ATC151126: Report of the Standing Committee on Finance on the Taxation Laws Amendment Bill [B 29 – 2015 (s77)] 2015, dated 25 November 2015
(The following report replaces the Report of the Standing Committee on Finance, which was published on page 5950 of the Announcements, Tablings and Committee Reports dated 25 November 2015)
Report of the Standing Committee on Finance on the Taxation Laws Amendment Bill [B 29 – 2015 (s77)] 2015, dated 25 November 2015
The Standing Committee on Finance having considered the Taxation Laws Amendment Bill [B 29 – 2015 (s77)], referred to it, reports that it has agreed to the Bill with amendments, B 29A – 2015 (s77)],
- Consultation on Bill
The draft Taxation Laws Amendment Bill was published by the National Treasury on 22 July 2015 and submitted to the Committee for its consideration. On 16 September 2015 the Standing Committee on Finance had public hearings on the draft Bill. On 15 October 2015 National Treasury replied to key proposals made by stakeholders; stakeholders were given the opportunity to reply; and National Treasury also then responded to the presentations by stakeholders.
On 27 October 2015 the Minister of Finance, Nhlanhla Nene, formally introduced the Taxation Laws Amendment Bill [B 29-2015], including new clauses (compared to the draft bill published) related to the timing of annuitisation for provident funds. The proposed amendments in the tabled Bill were explained in a media statement from the National Treasury on 27 October 2015. In the media release, the Minister called for and received further public submissions relating to the timing of uniform taxation for retirement-related reforms, including annuitisation of provident funds.
Following the above National Treasury consultations, the Minister proposed amendments to the tabled Bill in his letter to the Standing Committee on Finance (SCOF) on 4 November 2015. The amendment includes the deletion of clauses in the tabled bill related to the timing of annuitisation of provident funds, and effectively means that relevant sections in the Taxation Laws Amendment Act No. 39 of 2013 (as amended in 2014) will be allowed to stand, but with a higher threshold for annuitisation.
The SCOF requested stakeholders and the public to comment on the latest amendments. Written submissions were received and a public hearing was held on 10 November 2015.
The majority of stakeholders supported the amendments. The Chairperson of the Committee also facilitated further engagements outside the formal sittings of SCOF with stakeholders who did not agree with the amendments and National Treasury.
Besides SCOF’s engagement with stakeholders and the public, National Treasury reported to the Committee that they also engaged with stakeholders before and after the Bill was introduced to Parliament. In the case of the retirement reform amendments, these consultations, according to National Treasury, have been taking place since 2012, including through NEDLAC, even though finally there was no agreement in NEDLAC on the tax harmonization and annuitisation amendments. SCOF is unable to tell about the quality and depth of these negotiations, but that there have been negotiations is clear to the Committee.
The Committee did everything possible, under difficult circumstances, to try to get consensus on these amendments, and it deeply regrets that it was not able to. Treasury has provided evidence that those aspects of these amendments that the Congress of South African Trade Unions disagrees with requiring annuitisation will begin to come into effect after five years or more for most workers, and the Committee has amended the Bill to require the Minister to review them through consulting further with stakeholders and reporting back to Parliament by 30 June 2018. The amendment to clause 3 of the Bill provides that: “ The Minister shall, after consulting relevant stakeholders, review the impact and implementation of paragraphs (k), (l), (o), (p), (q), (r), (t), (u), (v), (w), (x) ,(y) ,(z) and (zC) of clause 3(1). The Minister shall table a report on the review in the National Assembly not later than 30 June 2018.”
Given the levels of indebtedness, the Committee is excruciatingly aware of how strongly workers feel about access to their provident funds and have urged Treasury to embark on a massive campaign to engage with workers and their representatives on these proposals.
2. Retirement Reform Amendments
The Treasury commenced the reform of the retirement industry in 2012, when it requested Cabinet approval to publish a number of key papers to improve the private retirement industry. The published papers dealt with the need for good governance, the challenges of certain inappropriate and inadequate annuities, the high costs for certain retirement services and products, the importance of discretionary savings, and simplifying the taxation of retirement contributions. The Financial Services Laws General Amendment Act of 2013 (FSLGAA) addressed some of the governance concerns, and criminalized the non-transfer to retirement funds of employee contributions. National Treasury consulted with trade unions and industry stakeholders, after which the first set of reforms were enacted into law in 2013, through the Taxation Laws Amendment Act (TLAA 2013) and the FSLGAA.
