The new definition of Retirement Funding Income

Payroll administrators who have been preparing employee tax certificates for a few years already will understand the struggle with understanding the term Retirement Funding Income or RFI.

I still remember the RFI Yes/No indicators where each income source had to be marked as either RFI or Non RFI. SARS simplified things a bit when they removed the requirement for individual indicators but still asked for a total RFI and Non RFI value allocated to source codes 3697 and 3698 respectively.

Now, from 01 March 2016, we won’t have to worry about the RFI and Non RFI totals when the tax certificate rules are changed for the 2016/2017 tax certificates (due for submission April/May 2017).

Although the RFI that we have known for years and have come to hate during PAYE reconciliation time is gone, the term RFI is still alive and well but is now used for a different purpose.

Before 01 March 2016, Retirement Funding Income allocated to code 3697 was defined as the taxable income sources used in the calculation of a pension or provident fund contribution.

Example: Employee A earns a salary of R350 000 per annum and receives an annual bonus of R30 000. He contributes 5% of his salary towards a pension. The salary of R350 000 was defined as RFI and allocated to code 3697 on the tax certificate. The bonus of R30 000 was defined as Non RFI and allocated to code 3698.

From 01 March 2016, RFI code 3697 and Non RFI code 3698 have no relevance to the tax certificate.

RFI is still used but is now relevant to the new retirement reform legislation only. Although the RFI value is no longer recorded on a tax certificate it must still be used to calculate the fringe benefit value of a defined benefit retirement fund contribution.

The calculation of the fringe benefit for a defined benefit or hybrid fund contribution is

Category Factor supplied by the fund * RFI less any contribution made by the employe

The RFI amount used in the calculation is still the portion of the employee’s remuneration used to determine the fund contribution BUT includes only the taxable portion of a travel allowance or use of motor vehicle fringe benefit and 50% of public office allowance. This happens because the new definition of RFI is

The income taken into account in determining the contributions made to a retirement fund excluding components not included in the Fourth Schedule of the Income Tax Act.

The Fourth Schedule defines the term Gross Remuneration which is used to calculate PAYE and specifically includes only a percentage of travel allowance and use of company car fringe benefits and only 50% of a public office allowance.

Example: Employee A earns an annual package of R350 000, which includes a monthly travel allowance of R5000. His employer contributes towards a hybrid retirement fund and the contribution is 5% of his monthly package.

His monthly package of R29 167 is used to calculate the contribution of R1458 made by the employer to the hybrid fund.

Because the monthly package includes a travel allowance, the RFI will only include the 80% taxable portion of the allowance.

The RFI in this case is R28 167 (R29 1679 less 20% of R5000).



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