Retirees will be encouraged to use all their retirement fund and retirement annuity (RA) savings to buy a pension if Parliament passes the latest tax law amendments.
National Treasury released the 2012 Taxation Laws Amendment Bill for comment this week, and one of the proposals is to allow you to take as a tax-free annuity (monthly pension) the tax-free lump sum to which you are entitled on retirement.
Members of pension funds, including members of RA funds but excluding members of provident funds, are obliged to buy an annuity with two-thirds of the proceeds of their savings at retirement. The other one-third can be taken as a lump sum.
In terms of the retirement fund tax tables, an amount up to R315 000 that you take as a lump sum withdrawal at retirement is tax-free. This tax-free amount applies to all lump sum benefits taken at retirement, including those from pension, provident and retirement funds. The amount is cumulative from all sources.
In addition, any contributions you made to your retirement fund that were not allowed as a tax deduction because your contributions had exceeded the maximum amounts that could be deducted can be taken tax-free at retirement.
However, if you do not take these amounts as a tax-free lump sum at retirement but use them to buy an annuity, the monthly pension is taxable when it is paid to you.
The proposed amendment seeks to correct this. If it is passed into law, from March next year you will be able to receive these amounts as a monthly pension without paying tax on them.
The explanatory memorandum to the bill says any tax-free amounts to which you are entitled on retirement will first be applied to any lump sums you take at retirement and then to your compulsory annuity income on a “first come, first served” basis.
This means the annuity payments you receive will be free of tax until you have used up the tax-free amount to which you are entitled, Cecil Morden, chief director for tax at National Treasury, says.
In addition, the Taxation Laws Amendment Bill proposes to introduce a fairer fringe benefit tax for employees who are provided with rental vehicles by their employers.
According to a media statement released with the bill, these employees may be over-taxed, because they are taxed on a fringe benefit that is calculated using the ownership and running costs of the vehicle.
The statement says the amendments propose that, as of March next year, the fringe benefit on which you pay tax for the use of a vehicle your employer rents be limited to the cost to your employer.
A third change in the proposed tax law amendments that could affect you, as a tax-paying employee, seeks to have variable payments for overtime pay, leave pay, commission, bonuses and travel reimbursements taxed when they are paid to you rather than when they accrue to you, as is currently the case.
According to the explanatory memorandum to the bill, variable remuneration may accrue to you before it is paid to you, because the amount you are owed may not have been determined at the end of the month, when you are paid. This may be due to a lack of time to determine the amount before the payroll cut-off or an employer’s internal controls, the memorandum says.
Currently, when amounts that accrue during one month are paid in a subsequent month, the employer should, after determining the amount, adjust your tax and deductions for the month in which the income accrued.
This, the memorandum says, is time-consuming and costly for both employers and the South African Revenue Service, and hence the proposal to tax these variable amounts when they are paid.
The Taxation Laws Amendment Bill is available on National Treasury’s website, www.treasury.gov.za, and comments on the bill can be submitted to Treasury until the end of this month.