2.2 Challenges in the current retirement system
There are three basic types of retirement funds in the South African retirement system: pension, provident and retirement annuity funds. Employer contributions to pension funds and provident funds are currently a non-taxable fringe benefit, and are a deductible business expense up to certain limits. Member or employee contributions to pension funds and retirement annuity funds are tax deductible (subject to limits) for personal income tax purposes. However no tax deduction is available for member contributions to provident funds. Pension and retirement annuity fund members are required to annuitise a portion (usually two-thirds, with one-third still available as a lump sum) of their retirement fund saving or interest upon retirement. However, provident fund members are not required to annuitise any portion of fund savings at retirement. As a result, provident fund members typically receive their retirement benefit as a lump sum upon retirement, and tend to spend it quickly or are targeted by unscrupulous service providers selling inappropriate products and so lose their savings and, therefore, become vulnerable to old-age poverty.
Further, since the employer contributions to a provident fund is a tax-free fringe benefit, employers of high-income members of provident funds make large contributions (and thereby enable such members to benefit from non-taxable income) on behalf of these members who are entitled to large lump sums at retirement without the requirement to annuitise. The different treatment of the various retirement funds creates complexity for both contributors and administrators, and increases the scope for structuring and tax avoidance by high income earners. This complexity and avoidance contributes to costs, and also makes enforcement by SARS difficult.
2.3 The benefits of the tax and retirement reforms
The reforms contained in TLAA 2013, which are meant to take effect on 1 March 2016, limit the tax deductibility per annum to 27.5% up to a maximum of R350 000. These reforms are meant to achieve the following important objectives and benefits:
- Allow provident members, for the first time, a tax deduction for their own contributions, thereby increasing their take home salaries.
- SARS data shows that there are over 2.5 million provident fund members who contribute to a provident fund. Around 1.25 million are above the tax threshold and would receive an increase in net pay.
- Encourage workers to save and save more for their retirement because of the higher tax deduction limits for contributions.
- Protect retirees against old-age poverty by extending the requirement to purchase an annuity to provident fund members.
- Improve vertical equity between high and low income taxpayers by imposing a limit on the total allowable deduction to high income taxpayers and reduce the scope for structuring their tax affairs, and thereby benefiting excessively from the tax deductions.
- Improve horizontal equity by harmonising the same deduction across all retirement funds, and hence allowing equal treatment for all retirement funds.
- Improve transparency and data collection by deeming contributions by employers on behalf of members as a taxable fringe benefit. This will enable better administration and enforcement by SARS.
- Simplify the tax treatment of contributions to retirement funds (the current system is complex and confusing). TLAA 2013 also does away with the misleading and restrictive concept of pensionable salary; the new limits will apply on taxable income or remuneration, and not pensionable salary.
- Vested rights are protected, resulting in the impact of annuitisation taking longer to be felt by provident fund members (even though the effective date is 1 March 2016, members will not have to annuitise immediately).
2.4 Progress to date
The amendments to the Pension Funds Act (through Financial Services Laws General Amendment Act No 45 of 2013) to strengthen governance in retirement funds were widely supported, and include:
- Whistle-blowing protection for Board members, valuators, principal/deputy officers, and employees who disclose material information to the Registrar of Retirement Funds (Financial Services Board).
- Fund board members/trustees to attain skills and training as prescribed by the Registrar within 6 months.
- Criminalisation and extending personal liability to employers in respect of non-payment of pension contributions to a pension fund.
- Protection for board members/trustees from joint and several liability, if they act independently and honestly and exercise their fiduciary obligations.
- Require pension funds to notify the Registrar of their intention to submit an application to register prior to commencing the business of a pension fund.
- Trustees to exercise fiduciary duty towards fund and members, and ensure proper governance.
The Taxation Laws Amendment Act No. 31 of 2013 included the following amendments:
- Same tax dispensation for all contributions into retirement funds (RA, Pension or provident);
- Annuitisation of benefits from provident funds (vested rights protected);
- De minimis threshold increased to R150 000 for annuitising; and
- Tax free lump sum at retirement increased from R315 000 to R500 000 in 2014.
3. Long-term insurance and Solvency Adequacy Management (SAM)
In 2014, section 29A (11) (g) of the Income Tax Act was amended to limit the unwarranted relief from taxation in respect of foreign reinsurance. The reference to reinsurance claims in the 2014 wording in section 29A (11) (g) created loopholes for tax avoidance. As a result changes were proposed in the 2015 Draft TLAB that were published for comment on 22 July 2015 to replace the concept of reinsurance with insurance. The concept was retained in the TLAB introduced in Parliament on 27 October 2015.
The proposed 2015 changes affected some existing policies with foreign insurers and after comments were received on the tabled Bill, National Treasury proposed to reinstate the 2014 proviso.
SCOF received comments from another long term insurer opposing the proposed amendments to clause 53(1)(f) of the 2015 Bill introduced in Parliament on 27 October 2015 on the grounds that it will result in a more onerous treatment of reinsurance contracts as compared to insurance contracts with foreign insurers
SCOF has evaluated the conflicting comments and come to the conclusion that the provision as introduced will be more effective in addressing the potential for tax avoidance and retaining equity across policies entered into by South African long term insurers with foreign insurers.
