CARMEN VENTER WORKSHOPS FOR CFP EXAMINATIONS 2014

1 CARMEN VENTER WORKSHOPS FOR CFP EXAMINATIONS 2014 EMPLOYEE BENEFITS AND TAX RETIREMENT FUNDS HEALTH CARE Page 1

2 RETIREMENT FUND CONTRIBUTION DEDUCTION AS FROM 1 MARCH 2015 C URRENT LEGISLATION UP TO 28 FEB 2015 TAX FOR RETIREMENT FUNDS DEDUCTIONS politician = pension 11(k) pension fund contributions allowed up to the greater of 7.5% of pensionable salary / non-retirement funding income or R1 750 limited to actual contributions AND Arrears max of R1800 pa For income? NO fringe benefit at this stage! receives = retirement annuity 11(n) retirement annuity contributions to the greater of: 15% of non retirement funding income R3500 pension contributions OR R1750 Arrears R1800 pa YOU CANNOT TAKE LUMP SUMS FROM RETIREMENT FUNDS AND OR SEVERANCE BENEFIT. For Income? Fringe Benefit if EMPLOYER contributes to a Retirement Annuity on behalf of the employee and, as a result the fringe benefit will deem that the contributions are made by the employee itself for a corresponding section 11(n) deduction! Page 2

3 LEGISLATION AS FROM 1 MARCH 2015 Section 11n of the Income Tax will be repealed as from that date. Section 11k will read as follows: any amount contributed during a year of assessment to any pension fund, provident fund or retirement annuity fund in terms of the rules of that fund by a person that is a member of the fund: Provided that (i) (ii) (iii) (iv) The total deduction to be allowed in terms of this paragraph must not in the year of assessment exceed the lesser of- (aa) R350 000; or (bb) 27.5% of the higher of the person s (A) Remuneration (other than in respect of any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit) as defined in paragraph 1 of the Fourth Schedule; or (B) Taxable income (other than in respect of any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit) as determined before allowing any deduction under this paragraph; For the purpose of this paragraph, any amount so contributed in any previous year of assessment which has been disallowed solely by reason of the fact that it exceeds the amount of the deduction allowable in respect of that year of assessment is deemed to be an amount so contributed in the current year of assessment, except to the extent that the amount so contributed has been (aa) allowed as a deduction against income in any year of assessment; (bb) accounted for under paragraph 5 (1)(a) or 6(1) (b)(i) of the Second Schedule; or (cc) exempted under Section 10C; For the purpose of this paragraph, any amount so contributed by an employer of the person for the benefit of the person must, to the extent that the amount has been included in the income of the person as a taxable benefit in terms of the Seventh Schedule, be deemed to have been contributed by the person; and For the purpose of this paragraph, a partner in a partnership must be deemed to be an employee of the partnership and a partnership must be deemed to be the employer of the partners in that partnership; Section 11(l) will read as follows as from that date this is the reference to employer deductions: Page 3

4 any amount contributed by a person that is an employee during the year of assessment for the benefit of any employee or former employee of the employer or for any dependant or nominee of a deceased employee or former employee of that employer to any pension fund, provident fund or retirement annuity fund in terms of the rules of that fund: Provided that for the purposes of this paragraph a partner in a partnership must be deemed to be the employer of the partners in that partnership ONE NEEDS TO THEN LOOK AT THE FOLLOWING DEFINITIONS TO UNDERSTAND THE NEW 11(k) DEDUCTIONS: TAXABLE INCOME: means the aggregate of (a) The amount remaining after deducting from the income of any person all the amounts allowed under Part 1 of Chapter II to be deducted from or set off against such income; and (b) All amounts to be included or deemed to be included in the taxable income of any person in terms of this Act. REMUNERATION: means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered, including: (a) Any amount referred to in [ the following paragraphs in definition of gross income]: (a) Annuities (a) (b) payments for services rendered (c) (c) restraint of trade payments (ca) (d) compensation for loss of office and proceeds of certain employer owned policies (d) (e) retirement fund lump sum benefits and retirement fund lump sum withdrawal benefits (e) (f) fund benefits arising from transferring or converting benefits from public sector funds (ea) (g) amounts due under service contracts that are commuted (f) (b) any amount required to be included in such person s gross income under para (i) of gross income [ fringe benefits but excluding use of motor vehicle para 7 of 7 th schedule] (ba) any allowance that must be included in a person s taxable income of that person in terms of section 8(1)(a)(i), other than... Effectively: to be included in remuneration: Page 4

5 a b 80% of any allowance or advance as per section 8(1)(b) in respect of transport expenses unless the employer is satisfied the employee s vehicle is used at least 80% for business purposes, in which case the inclusion rate is 20% 80% of the value of a motor vehicle taxable benefit (para 7) unless the employer is satisfied that the vehicle is used at least 80% for business purposes, in which case the inclusion rate is 20%. Not to be included in remuneration: a b an allowance or advance paid to that person in respect of accommodation, meals or other incidental costs while that person is obliged to spend at least one night away of business from his usual place of residence in the republic. If recipient has not spent the intended night away from home by the end of the month following the grant, and has not refunded the employer, then it is treated as normal salary subject to PAYE in that following month. para c of the definition of remuneration SMALL CASE STUDY INCORPORATING THE WAY FORWARD: Tom an employee of ABC Pty, earns a package of R545 000 pa. His package is made up as follows: A basic salary of R 450 000 and a total travel allowance of R 95 000. The travel allowance, for remuneration purposes, is taxable at 80%. Tom is a member of a Provident fund (defined contribution) where his employer contributes 8% of his basic salary and Tom contributes 6% of his basic salary. His employer also contributes R1000 pm to a medical aid for him and his wife. Tom also contributes R5000 pm to a Retirement Annuity. He receives the following over and above his salary: R40 000 in local interest, a linked annuity inherited of R60 000 pa, rental income of R100 000 pa of which R60 000 is expenses incurred in the production of trade. Tom has donated to a PBO an amount of R 56 000 in the same year of assessment and has made a taxable capital gain of R 69 000. Let us calculate his deduction allowed. Page 5

