1. T-Day is (partly) here
Tashia Jithoo
Bowman Gilfillan

2. What is T-Day about ?
Using tax incentives to drive behaviour and influence whether people save and how people save
Tax incentives are used differently at different times with different aims and results
In some countries currently seeing reductions in fund contribution tax relief (eg Ireland; Netherlands; UK effective April 2016) for various reasons (eg high tax relief suitable only for certain income earners; retirement saving is compulsory/near compulsory/or already have high saving culture; requiring tax for other reasons etc) See Pensions at a Glance 2015: OECD and G20 Indicators
In SA – restructuring and enhancing tax relief irt fund contributions to incentivize retirement saving

3. What is T-Day about?
a set of legislative changes to be implemented through the Taxation Laws Amendment Act (TLAA)
(partly) comes into effect on 1 March 2016
designed to:
harmonise the tax treatment of the different types of funds; and
‘encourage’ retirement saving in a way that secures people an income stream into retirement
Is part of a broader aim for (amongst other things) greater & more effective financial security for individuals and to better manage pressure on the national social security system.

4. Context and background – A long history. . .
2002 Report of the Committee of Inquiry into a Comprehensive System of Social Security for South Africa
2004 NT Discussion Paper on Retirement Reform & 2007 Second Discussion Paper on retirement reform - Social Security and Retirement Reform
History of the TLAA
2011 TLAB released for discussion (preservation first raised)
2013 TLAA passed but postponed for two years
2014 TLAA enacted implementation date 1 March but postponed for one year
2015 TLAA enacted with implementation date 1 March
2016 Revenue Laws Amendment Bill – proposes further amendments to 2015 TLAA
Parts of TLAA coming into effect on T-Day and parts not

5. What is changing on T-Day?
Until 16/02/2016 (Tuesday), the plan was that on T-Day there would be changes to:
what is tax deductible and what is not (aligning tax treatment of contributions between funds)
how much is tax deductible (tax deductions rates for retirement saving)
how retirement benefits are paid - annuitising retirement benefits in prov funds & increasing the de minimis amount

6. What is changing on T-Day?
As per NT statement on 16/02/2016 (Tuesday), the PROPOSAL was:
Alignment of tax treatment of contributions between funds - proceed
New tax deductions rates – proceed. NT sd it would look at a “formula that will allow a technically appropriate way to allow the tax deduction to provident members for two years”  
Annuitisation of prov fund benefits - postpone for two years
If no agreement between Govt and Nedlac after two years on how to proceed, then “the tax deduction [for provident funds] will fall away to get the right balance”
Prevent tax abuse by preventing transfers from pen to prov funds for the next two years “to avoid weakening the current pension system”
Reconsideration of the means test for the SOAP

7. What is changing on T-Day?
18/02/2016 (Thursday) – after Cabinet meeting:
Annuitisation to be postponed for two years
Alignment of tax treatment to proceed
New tax deduction rates to proceed but no indication about whether would be a max deduction rate for prov funds
No pen to prov transfers for next two years
Urgent amendments to 2015 TLAA to be tabled in Parliament

8. 24/02/2016 (Wednesday) - Budget Speech & Revenue Laws Amendment Bill
What is changing on T-Day?
24/02/2016 (Wednesday) - Budget Speech & Revenue Laws Amendment Bill
Proceed with the alignment of tax treatment and changes to tax deduction rates
Changes/corrections to calculation of fringe benefits
Postpone implementation of annuitisation for two years with all the same preservation rights as in the TLAA
Postpone tax free transfers from pen to prov
Relevant changes to be retrospective to T-Day

9. So let’s focus on what we know is changing wef today . . .

10. Aligning tax treatment across funds – WHAT is deductible
Aligning tax treatment across funds – WHAT is deductible? How MUCH is deductible?
Currently - different deductions iro pen funds, prov funds & RA funds
Employer (“Er”) contributions:
Current:
Tax deduction for contributions to pen and prov funds (no Er contributions to RA funds)
How much? ITA prescribes limit of 10% of ‘approved remuneration” but SARS practice to permit up to 20% as a deduction
New: No change to what is tax deductible and wrt how much, the amount of deductions is no longer restricted to certain limits

11. Aligning tax treatment across funds – WHAT is deductible
Aligning tax treatment across funds – WHAT is deductible? How MUCH is deductible?
Employee (“Ee”) contributions:
Current:
Pension funds - limited tax deductibility; not more than R1750 or 7.5% p.a of retirement fund employment income (RFEI) – ie pensionable salary ito fund rules
RA funds – limited tax deductibility; not more than 15% of non-retirement funding income (NRFEI)
Provident funds - no tax deduction for Ee .