The Minister proposed withdrawing the amendments to introduce the prudential requirements called SAM (Solvency Adequacy Management) as they apply to long-term insurers, since SAM will only take effect on or after 2017. The SCOF accepted this proposal, as it can be dealt with next year.
4. Use of Money Bills Amendment Procedure and Related Matters Act
The Money Bills Amendment Procedure and Related Matters Act was used to effect the above tax amendments.
As explained above, the Taxation Laws Amendment Bill, 2015 (TLAB) was tabled in Parliament on 27 October 2015. On 4 November 2015 the Minister of Finance requested SCOF to consider amendments to the Bill relating to retirement reform and long term insurance. Since the Bill had already been tabled in Parliament, any proposed amendments made or approved by SCOF must comply with the Money Bills Amendment Procedure and Related Matters Act, 2009, including sections 8 and 11 of the Act. The SCOF called for public comment and held a public hearing on the proposed amendments on 10 November 2015. This consultation was over and above the longer consultation period for the Draft TLAB published on 22 July 2015, with the closing date for comments on 24 August 2015. A draft response document to the TLAB and other tax amendments were published by the National Treasury on 15 October 2015. This section provides the information to meet the requirements in sections 8(5) and 11(3) of the Money Bills Amendment Procedure and Related Matters Act, 2009.
4.2 The proposed amendment
The proposed changes to the tabled version of the TLAB in relation to retirement reform are not new and reflect the proposals in the version of the TLAB that was published on 22 July 2015 (in this instance, no change to tax legislation approved in 2013), which are part of the approved 2015 Budget proposals. The TLAB that was tabled in Parliament on 27 October 2015 contained a further option to delay the requirement to purchase an annuity for provident fund members by up to two years. The Minister of Finance requested an urgent consultation on the revised retirement reform proposal, and elaborated on additional potential options in a media statement.
After consideration of the comments received and after discussions with interested parties, the Minister of Finance recommended that the SCOF amend the TLAB to revert to the original version as published on 22 July 2015 (that is, as approved in 2013 legislation), but with a higher threshold at which retirement fund members are required to purchase an annuity - up from R150 000 to R247 500.
4.3 Potential impact of the amendment
Section 11(3) requires that the amendment considers:
- The revenue raised (to be consistent with the fiscal framework);
- Equity, efficiency, certainty and ease of collection;
- The composition of tax revenues;
- Regional and international tax trends; and
- The impact on development, investment, employment and economic growth.
Section 8(5) requires that the amendment considers the impact on the fiscal framework, including elements of revenue, expenditure and borrowing.
The only change is the increase in the threshold at which someone should purchase an annuity upon retirement and so will only have an effect on those retiring in a given year. It is unlikely that any provident fund member would be impacted upon over the next few years since the vested rights provisions of the legislation allow for any member of a provident fund who is over the age of 55 at the implementation date (1 March 2016) to be able to take their full retirement interest as a lump sum.
The impact of the change will be on pension fund members and retirement annuity fund members who retire with a retirement pot of between R150 000 and R247 500, who will no longer be obligated to annuitise. Currently, an individual with a retirement pot between those values would be required to purchase an annuity with two-thirds of that amount and take one-third as a lump sum. Under the proposed amendment, these individuals would be able to take the full amount as a lump sum.
4.4 Tax revenue implications
The proposed amendments revert to the law as it applied at the time of the 2015 Budget Review, and hence has been factored into the budget estimates as at 27 February 2015. There is therefore no significant change to the fiscal framework that informed the 2015 Budget. Though not required to compare with the Medium Term Budget Policy Statement (MTBPS), it should be noted that the retirement reforms will also not significantly impact on the revised MTBPS revenue estimates.
In terms of a more micro-assessment to estimate the tax revenue impact, one can consider a specific example of an individual who retires with exactly R247 500 and compare the expected tax liabilities in the current position with the proposed amendment. It is likely that the affected individuals would take the full amount as a lump sum rather than purchase an annuity with two-thirds of their retirement interest.
- In the current environment, an individual with R247 500 at retirement would be required to purchase an annuity with two-thirds of that amount (R165 000) and can take a lump sum with the remainder (R82 500).
- The R165 000 could provide an annuity of around R915 per month, or R11 000 per year. This amount would be taxable as income. The current tax free threshold is R73 650. If the individual does not have other income of at least R62 650, there would be no tax revenue from the annuity income.
- The lump sum of R82 500 would fall below the tax free lump sum threshold of R500 000. However, this would only apply if previous lump sums that had been taken did not exceed R417 500 (as it is a cumulative total).
- The current tax revenue from this individual is thus not expected to be substantial.
- The proposal would allow the individual to take the full R247 500 as a lump sum.