6 PROPOSALS WITH EFFECTIVE DATE 1/3/2015 T DAY QUESTION Your client, who works for a big corporate company who has a provident fund, is concerned about the rumors regarding the impending changes to contributions to funds. He asks for your assistance: He is 34 years old, Has a salary of R 500 000 pa and contributes 7.5%of his salary towards this fund and his employer also contributes 7.5% pa. Because his contributions were never used for tax deduction he contributed a further R 12 000 pa towards his own Retirement Annuity. His only other income is interest of R 38 000 a year and local dividend of R30 000 a year. He inherited a Linked Annuity from his late father which pays R 40 000 a year. Show him the effect that the above will have when the new Act comes in on the 1/3/2015. Explain maximum deductions and what happens to excess contributions [ I understand that this is still draft but explain to your client in any event AND use current tax thresholds and tables] CALCULATE THE MAXIMUM DEDUCTION THAT YOUR CLIENT WILL BE ALLOWED. Defined Benefit Funds Fringe Benefit calculations will differ but deductions are the same. Please see Annexure for a copy of Treasury s examples in their Explanatory Memorandum ANNUITY EXEMPTIONS SECTION 10C There shall be exempt from normal tax in respect of the aggregate of compulsory annuities, an amount equal to so much of the person s own contribution to any pension, provident, retirement annuity fund that did not rank for a deduction under s11(k) and S11(n). Read with Para (5) and (6) of the 2 nd schedule where a deduction will be allowed against the lump sum to be taxed to the extent that: has not been exempted in terms of s10c or has not been previously allowed as a deduction in terms of these paragraphs.. Page 6

7 10C Exemptions of non-deductible element of compulsory annuities (1) For the purpose of this section- compulsory annuity means the amount of the remainder of the retirement interest of a person payable in the form of an annuity contemplated in (a) annuity from pension fund (b) annuity from preservation fund (c) annuity from retirement annuity fund (2) there shall be exempt from normal tax in respect of the aggregate of compulsory annuities payable to a person an amount equal to so much of the person s own contributions to any pension fund, provident fund and retirement annuity fund that did not rank for a deduction against the person s income in terms of section 11(k) or (n) as has not previously been (a) allowed to the person as a deduction in the 7 th schedule; or (b) exempted from normal tax in this section, in respect of any year of assessment Case Study Tom retires from his company and pension fund on the 1/3/2014 and receives his 1/3 rd in cash amounting to R250 000. Tom has had contributions amounting to R400 000 that have not been previously disallowed. The 2/3rds have been invested into a compulsory annuity which will be generating an annual annuity of R 90 000. Lump sum taxation: 1/3 rd received in cash R250 000 Less previously disallowed contributions limited to lump sum (R250000) Taxable amount R0 Page 7

8 Unused deductions R400 000 less used in 2 nd schedule (R250 000) R150 000 2014/2015 year end of assessment tax on the annuity received from the 2/3rds invested. Annuity received R90 000 10C exemptions limited to annuity (R90 000) Taxable Income R0 Unused deductions R150 000 Less used in10c (R90 000) R60 000 A subsequent lump sum is received: In 2015/2016 Tax year, Tom decides to retire from his Retirement annuity and receives a cash amount of R50 000. Tax on lump sum R50 000 Less contributions to retirement funds previously disallowed and not deducted before - limited to lump sum (R50 000) Taxable amount R0 Unused deductions R60 000 Less used in 2 nd Schedule (R50 000) R10 000 Page 8

9 Year end of 2015/2016 assessment continuity of taxation of annuity received Annuity received R100 000 10C exemption on amounts not deducted previously (R10000) Taxable amount income R90 000 ADDITIONAL NOTES TO SECTION 10C On death of the original annuitant: Full annuity Part annuity/ commutation Full commutation If any unused deductions still available not transferred to annuitants. NOTE: IT IS NOT THE R500 000 TAX FREE (TAXED AT NIL) AMOUNT THAT IS CARRIED OVER AS UNUSED DEDUCTIONS TAXATION OF MEDICAL AID CONTRIBUTIONS Fringe benefit if the Employer contributes any portion to a medical aid on behalf of the employee as a result, the fringe benefit will deem that the contributions are made by the employee itself and will be utilized for the calculation of the medical and medical expenses credit. MONTHLY CREDITS ARE: MEDICAL CREDIT (ONLY if contributing to a medical aid) R257 1 st Member & 2 nd (each get R257) R172 for each additional dependant The three age categories in determining credits applicable, still apply and in summary: Page 9

