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Abolishment of Tax on Retirement Funds: Closing the Book on RFT?

A joint submission by the Institute of Retirement Funds, Life Offices' Association, and South African Financial Services Intermediaries Association to the PCOF13 March 2007 Budget highlighting the need to close the book on the Tax on Retirement Funds (RFT) and address the shortcomings in legislation and administration.

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Abolishment of Tax on Retirement Funds: Closing the Book on RFT?

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  1. Joint submission by Institute of Retirement Funds, Life Offices’ Association and South African Financial Services Intermediaries Association to PCOF13 March 2007

  2. Budget 2007 • Abolishment of Tax on Retirement Funds (RFT) with effect from 1 March 2007. • Streamlining tax and regulatory aspects of retirement funds. • Broader Social Security reform. • We welcome this, but does it close the book on RFT? IRF, LOA & SAFSIA Joint Submission

  3. Budget 1996 • RFT introduced with effect from 1 March 1996 • Introduced as an “initial tax” * • “A first step in the implementation of the taxation of the income of retirement funds” * • “More time is needed for the refinement of the details of the tax dispensation in respect of retirement funds” * • “No significant additional burden is imposed” * * Extract from 1996 Budget Speech IRF, LOA & SAFSIA Joint Submission

  4. Implementation of RFT • SARS and industry had insufficient systems and resources to administer RFT because RFT was introduced as a temporary tax. • Systems struggled to handle increased volumes and complexity over time. • RFT was administered as a self assessment tax. IRF, LOA & SAFSIA Joint Submission

  5. RFT statistics • > R50 billion RFT collected by SARS since introduction in 1996. • 13 000 retirement funds currently under administration in industry. IRF, LOA & SAFSIA Joint Submission

  6. Issues raised in the past by the industry • Shortcomings in the legislation highlighted by industry on several occasions to SARS and NT from the outset. • Process with respect to exclusion from RFT of income backing annuities is inequitable and prone to dispute. • Legislation did not keep pace with industry developments (e.g. living annuities & inflation-linked annuities) • Inconsistent interpretation and application of RFT legislation by SARS (e.g. use of interim fund valuations and definition of interest bearing assets) • Lack of administrative alignment with Income Tax legislation (e.g. no settlement mechanism & no discretion for SARS with respect to waiving of interest on underpayment). IRF, LOA & SAFSIA Joint Submission

  7. Response from SARS / NT on issues raised • RFT was a temporary tax. • Retirement Reform investigation is underway and therefore no changes will be made to RFT legislation to rectify issues raised (consistent message since 2000.) • Result: Inconsistent interpretation of legislation driven by a desire to comply with the spirit of the law. IRF, LOA & SAFSIA Joint Submission

  8. Response from SARS / NT on issues raised (2) • SARS audits • Large number of SARS audits on retirement funds started in 2003 – going back to 1996 & applying the letter of the law with inequitable results to retirement fund members. • It highlighted the resources and systems constraints within SARS to deal with RFT. • Estimated 54 current formal disputes between funds and SARS. • Estimated amount of R30 million of RFT involved in current disputes. IRF, LOA & SAFSIA Joint Submission

  9. Risks if status quo continues indefinitely • Uncertainty in the industry if it remains an open-ended process. • Impact on finalisation of surplus calculations by funds. • Inequity to members since additional RFT with respect to past periods will have to be paid by current members of retirement funds or even pensioners. • Strain on members’ retirement benefits. • Ineffective use of resources in industry as well as at SARS. (Resources should rather be applied to Social Security and Retirement Reform process.) IRF, LOA & SAFSIA Joint Submission

  10. Current Position • RFT abolished with effect from 1 March 2007. • Shortcomings in legislation not attended to when raised over last 11 years. • Too late to make retrospective changes to legislation now. • Risk for funds and NT to allow SARS to continue with open-ended investigations. IRF, LOA & SAFSIA Joint Submission

  11. Proposal • Close the book on RFT (>R50 billion collected). • Introduce cut-off date (1 March 2007) for new assessments. • Introduce settlement procedures into RFT legislation in order to settle current disputes effectively. • Agree framework to address inequities in line with the spirit of the law with no interest and no penalties. • Introduce cut-off date for settlement of current disputes to bring closure. • Utilise resources in Social Security & Retirement Reform process. IRF, LOA & SAFSIA Joint Submission

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