- The lump sum is still below the R500 000 tax free lump sum threshold, but there may be additional tax revenues if the individual has withdrawn more than R252 000 previously.
Investigating tax certificate data from the South African Revenue Service shows that there were around 350 000 individuals who received a retirement lump sum in 2013/14. Of these, 91 000 individuals received a lump sum from a retirement fund where the value was between R50 000 and R82 500 (which corresponds to a total retirement interest of R150 000 and R247 500). Around 55 percent of people who contribute to a retirement fund are members of a pension fund or retirement annuity fund. Using the same proportion, it could be said that around 50 000 people would be impacted upon from the change each year. Given that in many cases there would be no tax change and that the number of people impacted is relatively small, the tax revenue implications are thus expected to be negligible.
4.5 Equity, efficiency, certainty and ease of collection
The amendment would make the tax system more equitable both vertically and horizontally.
The original amendments in the 2014 legislation improve vertical equity by capping the deductible contribution at R350 000, hence limiting the extent to which high-income individuals can benefit from the tax deduction. The amendments also improve horizontal equity as the same treatment of retirement assets would apply to all members of retirement funds, regardless of the type of fund and would not harm the efficiency of the tax system as it would not create additional distortions in behaviour (individuals cannot easily choose the level of their retirement assets at retirement). The amendment also allows members of provident funds who make their own contributions over and above that of the employer to benefit from the tax deduction if they are above the tax threshold.
The change would not create additional uncertainties and the administrative process is already in place and would be easy to implement. Implementing this reform will in fact bring more certainty to taxpayers.
4.6 Composition of tax revenues
Given that the revenue impact is expected to be negligible, there would be no impact on the composition of tax revenues, including between direct and indirect tax revenues.
4.7 Regional and international tax trends
There should not be any regional implications, and regional trends are not readily available, as retirement systems are not very developed in the region beyond South Africa. Internationally, tax trends also differ significantly between countries, not only depending on the level of development, but also between similar advanced or developing economies. Whilst the challenges in most developing economies is to deal with poverty, unemployment and inequality, the challenges in advanced economies differs on annuitisation, given that their residents are often part of a state-supported pension system with high coverage. Hence trends in advanced economies can be in total contrast to each other, so whilst Australia has recently announced that they are considering implementing compulsory annuitisation, the UK has removed the requirement to purchase compulsory annuities. In both these countries, the key factor to consider is how vulnerable workers are when they retire, and what broader support systems exist in that society or country.
4.8 Development, investment, employment and economic growth
The increase in the minimum threshold may result in fewer annuity purchases, decreasing the number of products sold by life companies. This may also result in a small decrease in investment, but only if the lump sum amounts are not invested by the individual. The impact on employment and economic growth is thus not expected to be significant.
4.9 The fiscal framework
As described above, it is expected that the amendment will have a negligible impact on tax revenues, as announced in the 2015 Budget. The amendment will also not have an impact on government expenditure or borrowing within the revised fiscal framework as published in the 2015 Medium Term Expenditure Framework tabled on 21 October 2015.
- Support of Parliamentary Budget Office
SCOF drew on the services of the Parliamentary Budget Office (PBO) in finally deciding to accept the retirement reform and long term insurance amendments and National Treasury’s compliance with sections 8 (5) and 11 (3) of the Money Bills Act.
- Support of Parliamentary Legal Services
A representative of Parliament’s Legal Services Office was constantly consulted on whether the requirements of the Money Bills Act were met. He confirmed that they were.
- Comprehensive Social Security Reform Paper
SCOF believes that the Comprehensive Social Security Reform Paper, which has been on the agenda for more than ten years, needs to be finalized as soon as possible and urges government to ensure the paper is published as soon as possible. National Treasury has made it clear that the retirement reform amendments referred to in section 2 above are consistent with the pending Paper.
- Massive Communication and Engagement Programme
The SCOF stressed to National Treasury the crucial importance of informing and educating employees who are on provident funds on the benefits of the retirement reform amendments and how they will be implemented. SCOF believes that there should be a massive campaign to reach employees and their union and other representatives in this regard. This should especially include the organizations that are not in agreement with the retirement reform amendments.
National Treasury presented to SCOF its Draft Media Plan, which includes:
• Media statements
• Radio and TV interviews (National and African Language Radio Stations)
• Speeches (Minister, DG and Deputy DDG) on relevant platforms
• Social media
• Newspaper op-ed pieces
• People’s Guide (pamphlets to be distributed through newspapers and through other means)
• Stakeholder engagements such as outreach visits, roundtables with unions, employer bodies and retirement fund members.
• An electronic campaign – including revamping the retirement reform page and a Facebook page
- Broadcast Campaign, including public service announcements airing around the news hours and business shows and personal finance shows
The SCOF will monitor National Treasury’s progress on the communication and engagement campaign.
Report to be considered.
No related documents