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Taxation Laws Amendment Bills, 2007 (Retirement Lump Sum Payouts). Informal Hearings 13 March 2007. Retirement Funding Basics. Three Basic Types of Retirement Funds. Pension Funds (Employment Plans) Example: Private sector Example: GEPF Provident Funds (Employment Plans) - PowerPoint PPT Presentation
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Taxation Laws Amendment Bills, 2007(Retirement Lump Sum Payouts)
Informal Hearings
13 March 2007
Retirement Funding Basics
3
Three Basic Types of Retirement Funds
• Pension Funds (Employment Plans)– Example: Private sector– Example: GEPF
• Provident Funds (Employment Plans)– Example: Unions
• Retirement Annuity Funds (Individual)– Example: Contractual savings
4
Three Retirement Stages
• Stage #1: Contributions
• Stage #2: Fund Growth
• Stage #3: Withdrawals– Lump sum payouts– Conversion to annuities
• Guaranteed annuities• Living Annuities
5
Contributions: No Change
• Pension Funds– Employee contributions are deductible up to 7,5 of
employee salary– Employer contributions are deductible up to 20% of
employee salary• Provident Funds
– No deductions for employee contributions– Employer contributions are deductible up to 20% of
employee salary• Individual Retirement Annuity Funds
– Member contributions are deductible up to 15% of contributions (after set offs for employment contributions)
6
Growth: Tax Removed
• Under current law, all retirement funds (i.e. pension, provident and retirement annuity funds) are subject to the Tax on Retirement Funds– 9% rate (down from a 25% historic high)– The tax impacts only retirement fund interest,
rental and foreign dividends
• The Tax on Retirement Funds removed– As of 1 March 2007– 1 final payment still due
7
Withdrawals
• Permissible withdrawals– Only a certain percentage of fund value can be
withdrawn upon retirement (i.e. as a lump sum)– All the excess must be converted to a (guaranteed or
living) annuity with funds withdrawn steadily over the post-retirement period
• Taxation of permissible withdrawals– Lump sum withdrawals: tax exemption plus tax
averaging– Annuity withdrawals: growth is tax-free before
withdrawal, but fully taxable upon withdrawal
Lump Sum Proposals
9
Permissible Lump Sums
• Current Law– Pension and individual retirement annuity funds can
be withdrawn equal to: the greater of 1/3rd of total value or an amount bearing a per annum annuity up to R1 800)
– Provident Funds can be fully withdrawn
• Proposal– The monetary R1 800 threshold will be abandoned– The new monetary threshold will be R50 000 as this
sums relates to the 2/3rds (the change prevents fees from outpacing potential benefits)
10
Tax-Free Lump Sums: “Say Good Bye to (2) Old Formulas”
• Formula A (Good Bye!)– Y = 15/1 x N/50 x 1/3rd x Average Salary– N means years of service– Maximum years (50) and salary (R60 000)
• Formula B (Good Bye!)– Z = C + E (minus) D– C means formula A, E means nondeductible
contributions and D means pre-1941 deductible contributions
• Formula C stays (exemption for pre-1998 government years of service)
11
Tax-Free Lump Sums: New Regime
• Under the new regime, the tax-free lump sum equals:– R300 000 (+)– Previous non-deductible contributions (+)– Pre-1998 Government employment
(formula C)
• The new regime ends all reliance on “salary” and “years of service”
12
Taxable Lump Sums:“Say Good Bye to Complex Averaging”
• Formula 5(10) (Good Bye!)– Y (A divided by [B + D – (C + L)]; (x)– (B – L); (+)– (L x R)– Along with other inputs
• In essence, the taxable lump sum was determined with reference to non-lump sum taxable income over 2 years with an 18% minimum
• Avoidance Scheme: Wealthy taxpayers reduced their lump sums to an 18% rate by relying on tax-free preference dividends
13
Taxable Lump Sums: New Regime
• Under the new regime, the taxable lump sum is:– Taxed at 18% for the first R300 000 taxable
amount (+)– Taxed at 36% for the remainder
• Complex averaging and planning opportunities removed
14
New Lump Sum Regime: Combined
• Once the tax-free lump sum is considered, the net effect is a separate rate schedule for lump sums, as follows:– Previous non-deductible contributions and
pre-1998 Government employment
(formula C) are tax-free– Next R0 to R300 000 is tax-free– Next R300 001 to R600 000 is taxed at 18%– Next R600 001 & more is taxed at 36%
15
New Lump Sum Benefits: Rationale
• Simplicity (including a simplified withholding regime)
• The new regime skews tax benefits in favour of lower- and middle-income earners
• High net worth individuals no longer benefit from the use of preference share schemes
• Note: The lump sum formulas are applied on a cumulative basis over the taxpayer’s lifetime
16
Effective Date
• 1 October 2007
• The delayed effective date provides sufficient time for operational systems changes
• Stay tuned for more changes!!
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