Retirement Fund Tax Harmonisation {FPRG-25_Retirement_Fund_Tax_Harmonisation}

Retirement Fund Tax harmonisation was introduced with effect from 01-Mar-2016 and is applicable to South African clients only.

General Information:

Retirement Fund Tax Harmonisation means that the taxation and administration rules have been standardised and the same rules will be applied to all Retirement Funds irrespective of whether it is a Pension, Provident or Retirement Annuity Fund. Prior to the introduction of Retirement Fund Tax Harmonisation, different taxation rules were applied to the various types of retirement funding depending on whether the Retirement Fund was a Pension Fund, Provident Fund or Retirement Annuity.

The effect on Payroll is as follows:

The employee’s contribution to any registered Retirement Fund will be deducted at a pre-tax salary level. The includes the Employee’s current months contribution, arrear contribution, voluntary additional contributions, buy back contributions and any individual Retirement Annuity Contributions that are calculated through the payroll for tax benefit purposes.
The employer’s contribution to any Retirement Fund and the contra of the transaction will be calculated at an after-tax salary level. This includes any arrear contributions.
There will be a Fringe Benefit to the employee on the Employer’s Contribution to the Retirement Fund; this salary transaction will be calculated as a pre-tax salary level.
As the Employee is liable for a Fringe Benefit on the Employer’s Contribution, the Fringe Benefit amount will be deemed to be an Employee Contribution to the Retirement Fund. Therefore the Employee Deemed Benefit Amount will be a contra to the Fringe Benefit Amount on the Employer’s Contribution; this salary transaction will be calculated as a pre-tax deduction.
The Employee allowed pre-tax deduction (i.e. current, arrear, buy back, voluntary additional, private RA contributions, employee deemed amount) is limited to the lessor of a capped amount or capped percentage calculated on the greater of taxable income or remuneration (Payrolls will use remuneration before allowable deductions). Remuneration for the purpose of calculating the percentage cap is defined by the Fourth Schedule with a few exclusions. Should the employee’s total contribution into Retirement Funding exceed the allowed pre-tax amount, an additional salary transaction should be calculated as a pre-tax Earning with an after-tax contra Deduction. This calculation is used purely for calculation purposes to ensure that the PAYE calculation on pre-tax Retirement Funding Contributions are correct and not for reporting purposes.

For the calculation in the full salary calc {FPRN-2}, single salary calc {FPRN-3} and pro-forma salary calc {FPRI-25}, actual Tax Year-to-date within continuous service period remuneration is determined and the allowed capping amount /percentage is annualised to ensure that the employee receives the maximum pre-tax benefit.

The annual monetary cap and a percentage based cap are linked to Table Code ‘9998’ on {FPRG-5}.

Some Retirement Funds provide their members with risk benefits for death or permanent disability cover. If the additional risk benefits are included in the fund’s rules and these rules are approved by SARS, then it is ‘Approved Risk Benefits’ and the total contribution (including the risk benefit portion of the contribution) is taxed and administered as a contribution to a Retirement Fund i.e. on Fringe Benefit amount calculation on the total Employer’s Contribution. Therefore, if this is the case and a Fringe Benefit exists for the Risk portion, it will need to be ended as at 28th February 2016. Consideration will need to be given as to how the Fund wants this reported /paid and ED Code setup will need to accommodate this requirement.

All Retirement Funds will fall into one of the following categories, the category determines how the Fringe Benefit on the Employer’s Contribution will be calculated:

Defined Contribution Fund (DC)

A Defined Contribution Fund (DC) is a fund where the rules of the fund calculate an employee’s retirement benefit based on the total contribution made by the Employee and /or the Employer, plus investment growth, less expenses. The value of the retirement benefit is directly linked to the total value of the contributions received, therefore the Employer’s contribution equals the Fringe Benefit Amount.

Defined Benefit Fund (DB)

A Defined Benefit Fund (DB) is a fund where the rules of the fund specify a formula that determines an employee’s retirement benefit. This usually takes into account the number of years of service and the employee’s last /average salary. As the benefit is not based on the actual contributions received for the member, the Fringe Benefit amount cannot be calculated on the Employer’s actual contribution, instead a formula is used to calculate the benefit amount.

FB = (Fund Factor x Retirement Funding Income) – EE contribution excluding Voluntary Additional Contributions

Hybrid Funds (DC&DB)

Some Funds are a combination of Defined Contribution and Defined Benefits and for these types of Funds, the Formula as described above is used to calculate the Fringe Benefit on the Employer’s contribution.

