application of the deduction limits.

I will continue posting a series of articles discussing these new concepts and how they will affect your payroll calculations. You may post any additional questions here which I will be happy to answer, if I am able to.

Remember to install our latest upgrade, Pastel Payroll & HR 2016 Update 3, which caters for the retirement reform rules and changes in the way contributions are taxed. You will also receive some handy user guides and documentation on these changes when you download the upgrade.

Keep a lookout for another post on this topic tomorrow when I will explain the new definition of RFI and how to implement it in your payroll calculation.

7 Comments

Filed under Channel, General, HR, Industry Information, Legislative Updates, Partner Payroll, Product Information

7 responses to “New Retirement Fund Taxation Legislation

  1. Johann Mey

    Will Pastel Payroll now calculated these maximum limits and give a warning?
    or automatically add a different transaction once the limit is reached?

    • Madelein Taljaard (van der Watt)

      Hi Johann

      Pastel Payroll will generate a warning on the payroll run

      Regards

      Madelein

  2. Fraswa

    Dear Madelein,

    Any idea where we can find and when we will have the definitions of: Defined Contribution (DC), Defined Benefit (DB) or Hybrid fund and the treatment thereof wrt salary and remuneration vs PAYE deductible structuring?
    FSB, SARS… etc… who will be the authority on this?

    Regards
    F Mans (E2E)

    • Madelein Taljaard (van der Watt)

      Hi Fraswa

      The retirement fund administrators were tasked with releasing the contribution certificates from 01 February 2016 already. These certificates have to indicate whether the specific fund option is a DC, DB or Hybrid and should also inlcude the fund contribution factor.

      I will dig up some info about the fund classification and post an update.

      Regards

      Madelein

  3. Carol

    hi Madelein,
    I am able to understand how you come about calculating the fringe benefit value but what I don’t understand is where is the benefit you get as an employee from all of this, can you kindly explain to me I seem to be lost

  4. What does it mean?taxed in the hands of the employee?

    • Madelein Taljaard (van der Watt)

      Hi Retha

      It means that even though the employee does not receive the payment in cash, the value of the payment is taxable and the tax is payable by the employee.

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