10 APPLICATION OF CREDITS BELOW AGE OF 65 ABOVE AGE OF 65 DISABILITY : SELF, SPOUSE OR CHILD CONTRIBUTION CONTRIBUTION CONTRIBUTION 1 CREDIT CREDIT CREDIT CONTRIBUTION > CONTRIBUTION > 4 X CREDIT REBATE 3 X CREDIT REBATE ADD TO X 33.3% = CREDIT IDENTICAL MEDICAL EXPENSES CREDITS 2 MEDICAL EXPENSES X 33.3% = CREDIT 3 MUST EXCEED 7.5% OF TAXABLE INCOME. THE AMOUNT THAT EXCEEDS X 25% = MEDICAL EXPENSES CREDIT 4 1 R257 FOR FIRST AND SECOND MEMBER EACH R172 FOR EACH DEPENDANT THEREAFTER 2 Section 6B(3)(b) 3 Section 6B(3)(a) 4 Section 6B(3)(c) Page 10

11 CASE STUDIES Please calculate fringe benefit and medical credits applicable. Scenario 1 Jane and Tom, married with 6 children are all on Jane s medical aid plan. Tom s mother is also a dependant on the medical aid and is disabled as defined. Jane is 55 years old and Tom is 66. The medical contribution for the year has been R 66 000 and they have had out of pocket expenses, not refunded by the medical aid, of R 65 000. Of this amount, at least R40 000 went to expenses for Toms Mom s disability all qualified. Jane s total earnings for the year is R650 000. Here employer contributes 50% of the total contribution on her behalf. Scenario 2 Jane and Tom, married with 3 children are all on Tom s medical aid plan. Tom is 45 years old. The medical contribution for the year has been R 56 000 and they have had out of pocket expenses, not refunded by the medical aid, of R 15 000. Tom s employer contributed R 16 000 of the total amount towards the medical contributions. Tom s earnings are R 550 000 a year, he has rental income of R50 000 of which R20 000 are expenses in the productions of rental income. He received R35 000 local interest and R15 000 foreign dividend. Page 11

12 Scenario 3 Jane and Tom, married with 5 children are all on Tom s medical aid plan. Tom is 66 years old. The medical contribution for the year has been R 76 000 and they have had no out of pocket expenses. Tom s total earnings for the year is R300 000 and he made a taxable capital gain of R12 000. Other fringe benefits EMPLOYER OWNED POLICIES DEDUCTIONS AND FRINGE BENEFITS CONTRIBUTIONS a. if policy is for the benefit of it s employee and or dependants [11(w)(i]) The contribution is deductible for the EMPLOYER BUT there is a corresponding fringe benefit to the same value for the employee. [Para 12C of the 7 th Schedule] NOTE: Share buy backs and contingent policies are capital in nature and also fall foul of the requirements as laid down by S11(w)(ii) and therefore contributions are not deductible for revenue purposes. EMPLOYMENT RELATED POLICIES The contributions for employment related policies are deductible under the general deduction S11(a). This does not constitute a fringe benefit for the employee BUT WILL BE TAXED in the hands of the employee. Page 12

13 Section 11(w) of the Income Tax Act provides some guidance. Does the employee benefit? Does the employer/company benefit? 11(w) (i) (aa) the policy relates to the death/ disablement Or severe illness of an employee / director AND (bb) the amount paid by the employer is a FRINGE BENEFIT for the employee [S2(k) of the 7 th Schedule. 11(w)(ii) (aa) the employer is insured against any loss by reason of death /disability/ severe illness of employee or director (bb) the policy is a risk policy with no cash value (cc) the policy is at all times the property of the employer/ company at the time of payment of premium... [note cessions do not affect the deductibility of the premium] (dd) (A) after march 2012 state that you want it to be deductible! Else automatically not deductible IF ALL REQUIREMENTS ARE MET AS PER ABOVE THE EMPLOYER CAN DEDUCT PREMIUMS FROM INCOME TAX. IF ONE OF THE REQUIREMENTS ARE NOT MET THEN EMPLOYER CANNOT DEDUCT PREMIUMS EVEN IF HE WANTS TO! IF EMPLOYER WANTS TO DEDUCT PREMIUMS (ONLY IF ALL REQUIREMENTS ARE MET) THEN HE HAS TO ELECT THIS ON THE APPLICATION. IF HE DOES NOT INDICATE THIS ON THE APPLICATION THE POLICY WILL AUTOMATICALLY BE NON-DEDUCTIBLE. Page 13

14 GROSS INCOME AND EXEMPTIONS EMPLOYER Included in Gross Income and then exempt BUT only if not deductible under 11(w)(ii). [Para (m) of the definition of gross income and exemption S10(1)(gG)] Subsequent use of payout, can be deducted under S11(a) if the proceeds were used in production of trade. EMPLOYEE Included in Gross Income and then exempt BUT: [Para (d) of the definition of gross income] a: if risk element only exempt if it was a fringe benefit from 1/3/2012 onwards b: if an investment/cash portion exists exempt if it was a fringe benefit from the date of commencement of the policy [exemption S10(1)(gH)] CESSIONS TO RETIREMENT FUNDS CESSIONS OF INVESTMENT POLICIES NOTE: THIS IS TO ASSIST EMPLOYER /EMPLOYEE TO EXIT FROM CURRENT DEFERRED INVESTMENTS AND NOT A NEW SCHEME TO BE ENTERED INTO.YOU ARE WARNED!!! 1. Employer can cede these existing investment policies to a Pension and or Provident fund as a tax neutral event 2. Employer can also cede these existing investment policies to the employee s individual Retirement Annuity HOWEVER, this will be seen as a fringe benefit for the employee and taxed as such at time of cession!! This is however deemed to be the employee s contribution and will be afforded a deduction under S11(n) [ie greater of R1750 or 3500 pension contribution or 15%] If any other form of cession :- to or on behalf of employee or his dependants etc. INCOME for the employee. Page 14