The following Tax Codes are applicable to Retirement Funding Tax Harmonisation (i.e. with effect from 2017 Year of Assessment):

Fringe Benefit Tax Codes

CODE	DESCRIPTION	EXPLANATION
3817 (3867)	Employer’s Pension Fund Contributions (PAYE)	Value of taxable benefit iro Employer’s Pension Fund Contributions paid for the benefit of Employee. DC Component: Taxable value = Employer’s Contribution DB Component: Taxable value = amount calculated ito par 12D(3), Seventh Schedule formula calculation DC&DB Component: Taxable Value = amount calculated ito par 12D(3), Seventh Schedule formula calculation
3825 (3875)	Provident Fund Contributions (PAYE)	Value of taxable benefit iro Employer’s Provident Fund Contributions paid for the benefit of Employee. DC Component: Taxable value = Employer’s Contribution DB Component: Taxable value = amount calculated ito par 12D(3), Seventh Schedule formula calculation DC&DB Component: Taxable Value = amount calculated ito par 12D(3), Seventh Schedule formula calculation
3828 (3878)	Retirement Annuity Fund Contributions (PAYE)	Value of taxable benefit iro Employer’s Retirement Annuity Fund contributions paid in respect of Employee. Taxable value = Employer’s Contribution

Deduction Codes

CODE	DESCRIPTION	EXPLANATION
4001	Total Pension Fund Contributions paid or ‘deemed paid’ by Employee	‘Deemed paid’ by employee is the value of the taxable benefit (Code 3817) included in the income of the Employee. Prior to the 2017 year of assessment, this Code is only applicable to ‘Current Pension Fund Contributions by Employee’
4003	Total Provident Fund Contributions paid or ‘deemed paid’ by Employee	‘Deemed paid’ by employee is the value of the taxable benefit (Code 3825) included in the income of the Employee. Prior to the 2017 year of assessment, this Code is only applicable to ‘Current Provident Fund Contributions by Employee’
4006	Total Retirement Annuity Contributions paid or ‘deemed paid’ by Employee	‘Deemed paid’ by employee is the value of the Fringe Benefit (Code 3828) included in the income of the Employee. Prior to the 2017 year of assessment, this Code is only applicable to ‘Current Retirement Annuity Fund Contributions by Employee’
4472	Employer’s Pension Fund Contributions paid for the benefit of the Employee	This Code was not reported on Tax Certificates from 2010 to 2016 years of assessments. It will once again be reported from 2017 year of assessment.
4473	Employer’s Provident Fund Contributions paid for the benefit of the Employee	This Code was not reported on Tax Certificates from 2010 to 2016 years of assessments. It will once again be reported from 2017 year of assessment
4475	Employer’s Retirement Annuity Fund Contributions paid for the benefit of the Employee	This Code is valid from the 2017 year of assessment.

Codes not applicable from 2017 year of assessment

CODE	DESCRIPTION	EXPLANATION
4002	Arrear Pension Fund Contributions paid by the Employee	This Code is not applicable from the 2017 year of assessment. Arrear Pension Fund Contributions paid by the Employee will be reported under Code 4001 from the 2017 year of assessment.
4007	Arrear (re-instated) Retirement Annuity Fund Contributions	‘This Code is not applicable from the 2017 year of assessment. Arrear Retirement Annuity Contributions paid by the Employee will be reported under Code 4006 from the 2017 year of assessment.

Additional Code used in the ITS Integrator system Retirement Tax Harmonisation ED Setup and programmatically converted to the applicable Retirement Funding Tax Code when calculated in the salary calculation.

CODE	DESCRIPTION	EXPLANATION
9998	Retirement Reform Fund Code to be converted	Used for Retirement Funding Tax Harmonisation and is converted programmatically to the applicable Tax Code determined by the type of Retirement Fund the Employee belongs to, for whom the salary calculation is being done i.e. Pension Fund, Provident Fund or Retirement Annuity Fund.

Setup Requirements:

The details below are in addition to the standard Pension Fund /Provident Fund setup requirements which currently calculates the Employer and /or Employee’s Contribution to the Fund. Please refer to {FPRG-25}, Calc Method ‘A’ for more details.

Retirement Fund Member’s Structure {PAOP-10} /{FPRI-15}

Member’s Retirement Fund details as captured on {PAOP-4} or {PAOP-5} will be displayed on this Menu Option. Users must add the Fund Component (i.e. ‘DC’, ‘DB’ or ‘DC&DB’) and as applicable the Fund Category, Fund Factor and the date that this detail is effective, to the existing details. This additional information will be supplied by the Fund Provider, for each member on a Member’s Certificate. This information is expected to change annually.

Please note that this information is used in the salary calculation and is therefore mandatory to ensure the correct calculation of the Fringe Benefit on the Employer’s Contribution, the Employee Deemed Benefit Amount and the Employee Contribution to Retirement Funding greater than the allowed Capped Amount /Capped Percentage

Example:

2. Export Retirement Fund Member’s Structure {PAOP-11} /{FPRI-16}
Import Retirement Fund member’s Structure {PAOP-12} /{FPRI-17}

To ease the burden of manually capturing the additional Retirement Funding information on {PAOP-10} /{FPRI-15} there is an Export /Import functionality to assist. The member’s details can be export into excel, the information updated and then import back into the structure.