12. Aligning tax treatment across funds – WHAT is deductible
Aligning tax treatment across funds – WHAT is deductible? How MUCH is deductible?
Employee (“Ee”) contributions:
New:
Ee gets tax deductions on Ee and Er’s contributions to all funds regardless of the type of fund (fringe benefits)
New single aggregated tax deduction rate applies across all funds that Ee participates in: How much?
27.5% of the higher of Remuneration or Taxable income BUT
subject to a cap of R p.a
Change in the ‘base’ of tax calculation from RFE (pen funds) and NRFE (RA funds) to the higher of Remuneration or Taxable Income (the aggregated rate). If tax base higher, likely that tax deduction amount may also be higher.

13. Fringe Benefits
In simple terms . . .
An amount paid by a third party (eg the employer) which the employee derives value from
How does it work?

14. Fringe Benefits
Er can claim deduction iro Er contribution to pen and prov funds
(s 11(l) of ITA no longer restricts this to a certain percentage)
But . . .
Er contribution is now also deemed to have been made by the Ee
This means that . .
Er contribution becomes taxable benefit in hands of the Ee (ie Fringe Benefit) (par 12D of 7th Schedule) AND so notionally increases Ee’s taxable income
but . . .
Ee should not be worse off because may still claim this amount of the Er contribution as his/her own tax deduction
unless . . .
Ee’s deductions exceed the aggregated tax deduction limit of 27.5% / R350,000

15. Fringe Benefits Issues
How are fringe benefits calculated?
Could there be a potential mismatch between Er contribution paid and value of the fringe benefit for the Ee?
Could there be a fringe benefit if the Er is on a contribution holiday?

16. Calculating Fringe Benefits
What you’re really calculating is the cash equivalent value of the fringe benefit
Why? To ascribe a value to the deduction that the Ee can claim
Where does this info go? Into the Contribution Certificate that the Fund prepares to enable the Er to calculate and effect the tax payments irt the Ee
Differs in DC vs DB context:
DC fund: FB = the value of the Er contribution.
DB fund or DB component: the value of the FB is calculated in accordance with a formula FB = (A x B) - C
A = contribution factor (Fund Member Category Factor – “FMC factor”) that will be provided by the Fund to the Er in Contribution Certificate
B = RFEI (ie pensionable salary)
C = Ee contribution

17. Calculating Fringe Benefits
NOTE: Minister has issued regs regarding calculation of the FMC factor:
Information to be included in the contribution certificate (issued Dec 2015)
Formulae to calculate FB for different components (issued Jan 2016)

18. Fringe Benefit Mismatches
What? A potential mismatch arises when the value of the Er contribution is less than the value of the FB
Why is this an issue? Ee is taxed on the full fringe benefit, but cannot claim the full deduction  
Example:
annual Er contributions to DB fund for Ee = R ;
using Seventh Schedule formula, the value of the taxable fringe benefit comes to R330,000;
ito s11(k) of the ITA, the Ee can only claim the amount actually contributed by the Er (i.e. R ) as a deduction, and not the full amount of the taxable fringe benefit (ie R ).
This means that the Ee is taxed on the R mismatch, which cannot not have been the intention.

19. Fringe Benefit Mismatches
Govt has sought to address the issue of potential mismatches in the Revenue Laws Amendment Bill (RLAB) tabled in the Budget Speech
RLAB proposes an amendment to s11(k) of the ITA to say that the Er contribution made (for the benefit of the Ee) must be:
deemed to be equal to the cash value of the FB; and also
deemed to have been contributed by the Ee
Effect of this?
Would not matter whether the contribution was in fact different to the value of the FB
Amounts deemed to be equal and the Ee deduction = Er contribution