15 RETIREMENT FUNDS The Pension Fund Act regulates: Pension Funds Provident Funds Occupational Funds Preservation Funds Retirement Annuities and Beneficiary funds. Non- occupational Funds Although the Pension Fund Act regulates these funds, the definition of each fund is entrenched in the Income Tax Act: PENSION FUND DEFINITION SUMMARISED!! Commissioner satisfied that: - established for the purpose of providing annuities for employees on retirement from employment or for dependents/ nominees of deceased employees and for providing benefits other than annuities or benefits as per Para 2C of the 2 nd Schedule. That the rules of the fund provide: - Not more than 1/3 rd of the total value of the retirement interest may be commuted and remainder must be paid in form of annuity EXCEPT where 2/3rds do not exceed R50 000 - All contribution of a recurrent nature to the fund shall be in accordance to specified scales - Membership throughout employment shall be a condition [from date established or member becomes participant] Page 15

16 - Staff before fund inception are given 12 months to decide to become member - That partner of a partnership is regarded as an employee of the partnership PROVIDENT FUND DEFINITION SUMMARISED! Commissioner satisfied that: - established for the purpose of providing benefits for employees on retirement from employment or for dependents/ nominees of deceased employees or solely for a combination of such purposes or mainly for the said purpose or benefits as per Para 2C of the 2 nd Schedule. - All contribution of a recurrent nature to the fund shall be in accordance to specified scales - Membership thru out employment shall be a condition [from date established or member becomes participant] - Staff before fund inception are given 12 months to decide to become member - That partner of a partnership is regarded as an employee of the partnership RETIREMENT ANNUITY DEFINITION SUMMARISED! approved by commissioner: -fund established sole purpose to provide life annuities for the members of the fund / dependants /nominees that the rules of the fund provide:- - Contribution by members include transfers from pension funds, pension preservations, provident funds, provident preservations or other RA s - Not more than 1/3 rd of total value may be commuted unless 2/3rds does not exceed R50 000 or where the member is deceased. - No member entitled to monies before retirement age - That a member who discontinues contributions prior to retirement age shall be entitled to: - an annuity or lump sum benefit as per 2(1)(a) of 2 nd schedule - be reinstated as full member payment of lump sum as per 2(1)(b)(ii) of the 2 nd schedule where the member s interest in the fund is less than amount determined in Gazette or Page 16

17 payment of lump sum as per 2(1)(b)(ii) of the 2 nd schedule where that memner emigrated from the Republic and that emigration is recognized by SARB PENSION PRESERVATION SUMMARISED! approved by commissioner: -former members of a pension or provident fund as result of resignation/retrenchment / dismissal of employment / winding up/partial / transfer of one employer to another or - Former members of any other pension preservation fund or provident preservation fund if wound/partially up - - unclaimed benefit from the fund if claimed by member/ descendents - Divorce order claims s 7(8) of Divorce Act if from a pension fund or pension preservation - Contributions limited to amounts but not that of retirement or death - Not more than one amount is allowed to be paid to member while member of fund - provided that applies to each payment transferred - Not more than 1/3 rd of the total value of the retirement interest may be commuted and remainder must be paid in form of annuity EXCEPT where 2/3rds do not exceed R50 000 PROVIDENT PRESERVATION SUMMARISED! approved by commissioner: -former members of a provident fund as result of resignation/retrenchment / dismissal of employment / winding up/partial / transfer of one employer to another or - Former members of any other provident preservation fund - - unclaimed benefit from the fund if claimed by member/ descendents - Divorce order claims s 7(8) of Divorce Act if from a provident fund or provident preservation - Contributions limited to amounts but not that of retirement or death - Not more than one amount is allowed to be paid to member while member of fund - provided that applies to each payment transferred Page 17

18 ALIGNMENT TO PROVIDENT FUNDS HOW WILL THE INTRODUCTION OF P-DAY AFFECT CURRENT AND FUTURE MEMBERS? P DAY EXISTING FUNDS NEW FUNDS PRE P DAY OLD RULES INC GROWTH 55 ON P DAY OLD RULES ON NEW & GROWTH POST P DAY CONTRIBUTIONS AND GROWTH ALL NEW RULES NEW MEMBERS NEW RULES NEW RULES If monies are moved will retain the rules and, transfer will start becoming all tax free! Page 18

19 As per the Explanatory Memorandum Example: Provident fund member transfers to new fund Person S, a member of Investment Provident Fund, is 29 years old on P DAY, at which time the fund interest is R1 000 000. Person S continues to contribute to the provident fund. Six years later, Person S resigns. At this point, the R1 000 000 has grown to R2 000 000. The new contributions that Person S made to the Investment Provident Fund (and the growth on thereon) amounts to R500 000. Person S transfers this R2 500 000 balance to a preservation fund. When Person S turns 70, Person S resigns from the preservation fund with a retirement interest of R10 000 000. The pre-p DAY account of R2 000 000 grew to R8 500 000, and the subsequent amount of R500 000 grew to R1 500 000. Administration: Investment Provident Fund must maintain an account for Person S in respect of the fund interest of R1 000 000 as at P DAY and any growth thereon (R1 000 000). Investment Provident Fund must also maintain a separate account for any contributions made after P DAY and any growth thereon (totaling R500 000). When Person S transfers these amounts to the preservation fund, Investment Provident Fund must provide the preservation fund with a split of fund interests with one account falling within annuitisation (R500 000) and the other enjoying vested right protection (R2 000 000). The Preservation fund must keep separate accounts for Person S. One account must exist in respect of the fund interest of R2 000 000 that continues to enjoy vested right protection and any growth thereon (R6 500 000). A separate account is required for the R500 000 that remains subject to annuitisation and any growth thereon (R1 000 000). Result: The pre-1 March 2015 contributions plus growth thereon (i.e. R8 500 000) will remain free from annuitisation. The newer amounts (of R1 500 000) will become subject to the new dispensation. Member W may only take one-third of the R1 500 000 as a lump sum while the remainder is subject to annuitisation. Definitions: All definitions will include the pre and post rules pre being vested and subject to vested rules and post being subject to the annuitisation rules. The de minimus amount will be doubled to R150 000 ie if the full fund value is below R150 000 the whole amount can be taken as a lump sum. Page 19

