Simplified pension tax on the way

Simplified pension tax on the way
Simplified pension tax on the way

It has always been easy to set examinations designed to fail Tax 101 students: simply test the tax deductions on employer and employee contributions to pension, provident and retirement annuity funds.

Each type of fund has its own tax deduction rules. Imagine a taxpayer with multiple fund benefits -and the chaos is complete.

This will all be changed with effect from March 1 2014. If the proposals in the draft tax amendment bill are anything to go by, we should have a far simpler system that will benefit most taxpayers.

The logic behind the new system is to treat all contributions to pension, provident and retirement annuity funds as a deductible employment expense for the employer and a taxable fringe benefit for the employee. This allows the employee a tax deduction that neutralises the fringe-benefit tax on reasonable contribution levels.

Instead of having different tax deduction rules for different funds, the new system grants an overall tax deduction encompassing all contributions to retirement funds. To sweeten the deal, the tax deduction contribution ceiling has been increased to 27.5% of taxable income, regardless of the age of the taxpayer.

An overall cap limits the tax deduction to a maximum of R350000 a year  — a far higher level than initially proposed. Only taxpayers with income exceeding R1.27m will potentially be affected. To soften the blow, any amounts disallowed are carried forward for deduction into the next year of assessment.

The greatest benefit in the new order will go to the self-employed who do not have ready access to pension and provident funds, limiting their tax-deductible contributions to retirement annuity funds only. These contributions, now capped at 15% of non-retirement-funding income, will increase to 27.5% of taxable income.

It will be fascinating to watch how the retirement-planning industry adapts to the changes. There must be huge potential to create a retirement annuity suite administered by the employee over a lifetime. This would simplify retirement fund considerations when moving jobs, starting one’s own business or retiring.

Written by: Matthew Lester

Picture credit:

  • Originally published in the Sunday Times: Money & Careers Tax Talk column.

Source:  Commerce

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