Non-deductible contributions to retirement funds

A new section 10C was inserted into the ITA with effect from 1 March 2014. 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”.

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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.

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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are aggregated and can be applied against a person’s retirement interest regardless of the fund that it was withdrawn from.

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Example 1: One fund contribution, one annuity

Gerald retires from a pension fund. He has R200 000 in non-deductible 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 R1 000 000 retirement interest. The first R200 000 in annuities from the living annuity will be exempt from income tax.

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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 R500 000 lump sum taxed at zero per cent. If the taxpayer selected a lump sum of exactly R700 000 the position would have been as follows:

Example 1: One fund contribution, one annuity

Lump sum R700 000

Less: Paragraph 5 deduction 200 000

R500 000

Tax on R500 000 at 0% = 0

If this is correct, the R200 000 was “accounted for” under paragraph 5 and not be deductible against the annuity.

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Example 2: More than one fund

John previously (in 2013 tax year) retired from a provident fund and received a lump sum of R315 000. The full amount was tax-free (taxed at 0%). In 2014 tax year John contributed a lump sum of R400 000 to a retirement annuity fund. In 2015 he retires from the RA and his retirement interest is R420 000. He takes a lump sum of R140 000 (R420 000 ÷ 3). The balance of the R400 000 contribution that was not deductible under section 11(n) is R385 000. His tax position is as follows:

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Example 2: More than one fund

RFLB R140 000

Less: Undeductible contribution 140 000

0

Plus: Prior lump sum 315 000

Aggregate R315 000

Tax on aggregate 0

Less: Tax on prior lump sum 0

Tax on RFLB 0

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Example 2: More than one fund

The undeductible contributions of R245 000 (R385 000 - R140 000) 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.

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Example as per Explanatory Memorandum

Nhlanhla belongs to a pension fund.

Year Contributed Deducted Balance of non-

deductible

contributions

PF RAF PF RAF PF RAF

1 100 000 20 000 70 000 10 000 30 000 10 000

2 100 000 20 000 70 000 10 000 60 000 20 000

3 100 000 20 000 70 000 10 000 90 000 30 000

4 100 000 20 000 70 000 10 000 120 000 40 000

5 20 000 15 000

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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 R450 000. He takes a lump sum of R150 000, and acquires a living annuity with the two-thirds (R300 000) remaining. Taxable portion of lump sum Non-deductible contributions R160 000. Lump sum R150 000. Therefore no tax so that R10 000 of non-deductible contributions remain. In year 5, Nhlanhla receives R5 000 in annuity payments. At end of the year of assessment a non-deductible balance of R20 000 available. In year 5 he has a total of R15 000 in non-deductible contributions which he can deduct against the R5 000 annuity income. 10

Comprehensive example

Ricky resigned from a pension fund in July 2011 and received a lump sum of R400 000 that was taxed as a withdrawal benefit. He is currently a member of an RA fund (total value R600 000) and a provident fund with a total value of R800 000. His undeductible contributions to these funds are:

RA - R50 000

Provident fund - R120 000

He retires on 1 April 2014 and receives the following lump sums:

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Comprehensive example

RA R200 000 (R600 000 ÷ 3)

Provident fund R800 000 (100%)

RA lump sum R200 000

Provident lump sum 800 000

1 000 000

Less: Non-deductible contribution 170 000

830 000

Plus: Prior WB 400 000

1 230 000

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Comprehensive example

Tax on R1 230 000 R195 300

Less: Tax on R400 000 0

Tax payable R195 300

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.

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