20 Provident fund definition will be required to be established to provide annuities for employees on retirement from employment or for the dependants or nominees of the deceased employee Provident Preservation definition will change to include the 1/3 rd and 2/3 rd rule. Page 20

21 Page 21

22 RULES OF A FUND ELIGIBILITY OF MEMBERSHIP TO A FUND Rules of the fund must set out the criteria for membership e.g. Who must and who may not Max and min age Full time or/and part time Must be employer / ee relationship Must be compulsory ie condition of employment UMBRELLA FUNDS This is not a different type of fund. It is merely a single fund that is established by the insurer or Fund Administrator and, is a fund already registered and approved by SARS. Umbrella Funds have an established board of trustees. Umbrella funds have 2 sets of Fund rules: 1- One set of rules governing and binding all employers.[ Master Rules] 2- General rules setting out main provisions- each employer has set of special rules applicable to employees FREESTANDING FUNDS The fund is in the name of the company and the employees of the company have exclusive membership to the fund. The fund is governed by their own Board of Trustees who abide by a set of rules specific to that Fund. Page 22

23 Pension COMPARISON Provident Employer Employer Retention of staff. SAME AS PENSION Contributions are tax deductible. Assist employee with retirement provisions & maintenance of dependants. Lump sums (not recurring) earned can be directed into fund as employer contribution and deductible under S11(l) Employee Contributions tax deductible subject to 11(n). And where disallowed- carried to retirement/death etc. Protected against creditors. 2/3rds have to be invested to provide for an annuity. Lump sum & Annuity = Estate duty Exempt Employee Contributions are not tax deductible but carried over to retirement / death to reduce taxable portion. Protected against creditors. Take full benefit amount in cash. Lump sum & annuity = estate duty exempt Penalties for Members who draw their contributions + growth at resignation etc by reducing the R315000 tax free on retirement. Penalties for Members who draw their contributions + growth at resignation etc by reducing the R315 000 tax free on retirement. Page 23

24 DEFINED BENEFIT VS DEFINED CONTRIBUTION Defined Benefit Defined Contribution Defining retirement benefits leaves all the risk on your pension payments to your employer. You are being guaranteed a certain level of income/benefit which your employer has to honour. Because it is defined, you may not have the advantage of a higher pension as a result of good investment performance it is up to trustees to decide whether to pass on as benefit increases. You take all the risk nothing is guaranteed. But you have a say in your investment fund. Your employer guarantees to make a contribution but not a pension. You take the investment risk but may have the advantage of a higher pension that you would with defined. If you die or have to take early retirement you /family may not be better off as pension based on what you have accumulated SECTION 37C When a death of a member occurs, the Trustees of the Fund MUST comply with Section 37C and use their discretion when they decide who and how to distribute the proceeds. This would include both the PENSION VALUE component as well as any DEATH COVER that the fund may have incorporated. Section 37C of the PFA reads: Section 37C Disposition of pension benefits upon death of member (1), any benefit (other than a benefit payable as a pension to one or more dependants in terms of the rules of a registered fund, which must be dealt with in terms of those rules) payable by such a fund upon the death of a member, shall, subject to a pledge in accordance with section 19 (5) (b) (i) and subject to the provisions of section 37A (3) and 37D, not form part of the assets in the estate of such a member, but shall be dealt with in the following manner: (a) If the fund within twelve months of the death of the member becomes aware of or traces a dependant or dependants of the member, the benefit shall be paid to such dependant or, as may be deemed equitable by the board, to one of such dependants or in proportions to some of or all such dependants. Page 24

