Deferred compensation schemes may be scrapped if a proposal in this year's Budget Review to levy fringe benefits tax on employer contributions to such schemes is adopted, Hein Daffue, a legal adviser at Sanlam Life law ser-vices, says.
The schemes, which are investments through employer-owned life assurance policies, are often provided on a salary-sacrifice basis, thereby avoiding tax, with employees receiving the benefits at retirement.
Daffue warns that it would be prudent for employers to wait for the publication of the Taxation Laws Amendment Bill before deciding whether or not to cancel their deferred compensation schemes.
"Only once the Bill is finalised will employers and their employees be in a position to make informed decisions on the future of such schemes and the employer-owned policies."
Fate of tax-free R30 000
Daffue says the Budget Review did not indicate what will happen to the tax-free amount of R30 000 that is available to employees at retirement, early retirement due to disability, service termination at or after age 55, or death in service. The review said only that the R30 000 will now be included in the R300 000 that a retrenched employee may withdraw tax-free from a retirement fund.
Even if fringe benefits tax is levied on employer contributions, if the R30 000 tax-free amount stays, it might be to the advantage of some employees if their employers retained ownership of the policies until the benefits are paid out, Daffue says.
Employees who are far from retirement might be better off if their employers agree to amend their employment contracts and either pay out the benefits or cede the value of the policy to the employees while they are still in service. However, the employees would have to pay tax, at their marginal rate, on the benefits or the value of the policy. Daffue says there might also be tax implications for the employer to consider.
Employers should consult their tax advisers on the most appropriate solution for their employees and then reach an agreement with their employees, he says.