2011 budget overview in respect of Employee Benefits
Changes to tax treatment of retirement fund contributions
Taxpayers are allowed income tax deductions for contributions to pension and retirement annuity funds. In addition, employers may contribute to retirement funds on behalf of employees. These contributions by employers are not currently taxed in the hands of employees. Several changes are proposed to improve tax administration and promote greater equity in the income tax system. From 1 March 2012:
To protect workers’ savings, government proposes to subject lump-sum withdrawals from provident funds to the one-third limit applying to pension and retirement annuities. The implementation date of any changes in the rules governing provident funds will be subject to thorough consultation with trade unions and other interested parties, and vested rights will be protected. It remains to be seen what impact this will have on provident funds as a retirement planning vehicle.
Retirement industry reforms
Workers often withdraw their savings when they leave a job rather than transfer it to a new fund. The National Treasury will consult with the public this year regarding the viability of mandating preservation upon change of jobs or in the event of divorce.
The Pension Funds Act does not cover public sector funds. Discussions are under way regarding the way these funds will be regulated in future.
Strong supervisory capacity is also required to ensure that funds obey the rules. Although the number of active funds has declined significantly to about 3200 today, the Minister feels more consolidation is both desirable and achievable.
Pension Funds also need to improve the level of disclosure to clients. A lack of transparency prevents customers to compare products across funds which often results in excessive charges. During 2011 the National Treasury will consult with industry bodies to draft a code of ethics and address concerns over high fees.
Personal income tax relief
Government proposed to reduce personal income tax by R8.1 billion to compensate partially for inflation. Most of the relief is provided to taxpayers in lower income brackets.
Income tax brackets will be adjusted to offset the effect of bracket creep. Income tax thresholds have been raised from R57 000 to R59 740 for below 65’s and from R88 528 to R93 150 for 65’s and older. For 75’s and older the threshold will be R104 261.
The interest income exemption has been raised from R22 300 to R22 800 (and also from R32 000 to R33 000 for 65’s and older).
The primary rebate for individuals will be increased from R10 260 to R10 755 and the secondary rebate (for 65’s and older) from R5 675 to R6 012. A third rebate of R2 000 is proposed for 75’s and older.
Tax free lump sum upon retirement and involuntarily retrenchments
This will increase from R300 000 to R315 000 from March 2011.
Medical scheme contributions
The deduction has increased from R670 to R720 for the member and first dependent and for each additional dependent increased from R410 to R440.
These deductions and qualifying out-of-pocket medical expenses will be converted to tax credits from 1 March 2011. A tax credit provides for more equitable tax relief as the relative value of the relief does not increase as the marginal tax rate of the individual increases which is currently the case.
This will increase by R60 to R1140 from 1 April 2011. For pensioners over age of 75 the old age grant will increase by a further R20 to R1160 per month.
Child grants will be increased from R250 to R260 per month in April 2011 and to R270 in October 2011.
Reforming the Means Test
Social grants means tests are intended to ensure that support is provided to beneficiaries who need it, and that social assistance is both fair and financially sustainable.
Up to a certain income – the “disregard level” – recipients get the full grant. The grant level falls as incomes rise above the disregard level. Above the means test threshold, no grant is payable.
It is proposed that the disregard level and the means test threshold be increased substantially.
Enhanced competition for provision of living annuities
Living annuities can only be provided by long-term insurers. To encourage competition, government proposes to broaden the list of service providers allowed to provide these annuities to include collective investment schemes and the National Treasury’s retail savings bond scheme.
Review tax treatment of risk benefits
To ensure equity, the tax system should not treat lump-sum payments more favourably than annuity payments. Government proposes that any compensation from the Road Accident Fund and its no-fault successor, whether as a lump-sum payment or an annuity, be exempted from income tax. At the same time, alignment of the tax treatment of risk benefits paid by private-sector funds will be investigated.
National health insurance
Proposals are under review for a national health insurance system, as part of the broader restructuring and enhancement of health services. There will be substantial cost implications. Government expects that the national health insurance system will be phased in over 14 years.
Tax policy research projects underway –
Sanlam Employee Benefits
Contributors: Anton Swanepoel, Danie van Zyl, Kobus Hanekom, Lance Hoffman
23 February 2011
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