Parliament’s standing committee on finance has postponed to next week its decisions on the implementation of uniform tax deductions for all retirement fund members and the requirement that provident fund members must buy a pension at retirement.
This followed a statement this week by labour union federation Cosatu, which said the implementation of these changes to the Income Tax Act by way of a 2013 amendment was “a declaration of war on workers” by the National Treasury.
The changes, due to come into effect on March 1 next year, introduce a tax deduction for contributions made to any retirement fund of up to 27.5 percent of the higher of your taxable income or remuneration – with an annual cap on the deduction of R350 000.
In addition, members of provident funds, who can currently withdraw all their savings at retirement, will be required – as are members of pension funds – to buy an annuity (monthly pension) with two-thirds of their savings at retirement. This requirement is commonly referred to as annuitisation.
Parliament is now being asked to decide whether to go ahead with the implementation of the already-legislated amendments next year (but with a higher threshold for annuitisation, below which retirement fund members will not be required to buy a pension), or to delay implementing the requirement to buy an annuity until 2018.
If Parliament chooses to delay annuitisation until 2018, provident fund members will receive a higher tax deduction for their contributions next year and a reduced deduction in 2017 if they are still not prepared to use two-thirds of their future contributions to buy an annuity at retirement.
Under the reforms, provident fund members will continue to have the right to take as a lump sum when they retire the amount saved in their funds before the date of implementation, and members over the age of 55 on March 1 next year will be able to take all their savings as a lump sum.
Cosatu says the new tax deductions coupled with annuitisation are meant to “coerce workers to save”. It had demanded the release of a comprehensive social security reform discussion document before it will consider the retirement reforms.
This week, Parliament’s finance committee chairman, Yunus Carrim, gave members of the committee more time to consult with their parties before deciding how to vote on Tuesday next week, with a view to the bill going before the National Assembly on Wednesday.
The changes to the Income Tax Act were passed by Parliament in 2013 for implementation in March this year, but last year the Act was amended to delay implementation to March next year to allow for further consultation with unions through the National Economic Development and Labour Council (Nedlac).
National Treasury has told the committee that its consultations have not resulted in any progress and Cosatu has stuck to its demands.
Treasury officials have also said that the tax changes and annuitisation are in line with the social security proposals, but the social security proposals are complex and further work has to be done before the paper can be released.
At this week’s parliamentary hearing, Treasury responded to public comments on the latest proposals around the timing of the implementation of uniform tax deductions and annuitisation.
The finance committee heard that there were 11 submissions on the proposals. Eight favoured the proposal of proceeding with the changes with a higher annuitisation threshold of R247 500, while two wanted the reforms postponed until the paper on comprehensive social security was released and discussed, and one said the reforms should be delayed to March 2017 to allow more time for consultation.
In its response, Treasury says it will be difficult to implement social security reforms in a single step. They will have to be implemented incrementally over a number of years. It says delaying the implementation of the retirement reform amendments will mean that members of retirement funds will “continue to be treated unfairly with regard to higher charges, denial of tax deductions for provident fund members, and poorly designed annuity policies”.
Further, the taxation system will continue to benefit higher earners who receive bigger tax deductions than those on lower incomes, it says.
Dismissing comments about the failure to increase the R350 000 limit on deductions in line with inflation, Treasury said this could be addressed in next year’s Budget.