25 (b) If the fund does not become aware of or cannot trace any dependant of the member within twelve months of the death of the member, and the member has designated in writing to the fund a nominee who is not a dependant of the member, to receive the benefit or such portion of the benefit as is specified by the member in writing to the fund, the benefit or such portion of the benefit shall be paid to such nominee: provided that Provided that where the aggregate amount of the debts in the estate of the member exceeds the aggregate amount of the assets in his estate, so much of the benefit as is equal to the difference between such aggregate amount of debts and such aggregate amount of assets shall be paid into the estate and the balance of such benefit or the balance of such portion of the benefit as specified by the member in writing to the fund shall be paid to the nominee. (ba) If a member has a dependant and the member has also designated in writing to the fund a nominee to receive the benefit or such portion of the benefit as is specified by the member in writing to the fund, the fund shall within twelve months of the death of such member pay the benefit or such portion thereof to such dependant or nominee in such proportions as the board may deem equitable: Provided that this paragraph shall only apply to the designation of a nominee made on or after 30 June 1989: Provided further that, in respect of a designation made on or after the said date, this paragraph shall not prohibit a fund from paying the benefit, either to a dependant or nominee contemplated in this paragraph or, if there is more than one such dependant or nominee, in proportions to any or all of those dependants and nominees. (c) If the fund does not become aware of or cannot trace any dependant of the member within twelve months of the death of the member and if the member has not designated a nominee or if the member has designated a nominee to receive a portion of the benefit in writing to the fund, the benefit or the remaining portion of the benefit after payment to the designated nominee, shall be paid into the estate of the member or, if no inventory in respect of the member has been received by the Master of the Supreme Court in terms of section 9 of the Estates Act, 1965 (Act 66 of 1965), into the Guardian's Fund. (2)(a) For the purpose of this section, a payment by a registered fund for the benefit of a dependant or nominee contemplated in this section shall be deemed to be a payment to such dependant or nominee if payment is made to: (i) a trustee contemplated in the Trust Property Control Act nominated by- (aa) the member (bb) a major dependant or nominee subject to para (cc) or (cc) a person recognised in law or appointed by a court as the person responsible from managing the affairs or meeting that daily care needs Page 25

26 of a minor dependant or nominee or a major dependent or nominee not able to manage his or her affairs or meet his or her daily care needs (ii) a person recognised in law or appointed by a Court as the person responsible for managing the affairs or meeting the daily care needs of a dependant or nominee or (iii) a beneficiary fund ( has to be registered as per the act 1/1/2009) (3) Any benefit dealt with in terms of this section, payable to a minor dependant or minor nominee, may be paid in more than one payment in such amounts as the board may from time to time consider appropriate and in the best interests of such dependant or nominee: Provided that interest at a reasonable rate, having regard to the investment return earned by the fund, shall be added to the outstanding balance at such times as the board may determine: Provided further that any balance owing to such a dependant or nominee at the date on which he or she attains majority or dies, whichever occurs first, shall be paid in full (4) (a) Any benefit dealt with in terms of this section, payable to a major dependant or major nominee, may be paid in more than one payment if the dependant or nominee has consented thereto in writing: Provided that- (i) the amount of the payments, intervals of payment, interest to be added and other terms and conditions are disclosed in a written agreement; and (ii) the agreement may be cancelled by either party on written notice not exceeding 90 days. (b) If the agreement contemplated in paragraph (a) is cancelled the balance of the benefit shall be paid to the dependant or nominee in full. (5) The provisions of subsection (3) and (4) do not apply to a beneficiary fund, and any remaining assets held for the benefit of a deceased beneficiary in a beneficiary fund must be paid into the estate of such beneficiary or, if no inventory in respect of the beneficiary has been received into the Guardian s Fund. What is a dependant mentioned in 37C? Section 1 Definitions 'dependant', in relation to a member, means- (a) a person in respect of whom the member is legally liable for maintenance; (b) a person in respect of whom the member is not legally liable for maintenance, if such person- (i) was, in the opinion of the board, upon the death of the member in fact dependent on the member for maintenance; Page 26

27 (ii) is the spouse of the member. (iii) is a child of the member, including a posthumous child, an adopted child and an a child born out of wedlock (c) a person in respect of whom the member would have become legally liable for maintenance, had the member not died; What is a spouse 13/9/2007? A person who is a permanent life partner OR spouse OR civil union partner in accordance with the marriage act; recognition of customary marriages act, OR civil union act, OR the tenets of a Religion THE BOARD OF THE FUND Section 7A Board of fund (1) Notwithstanding the rules of a fund, every fund shall have a board consisting of at least four board members [trustees], at least 50% of whom the members of the fund shall have the right to elect. (2) Subject to subsection (1), the constitution of a board, the election procedure of the members mentioned in that subsection, the appointment and terms of office of the members, the procedures at meetings, the voting rights of members, the quorum for a meeting, the breaking of deadlocks and the powers of the board shall be set out in the rules of the fund: Provided that if a board consists of four members or less, all the members shall constitute a quorum at a meeting Section 7B Exemptions (1) The registrar may on the written application of a fund which shall include such information as the registrar may require- (a) authorise a fund to have a board consisting of less than four board members if such number is impractical or unreasonably expensive: Provided that the members of the fund shall have the right to elect at least 50% of the board members; Page 27 (b) exempt a fund from the requirement that the members of the fund elect members of the board, if the fund-

28 (i) has been established for the benefit of employees of different employers which are not subsidiaries of a single holding company; or (ii) is a retirement annuity fund as defined in the Income Tax Act, 1962 (Act 58 of 1962). What are the rules with regards to contributions collected? Section 13A- Contributions Contributions to the fund must be paid within 7 days from the end of the period to which it relates. WHAT ARE THE PROTECTION AFFORDED TO FUNDS? Section 37A Protection from transfer, attachment or execution. Members Benefits may not be: Reduced Transferred or ceded Pledged or Hypothecated Attached to any form of execution / order of court Amount > R 3000 pa taken into account ito S65 of the magistrate court Section 37A subject to Section to 37D Section 37 B Disposition of pension benefits upon insolvency If the estate of any person entitled to a benefit payable in terms of the rules of a registered fund (including an annuity purchased by the said fund from an insurer for that person) is sequestrated or surrendered, such benefit or any part thereof which became payable after the commencement of the Financial Institutions Amendment Act, 1976 shall, subject to a pledge in accordance with section 19 (5) (b) (i) and subject to the provisions of sections 37A (3) and 37D, not be deemed to form part of the assets in the insolvent estate of that person and may not in any way be attached or appropriated by the trustee in his insolvent estate or by his creditors, notwithstanding anything to the contrary in any law relating to insolvency Page 28

