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Taxation Laws Amendment Bills, 2007 (Retirement Lump Sum Payouts) Informal Hearings 13 March 2007.

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Presentation on theme: "Taxation Laws Amendment Bills, 2007 (Retirement Lump Sum Payouts) Informal Hearings 13 March 2007."— Presentation transcript:

1 Taxation Laws Amendment Bills, 2007 (Retirement Lump Sum Payouts) Informal Hearings 13 March 2007

2 Retirement Funding Basics

3 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 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 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 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7 7 Withdrawals Permissible withdrawals –Only a certain percentage of fund value can be withdrawn upon retirement (i.e. as a lump sum) –All the excess must be converted to a (guaranteed or living) annuity with funds withdrawn steadily over the post-retirement period Taxation of permissible withdrawals –Lump sum withdrawals: tax exemption plus tax averaging –Annuity withdrawals: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

8 Lump Sum Proposals

9 9 Permissible Lump Sums Current Law –Pension and individual retirement annuity funds can be withdrawn equal to: the greater of 1/3 rd of total value or an amount bearing a per annum annuity up to R1 800) –Provident Funds can be fully withdrawn Proposal –The monetary R1 800 threshold will be abandoned –The new monetary threshold will be R as this sums relates to the 2/3 rds (the change prevents fees from outpacing potential benefits)

10 10 Tax-Free Lump Sums: “Say Good Bye to (2) Old Formulas” Formula A (Good Bye!) –Y = 15/1 x N/50 x 1/3 rd 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 11 Tax-Free Lump Sums: New Regime Under the new regime, the tax-free lump sum equals: –R (+) –Previous non-deductible contributions (+) –Pre-1998 Government employment (formula C) The new regime ends all reliance on “salary” and “years of service”

12 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 13 Taxable Lump Sums: New Regime Under the new regime, the taxable lump sum is: –Taxed at 18% for the first R taxable amount (+) –Taxed at 36% for the remainder Complex averaging and planning opportunities removed

14 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 R is tax-free –Next R to R is taxed at 18% –Next R & more is taxed at 36%

15 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 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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