You should be able to claim a tax deduction for retirement fund contributions against passive income such as interest income or royalties, the latest tax amendments propose.
The Tax Laws Amendment Bill, released by National Treasury late last week, proposes these deductions be allowed with effect from March 1 this year.
On March 1, the new tax deduction regime for retirement fund contributions became effective, making it possible for you to claim contributions to a pension fund, provident fund or retirement annuity (RA) as a deduction against taxable income or taxable remuneration, which ever is higher, up to 27.5 percent of that income or remuneration.
According to the explanatory memorandum to the bill, until March 1 this year, members of RAs were able to claim contributions to RAs as a deduction against passive income.
Under the new tax deduction regime, the Act was amended to allow for deductions against income from “carrying on a trade”, which excludes deductions against passive income.
The proposal in the amendment bill is to allow you to deduct contributions to an RA, a pension fund or a provident fund from both income from a trade and passive income.
However, capitals gains will continue to be excluded from passive income.
Another provision of the Income Tax Act allowed you to carry over excess contributions to an RA and deduct them the following year. This too has been amended, with effect from March 1 this year. In terms of this provision, you can now also roll over excess contributions to a pension fund and claim them as a deduction in the following year. Previously you had to wait until retirement to claim excess contributions to a pension fund.
But the change refers only to excess contributions made after March 1 this year, effectively preventing anyone who made excess contributions to an RA before the start of this tax year from rolling these over and claiming them.
The amendment bill proposes fixing this so that you can roll over and claim from this year excess contributions made before March 1 to a pension fund or RA.
Last year’s changes were aimed at harmonising the tax treatment of contributions to provident funds and pension funds. The rollover of excess contributions to provident funds are not yet included because their members are not yet required to buy an annuity (monthly pension) on retirement with two thirds of their savings. Treasury hopes to introduce this measure by 2018.
Other proposed amendments in the bill will ensure that:
• If you receive a lump sum or annuity from an RA that arises from contributions made while you were not in South Africa, these will not be regarded as having arisen in respect of services rendered outside the country and therefore will not be subject to the tax exemption on foreign pensions.
• You will not be able to withdraw your savings from an RA before age 55 unless you emigrate from South Africa and your emigration is recognised by the South African Reserve Bank. The explanatory memorandum says the failure to specify emigration as recognised by the Reserve Bank and to allow the withdrawal of lump sums from an RA when a South African resident ceases to be one has created a loophole that allows RA fund members to withdraw their savings without formally emigrating.