29 WHAT ARE THE DEDUCTIONS THAT ARE ALLOWED AGAINST A MEMBER S INTEREST? Section 37D Fund may make certain deductions from pension benefits (1) A registered fund may- (a) deduct any amount due on the benefit in question by the member in accordance with the Income Tax Act, 1962 (Act 58 of 1962), and any amount due to the fund in respect of (i) a loan granted to a member in terms of section 19 (5); or (ii) any amount for which the fund becomes liable under a guarantee furnished in respect of a member for a loan granted by some other person to the member in terms of section 19 (5), from- (aa) the amount of the benefit to which the member or a beneficiary becomes entitled in terms of the rules of the fund; or (bb) in the case of a transfer of the member to another fund, the amount of the benefit which the fund is so entitled to transfer, if the board of the transferor fund is satisfied that it is not otherwise reasonably possible to negotiate the repayment or to transfer the loan or the guarantee; or (cc) in the case of default on the repayment of any such loan by the member concerned in circumstances where his or her membership of the fund is not terminated, the amount of the benefit which the member would have received on termination of membership on the date of default, if such a deduction is only effected as a last resort after the board of the fund is satisfied that no other arrangement for the required repayment can be made; (b) deduct any amount due by a member to his employer on the date of his retirement or on which he ceases to be a member of the fund, in respect of- (i) (aa) a loan granted by the employer to the member for any purpose referred to in section 19 (5) (a); or (bb) any amount for which the employer is liable under a guarantee furnished in respect of a loan by some other person to the member for any purpose referred to in section 19 (5) (a), to an amount not exceeding the amount which in terms of the Income Tax Act, 1962, may be taken by a member or beneficiary as a lump sum benefit as defined in the Second Schedule to that Act; or (ii) compensation (including any legal costs recoverable from the member in a matter contemplated in subparagraph (bb)) in respect of any damage caused to the employer by reason of any theft, dishonesty, fraud or misconduct by the member, and in respect of which- Page 29

30 (aa) the member has in writing admitted liability to the employer; or (bb) judgment has been obtained against the member in any court, including a magistrate's court, from any benefit payable in respect of the member or a beneficiary in terms of the rules of the fund, and pay such amount to the employer concerned; (c) deduct any amount which the fund has paid or will pay by arrangement with, and on behalf of, a member or beneficiary in respect of- (i) such member's or beneficiary's subscription to a medical scheme, registered otherwise than provisionally in terms of the Medical Schemes Act, 1967 (Act 72 of 1967); (ii) any insurance premium payable by such member or beneficiary to an insurer registered in terms of the Insurance Act, 1943 (Act 27 of 1943); (iii) any purpose approved by the registrar, on the conditions determined by him, upon a request in writing from the fund, from the benefit to which the member or beneficiary is entitled in terms of the rules of the fund, and pay such amount, if due, to such medical scheme, insurer or person concerned, as the case may be. (d) deduct from a member s benefit or min individual reserve as the case may be_ (i) any amount assigned from such a benefit or individual reserve to a nonmember spouse in terms of a decree granted under section 7(8) of the Divorce Act (ia) an amount payable in terms of a maintenance order as defined in section 1 of the Maintenance Act and (ii) employee s tax required to be deducted or withheld in terms of the 4 th Schedule to the Income Tax Act as a result of the deduction referred to in subpara (i) and (ia) [financial services laws general amendment bill: effective 1/1/2009] (2) For the purposes of paragraph (a) (ii) (bb) and (cc) of subsection (1), the amounts so deducted shall be deemed to be a benefit to which the member becomes entitled on termination of his or her membership of the fund for reasons other than as a result of retirement or death arising at the date of the transfer or the default. (3) (a) Any amount that may be deducted in terms of subsection (1)(d) may only be deducted after the amount of pension interest available has been reduced by any loan amount or guarantee amount referred to in subsection (1)(a), where such a loan or guarantee was granted prior to the granting of the court orders, irrespective of the fact that that amount is due and payable or not: Provided that the aggregate of all amounts deducted in terms of this subsection may not exceed the member's pension interest available at any given time. Page 30

31 (b) In the event that more than one of the court orders referred to in subsection (l)(d) provides for the deduction of amounts from a member's benefit or minimum individual reserve, as the case may be, at the same time, the court orders must be dealt with in accordance with the following hierarchy (i) any maintenance order referred to in subsection (1)(d)(i), (ii) any decrees of divorce or for the dissolution of a customary marriage." (4) (a) For purposes of section 7(8)(a) of the Divorce Act, 1979 (Act No. 70 of 1979), the portion of the pension interest assigned to the non-member spouse in terms of a decree of divorce or decree for the dissolution of a customary marriage is deemed to accrue to the member on the date on which the decree of divorce or decree for the dissolution of a customary marriage is granted, and, on the written submission of the court order by the non-member spouse (i) must be deducted by (aa) the pension fund or pension funds named in or identifiable from the decree: (bb) the pension fund or pension funds to which the pension fund referred to in item (aa) transferred the pension interest referred to in the decree; (ii) must be deducted on the date on which an election is made or, if no election is made within the period referred to in para (b)(i), the date on which that period expires; and (iii) must reduce the member's accrued benefits or minimum individual reserve at the date of the decree. (b) (i) The pension fund must, within 45 days of the submission of the court order by the non-member spouse, request the non-member spouse to elect if the amount to be deducted must be paid directly to him or her, or if it must be transferred to a pension fund on his or her behalf. (ii) The non-member spouse must within 120 days of being requested to make an election (aa) inform the pension fund of how the amount referred to in subparagraph (i) must be dealt with; and (bb) if he or she elects that the amount must be paid to him or her directly, provide the pension fund with the details of how that payment must be effected; or (cc) if he or she elects that the amount must be transferred to a pension fund on his or her behalf, provide the pension fund with the details of that pension fund. (iii) The pension fund must pay or transfer the amount within 60 days of being informed of how the amount must be dealt with in accordance with the non-member spouse's election. Page 31