20. Could there be a fringe benefit if the Employer is on a contribution holiday?
Why is this an issue?
If on a CH, no actual contribution paid by Er
But is still a FB which increases the E’s taxable income - formula for the calculation of FB makes no reference to actual Er contribution (X = (A x B) – C)
Without an actual Er contribution, Ee has no tax deduction to off-set against the increased taxable income
How is it being addressed?
2016 Budget p158 of Annexure C acknowledges that para 12D of the Seventh Schedule currently only makes provision for actual Er & Ee contributions and “excludes contributions made on behalf of the Er or Ee, for eg by the retirement fund”.
Proposed amendment to include “all contributions made for the Ee’s benefit”

21. Annuitisation: The Current Position
How retirement benefits are paid
Annuitisation: The Current Position
Pension and RA funds:
What can be taken as a lump sum on retirement?
If total benefit is less than R75 000 can take all in cash
If total benefit is more than R75 000, maximum of 1/3 of that permitted as cash payment
What must be taken as a pension/annuity?
The total less any lump sum taken
Must be a life or living annuity
Can be provided in house by the fund or by a long term insurer
 Provident Funds:
The whole benefit can be taken in cash.
Members can use that lump sum to purchase an annuity from a long term insurer

22. Some points on Annuitisation: How will it be managed when effective?
How retirement benefits are paid
Some points on Annuitisation: How will it be managed when effective?
Pension and RA funds:
Same as now but de minimis amount (ie the amount which triggers annuitisation) is increased from R to R – (NT indicated that will be effective wef 1 March 2016)
Provident fund :
55 or older on T-Day (Full Encashment Rights): Entire benefit accumulated before and after T-Day can still be taken in cash (if remain in same fund).
Under 55 on T-Day (Limited Encashment Rights)
Benefit split into “pre T-Day-pot” (Old Money) and “post T-Day pot” (New Money)
Old Money (Pre-pot) (which includes contributions and other amounts paid in before T-Day eg divorce benefit plus investment growth on these) can still be taken in cash after T-Day
New Money (Post-pot) amount under R247 500 can be taken in cash
Post-pot amount above R247 500 can only be taken as an annuity

23. Annuitisation Implementation Issues
How retirement benefits are paid
Annuitisation Implementation Issues
If limited encashment rights:
mechanism for fund/admin to keep track of both pots of money
admin system capability & benefit statements
managing transfers of two pots to new fund (reliant of info from old fund; managing errors & liability)
managing deductions and one withdrawal in preservation funds (different options - eg at election of member or fund; proportionately)
Note : Budget Review, Annexure C specifically deals with divorce deductions and proposes a proportionate deduction from both pots
Not clear why limited mention of divorce deductions only
But submitted that correct principle as s37D refers to deductions from “the benefit” as a whole & also prevents abuse aimed at reducing the “post-pot”

24. Some points on annuitisation: How will it be managed when effective on 1 March 2018?
Other issues from Budget Review
Concern that currently full encashment rights in prov fund for over 55 year olds are lost if they move to another prov fund
Ito Budget Review (Annexure C)
This is an unintended consequence
“Forced transfers (through the closure of the retirement fund) of over 55s will not affect their ability to make further contributions that can be taken as a lump sum”
Does not recognise forced transfers through means other than fund closure – no seemingly defensible reason?
Needs to be addressed

25. Employers and Employees
How does all this affect different role-players ?
Employers and Employees
retirement benefits and risk benefits (and medical aid) are often the biggest component of the suite of employee benefits provided by an employer,
the differential tax treatment of contributions to, and benefits from, the different types of funds influences how employers (and employees) design their compensation packages; and
employers ‘administer’ the tax consequences on contributions for employees through deduction and payment of tax
Communication obligations
Likely to see . . .
Restructuring of compensation packages for sectors of employees above R cap
Consideration of changes to categories of eligible employees; lower contribution rate options, changes to pensionable salary definitions etc (but note implications , eg effect of risk benefits)
Review of approved v unapproved risk benefits arrangements for tax deduction purposes (but note difference in distribution regime )

26. Funds/Administrators/Valuators
How does all this affect different role-players ?
Funds/Administrators/Valuators
Managing annuitisation (when effective)
Communication obligations
Valuing fringe benefits (also look at SLA where delegating function)
Contribution certificates – roles of different service providers; indemnities and liability for errors etc
Managing requests from employers info and/or for changes to fund structure, member categories, risk benefit arrangements, contribution rates (rule amendments if changes are permissible)
Others?

27. THANK YOU Tashia Jithoo
Of Counsel: Pensions and Financial Services Regulation
Bowman Gilfillan