Tax harmonisation of retirement fund contributions
As from 1 March 2016, all contributions to retirement funds (pension, provident and retirement annuity funds) are treated similarly for tax-deduction purposes, under s 11F of the Income Tax Act.
The tax-deduction formula of 27,5% a year (with a cap of R350 000) of the greater of taxable income and remuneration applies to members of all retirement funds, aggregated, including provident funds.
The original rationale was that pension and retirement annuity funds would still require a compulsory purchase of an annuity upon retirement (unless the value of the fund is R247 500 or less) with two-thirds of the fund benefits, while provident fund benefits might be commuted in full, until 1 March 2019, from when annuitisation was also to apply.
But, in a media statement issued by National Treasury on 16 July 2018, it was stated that:
Government may introduce further legislative amendments related to the start-date of 1 March 2019 once the NEDLAC process is completed.
Subsequently, the National Assembly again postponed the effective date for annuitisation of provident fund benefits, to 1 March 2021.
Each postponement of the effective date for annuitization required several consequential amendments to various provisions of the Income Tax Act. In the process, several required consequential amendments were inadvertently left out of para 6(1)(a) of the Second Schedule to the Income Tax Act, which makes provision for tax-neutral transfers between retirement funds.
The failure to change the effective date of this provision resulted in the non-taxable treatment of transfers from pension funds to provident or provident preservation funds with effect from 1 March 2019.
This created a loophole, since the intention was to align the effective date of the tax-neutral transfers from pension to provident or provident preservation funds with the effective date of retirement reform amendments concerning annuitisation, which is 1 March 2021.
In order to include the consequential amendment that was inadvertently left out, it is now proposed that changes be made in the Income Tax Act to align with the annuitisation date the effective date of the tax-neutral transfers from pension to provident or provident preservation funds—from 1 March 2019 to 1 March 2021.
Simply put, tax-neutral transfers from a pension to provident fund will be allowed only as from 1 March 2021.