32 (iv) In the event that the non-member spouse fails to make an election or identify the pension fund to which the amount should be transferred within the period referred to in subparagraph (ii), the pension fund must pay the amount directly to the non-member spouse within 30 days of the expiry of that period. (v) Despite subparagraph (iv), in the event that the pension fund cannot reasonably ascertain how the payment to the non-member spouse must be effected, the pension fund must retain the amount and any fund return referred to in paragraph (c)(ii) in the pension fund until such time as details of how that payment must be effected is made available to the pension fund by the member, the non-member spouse or any other person. Page 32

33 HEALTH CARE Page 33

34 Provisions of Act effective 1/1/2000 Introduce open enrolment to prevent discrimination on the basis of age, medical history /health status Introduces community rating - contributions can only be based in income / number of dependants Introduces a set of PMB payment in full with no limits or co-payments Introduces regulation of intermediaries, administrators, managed care etc Section 1 of the Act Definitions: dependant means: (a) the spouse or partner, dependant children or other members of the member s immediate family in respect of whom the member is liable for family care and support or. (b) any other person who, under the rules of a medical scheme, is recognised as a dependant of a member. Income Tax Act refers to above definition but makes it more clear on the definition of dependant for tax purposes as follows: IMPORTANT DEFINITIONS THE MEANING OF SPOUSE in the INCOME TAX ACT A spouse as defined in section 1 means in relation to any person, a person who is the partner of such person (a) in a marriage or customary union recognised in terms of the laws of the Republic; (b) in a union recognised as a marriage in accordance with the tenets of any religion; or (c) in a same-sex or heterosexual union which the Commissioner is satisfied is intended to be permanent. Page 34

35 THE MEANING OF DEPENDANT in the MEDICAL SCHEME ACT A dependant as defined in section 1 of the MS Act means (a) the spouse or partner, dependant children or other members of the member s immediate family in respect of whom the member is liable for family care and support; or (b) any other person who, under the rules of a medical scheme, is recognised as a dependant of a member. THE MEANING OF CHILD IN RELATION TO THE TAXPAYER IN THE INCOME TAX ACT The term child in relation to the taxpayer, as defined in section 18(4) means the taxpayer s child or child of his or her spouse who was alive during any portion of the year of assessment, and who on the last day of the year of assessment (a) was unmarried and was not or would not, had he lived, have been (i) over the age of 18 years; (ii) over the age of 21 years and was wholly or partially dependent for his maintenance upon the taxpayer and has not become liable for the payment of normal tax in respect of such year; or (iii) over the age of 26 years and was wholly or partially dependent for his maintenance upon the taxpayer and has not become liable for the payment of normal tax in respect of such year and was a fulltime student at an educational institution of a public character; or (b) in the case of any other child, was incapacitated by a disability from maintaining himself or herself and was wholly or partially dependent for maintenance upon the taxpayer and has not become liable for the payment of normal tax in respect of such year: Provided that any child of the taxpayer who has become liable for the payment of normal tax in respect of any year of assessment solely by reason of the provisions of section 5(1A) shall be deemed for the purposes of this section not to have become liable for the payment of normal tax in respect of such year. Page 35

36 FOR INCOME TAX ACT AND DEDUCTIONS IT IS NOT: In order to qualify for a deduction of medical expenses paid for a child, the child must be your own child or that of your spouse. The following children are excluded for purposes of the medical allowance: A foster child (the period that the child is in your care does not play any role) A child who has not yet been legally adopted A child who is under your custodianship You can however claim medical expenses for a child that does not qualify in terms of the definition as a child, if the child is admitted as a dependant of the taxpayer s medical scheme. It should be noted that disability expenses can only be claimed in respect of your own child or that of your spouse and not in respect of any dependant. QUALIFYING CONTRIBUTIONS FOR INCOME TAX ACT Contributions Paid by you! Any contributions paid by you for yourself, your spouse, your or your spouse s children and any dependants as described, to a medical scheme registered under section 24(1) of the MS Act, may be taken into account when the medical allowance is determined. Contributions paid by you to any other funds registered under similar provisions contained in the laws of any other country, may also be taken into account. FOR DEDUCTIONS UNDER THE INCOME TAX ACT Deemed contributions Contributions paid by a person other than yourself will not be taken into account when your medical allowance is determined, except for contributions paid by the estate of a deceased taxpayer for the period up to the date of the taxpayer s death. These contributions are deemed to have been paid by the taxpayer on the day before the taxpayer s date of death; and contributions paid by an employer of a taxpayer, which are deemed to have been paid by the taxpayer to the extent that the amount has been included in the income of the taxpayer as a taxable benefit. Page 36