Relief coming soon
In circumstances in which annual tax-deduction limits to retirement fund contributions are exceeded, a taxpayer may carry forward the nondeductible portion to the following tax year, under s 11F of the Income Tax Act.
Ultimately, upon retirement, death or withdrawal, nondeductible contributions qualify for exemption, in addition to the R500 000 (death or retirement) or R25 000 (withdrawal, pre-retirement) relief against the commuted portion of a pension, pension preservation fund, retirement annuity fund or provident fund.
Yet this relief suffers from a shortcoming, inasmuch as it assumes that the maximum commutation-amount of a retirement fund benefit is sufficient to absorb such excess contributions.
For example, if the full value of a retirement fund benefit is R1,5 million upon retirement, a maximum of one-third, namely, R500 000, may be commuted. R500 000 is tax exempt, leaving nothing to absorb excess contributions, the deduction of which would consequently be forfeited.
To address this shortcoming, s 10C, with effect as from 1 March 2013, provided that nondeductible contributions to pension and retirement annuity funds would be exempt from income tax, inasmuch as the exemption of any excess contributions would be applied first to a lump-sum commutation and then also to the compulsory annuity, until extinguished.
Provident funds excluded
Yet this exemption is currently inapplicable to provident or provident preservation fund members. The historical rationale behind this exclusion was based on the absence of any requirement that these fund members were to use at least two-thirds of their fund benefits upon retirement to acquire or purchase a compulsory annuity. Provident or provident preservation fund members were instead allowed to receive their full retirement benefits as lump sums upon retirement.
In order to promote the Treasury’s policy of a uniform approach to the tax treatment of all retirement funds, it is proposed in the draft Taxation Laws Amendment Bill, 2019 that provident and provident preservation fund members receiving annuities (currently, voluntarily, since full commutation is allowed until 1 March 2021) be afforded the same exemption status applicable to other retirement fund members.
In other words, any nondeductible contributions to a provident fund will be allowed as an exemption in the determination of the taxable portion of annuities received from a provident or provident preservation fund.
This relaxation will apply in relation to annuities received on or after 1 March 2020.
As I noted in 196 TSH 2019, compulsory annuitization of provident funds benefits commences on 1 March 2021.