T-Day legislation gets the nod from parliament

By Kobus Hanekom, Simeka Consultants & Actuaries

Taxation Laws Amendment Bill, 2015

T-Day legislation gets the nod from parliament

Update (13 January): .  It was agreed that it would be implemented in substantially the same format but with an increase in the de minimis amount from R150 000 to R247 500. It has now been confirmed that President Zuma has officially signed the Taxation Laws Amendment Act of 2015 into law, and did so on 8 January 2016.  T-Day will therefore be implemented on 1 March 2016. The legal team from associate company, Simeka Consultants and Actuaries, tell us that the Act contains the same wording we have seen in the Bill.

Original article:
After protracted consultations with Labour and other interest groups T-Day will be implemented in substantially the same format but with an increase in the de mimimis amount from R150 000 to R247 500.

Last week the National Assembly voted in favour of option 1 proposed by National Treasury. During the debate Finance Minister Nhlanhla Nene emphasised that the retirement reforms so strongly opposed by the Congress of South African Trade Unions (Cosatu) were good ones that would help protect pensioners against old-age poverty. He said the Treasury would undertake a review of the new law, including further consultations, within two years of its implementation. It would also conduct an extensive education campaign.

On 1 December this week, The National Council of Provinces passed the Bill without amendments and sent it to the President to be signed into law. Although there can be no guarantee, there is a very strong probability that the President will sign the Bill into law without further changes.

Retirement funds and employers will therefore have to take steps to ensure they will be in a position to implement T-Day on 1 March 2016.

Option 1 is the implementation of the original Taxation Laws Amendment Act of 2013 (which in terms of the current Income Tax Act will apply from 1 March 2016) with the exception that the de minimis amount is increased from R150 000 to R247 500. That means that a retirement benefit payable by any pension, provident or retirement annuity fund after T-Day that does not exceed the de minimis amount can be taken in a cash lump sum.

The implementation of T-Day will have two significant implications for retirement fund members.

• It will harmonise the tax deductibility of retirement fund contributions and
• It will change provident funds benefit structures into pension fund benefit structures (also referred to as compulsory annuitisation), subject to the protection of vested rights.

T-Day is good news for most members because they will be able to make greater tax deductible contributions to retirement funds and they will effectively enjoy contribution flexibility for the first time.

Most members who run a retirement calculator and discover that they are under provided for are not be in a position to increase their contributions at present – primarily because tax legislation does not allow it outside a total cost to company remuneration approach. From 1 March 2016 any member will be able to request an increase in contributions and will enjoy a tax deduction up to the new threshold (assuming the fund rules allow additional voluntary contributions).

T-Day financial regulations will not be good news for fund members who earn more than R1 300 000 pa. They will be entitled to a tax deduction on contributions of up to 27.5% of their remuneration or their taxable income, whichever is the greater, but subject to a rand cap of R350 000 pa. This is a cumulative maximum for all retirement fund contributions. Higher income earners will therefore have to aggregate their contributions, including those to retirement annuity funds and decide on a strategy going forward. There are alternatives, but none as effective as making deductible contributions to a retirement fund. Retirement funds are very tax efficient and cost efficient – especially larger occupational retirement funds that benefit from economies of scale. You will not find a better investment vehicle in South Africa.

Provident fund members will not be affected by compulsory annuitisation immediately. All new contributions will effectively be paid into a pension fund type benefit structure but vested rights (the amount of the retirement benefit that may be taken in a lump sum) will be protected. Whatever the member’s retirement benefit in a provident fund is at the end of February 2016 it will be “protected”. Even where a member will retire many years after T-Day, he/she will be able to take that amount as well as the growth thereon as a lump sum benefit. It will take the average fund member (earning R10 000 pm and contributing 15% pa) 7 years for new contributions and growth thereon to reach the de minimis of R247 500. Members 55 and older on T-Day will not be affected if they remain in the same provident fund.

Observation: The Government has taken great care with the introduction of compulsory annuitisation to provide provident fund members with the softest possible landing. No vested rights will be affected and the new regime will effectively phase in over a good number of years.

What action will employers have to take to ensure the implementation of T-Day on 1 March 2016?

Employers need to make sure that their payroll service provider can make all the necessary structural adjustments to the payroll and the salary advice. These adjustment need to show that employer contributions to retirement funds will be taxed as fringe benefits in the hands of employees. Employees on the other hand will enjoy increased tax deductibility up to 27.5% as discussed.

Contribution flexibility is arguably the most important development to help facilitate and explain. Many members are not able to increase their deductible contributions at present. From T-day next year they will for the first time be able to manage their contributions to ensure a good retirement outcome.

Trustees of especially provident funds will have to attend to rule amendments and adjustments to forms and procedures as a result of T-day.

The implications and the opportunities created by the T-Day amendments should be communicated with members.

Observation: Member communication and education sessions will be essential. In our experience member guidance and support programmes such as a Day One fund induction strategy and a projected pension ratio calculator that engages members in their own retirement outcomes are much more effective.