Non-deductible contributions to retirement funds

Transcription

1 Non-deductible contributions to retirement funds A new section 10C was inserted into the ITA with effect from 1 March It provides an exemption in respect of a compulsory annuity. Compulsory annuity is defined to mean the remainder of the retirement interest of a person payable in the form of an annuity as contemplated in a) Paragraph (ii)(dd) of the proviso to paragraph (c) of the definition of pension fund; b) Paragraph (e) to the proviso to the definition of pension preservation fund ; or c) Paragraph (b)(ii) of the proviso to the definition of retirement annuity fund. 1

2 Non-deductible contributions to retirement funds Section 10C(2) It exempts from income tax compulsory annuity equal to so much of own contributions to a pension fund, provident fund and RA fund that did no rank for deduction against the person s income in terms of section 11(k) or (n) And has not previously been allowed as a deduction in terms of the Second Schedule exempted from normal tax under section 10C in determining taxable income in respect of any year of assessment. 2

3 Commentary on section 10C The exemption only applies in respect of a compulsory annuity as defined. The definition does not include a compulsory annuity payable by a provident fund or a provident preservation fund. As from 1 March of it will apply. The exemption only applies to a compulsory annuity acquired by a person after retirement. Subsequent holders of the annuity do not qualify. Non-deductible contributions are aggregated and can be applied against a person s retirement interest regardless of the fund that it was withdrawn from. 3

4 Example 1: One fund contribution, one annuity Gerald retires from a pension fund. He has R in nondeductible contributions accumulated at the time of his retirement from the fund. He decides not to take a lump sum, and acquires a compulsory with his entire R retirement interest. The first R in annuities from the living annuity will be exempt from income tax. Commentary on example 1 Other options available to the taxpayer in this example Option 1 The section 10C exemption applies to the taxable annuity. It has nothing to do with the R lump sum taxed at zero per cent. If the taxpayer selected a lump sum of exactly R the position would have been as follows: 4

5 Example 1: One fund contribution, one annuity Lump sum R Less: Paragraph 5 deduction R Tax on R at 0% = 0 If this is correct, the R was accounted for under paragraph 5 and not be deductible against the annuity. 5

6 Example 2: More than one fund John previously (in 2013 tax year) retired from a provident fund and received a lump sum of R The full amount was tax-free (taxed at 0%). In 2014 tax year John contributed a lump sum of R to a retirement annuity fund. In 2015 he retires from the RA and his retirement interest is R He takes a lump sum of R (R ). The balance of the R contribution that was not deductible under section 11(n) is R His tax position is as follows: 6

7 Example 2: More than one fund RFLB R Less: Undeductible contribution Plus: Prior lump sum Aggregate R Tax on aggregate 0 Less: Tax on prior lump sum 0 Tax on RFLB 0 7

8 Example 2: More than one fund The undeductible contributions of R (R R ) that has not yet been deducted or taken into account can be deducted from any compulsory annuity income that he receives. It can, however, not be exempted against a compulsory annuity from a provident fund. 8

9 Example as per Explanatory Memorandum Nhlanhla belongs to a pension fund. Year Contributed Deducted Balance of nondeductible contributions PF RAF PF RAF PF RAF

10 Example as per Explanatory Memorandum At the end of year 4 Nhlanhla retires from the pension fund, but continues contributing to the retirement annuity fund. His pension fund retirement interest at the time is R He takes a lump sum of R , and acquires a living annuity with the two-thirds (R ) remaining. Taxable portion of lump sum Non-deductible contributions R Lump sum R Therefore no tax so that R of nondeductible contributions remain. In year 5, Nhlanhla receives R5 000 in annuity payments. At end of the year of assessment a non-deductible balance of R available. In year 5 he has a total of R in non-deductible contributions which 10 he can deduct against the R5 000 annuity income.

11 Comprehensive example Ricky resigned from a pension fund in July 2011 and received a lump sum of R that was taxed as a withdrawal benefit. He is currently a member of an RA fund (total value R ) and a provident fund with a total value of R His undeductible contributions to these funds are: RA - R Provident fund - R He retires on 1 April 2014 and receives the following lump sums: 11

12 Comprehensive example RA R (R ) Provident fund R (100%) RA lump sum R Provident lump sum Less: Non-deductible contribution Plus: Prior WB

13 Comprehensive example Tax on R R Less: Tax on R Tax payable R Note. The contributions made to the provident fund that were non-deductible can be deducted under paragraph 5. If deducted against the lump sum it cannot be deducted against compulsory annuity. 13