3. Earning /Deduction Types {FPRG-6}

The following new ED Codes must be defined:

(i) Fringe Benefit on Employer’s Contribution

one ED Code per Retirement Fund where there is an Employer’s Contribution
Tax Code ‘9998’
This is an internal Tax Code which will be programtically updated when running a salary calculation to the correct SARS Tax Code, determined by the Fund Type (i.e. Pension, Provident or RA)
Calc Method ‘X’
Used for Retirement Funding Tax Harmonisation calculations
This is a taxable Fringe Benefit and therefore will always be defined at a salary level <50 (assuming PAYE is calculated at salary level 50)
The program will determine the Fund Component for the member and then will calculate the Fringe Benefit amount using this information.

Component ‘DC’ means that the Employer Contribution will be the Fringe Benefit Amount.

Component ‘DB’ or ‘DC&DB’ means the formula will be used for the calculation i.e. Retirement Funding Income (i.e. income used to calculate the Retirement Funding Contribution) x Retirement Funding Factor (as defined for the member on {PAOP-10} /{FPRI-15} minus Employee Contribution (current, arrear, buy back but excluding voluntary additional contribution).

See example below of a typical example

(ii) Employee Deemed Benefit

one ED Code per Retirement Fund where there is an Employer’s Contribution
Tax Code ‘9998’
This is an internal Tax Code which will be programtically updated when running a salary calculation to the correct SARS Tax Code, determined by the Fund Type (i.e. Pension, Provident or RA)
Calc Method ‘6’
As there is Fringe Benefit being calculated on the Employer’s Contribution, the Fringe Benefit amount is deemed to be an Employee Contribution and is reported on the Tax certificate as an Employee Contribution.
The amount of this transaction equals the Fringe Benefit Amount, is calculated at a salary level <50 and essentially is the contra for the Fringe Benefit transaction.

See example below of a typical example

(iii) Employee Contribution greater than the Allowed Amount

The same ED Code may be used for all Retirement Funds and must be defined if there is any type of Retirement Funding calculations in the salary calculation irrespective of whether it is an Employee and /or Employer Contribution or Employee’s private Retirement Annuity policies.
Tax Code ‘9998’
This is an internal Tax Code which will be programtically updated when running a salary calculation to the correct SARS Tax Code, determined by the Fund Type (i.e. Pension, Provident or RA)
Calc Method ‘X’
Used for Retirement Funding Tax Harmonisation calculations
There is a limit to the total amount that the Employee is allowed as a Retirement Funding Contribution as a pre-tax deduction. This transaction is used to adjust the pre-tax contribution greater than the allowed amount /allowed percentage by calculating an ‘adjustment transaction’ and is for calculation purposes only, not reporting purposes. Therefore it will only calculate when applicable and although defined as an Earning, it may also be calculated as a negative Earning.
The allowed amount /allowed percentage is linked to Table ‘9998’ on table Details {FPRG-5}

See below, for an example of what this transaction is determining:

Amounts are calculated as follows:

Determine YTD Remuneration

Sum YTD amounts for following Tax Codes ’36—‘, ’37—‘, ’38—‘, ’39—‘ (always salary level 0-48)

The following exceptions apply:

   - Exclude
    Tax Code ‘3616’ Independent Contractors
    Tax Code ‘3901’ Severance Benefits

   - Only 80% of the following Tax Codes are included
(i.e. only Remuneration value not Income value)
Tax Code ‘3701’ Travel Allowance
Tax Code ‘3702’ Reimbursive Travel
Tax Code ‘3802’ FB on Company Car purchased
Tax Code ‘3816’ FB on Company Car that is rented

- Tax Code ‘3703’ Reimbursive Travel
If Tax Code ‘3703’ will be converted to ‘3702’ on generation of the Tax Certificates, then 80% on this Tax Code must also be included. An additional calculation is done in resignation month and February to determine this. Tax Code ‘3703’ is converted under the following conditions:

   If Tax Code ‘3701’ exists
If Tax Code ‘3702’ exists
If rate per km paid is > rate per km as per table ‘9999’
If km travelled is > than max km allowed as per table ‘9999’
If total amount reported is > rate per km x max km

Determine Allowed Amount

The employee is allowed the lessor of the capped percentage or the capped amount as defined in Table ‘9998’.
The YTD Remuneration as determined above is then applied to this calculation and the lessor of the two is then used as the maximum Allowed amount. If an employee is in service for an incomplete cycle, days are used in the calculation.

Determine YTD EE Contribution to Retirement Funding

YTD Tax Codes ‘4001’, ‘4003’, ‘4006’ are summed, including the current months calculation

Determine YTD EE Contribution > Allowed Amount

This is the difference between what the employee is allowed as per the above calculation and the employee’s actual Retirement Funding
YTD amounts are used and should an employee have an additional earning in a particular month, the previously dis-allowed amount would be adjusted in the current month.

See example below of a typical example

(iv) Employee Contribution greater than the Allowed Amount Contra

The same ED Code may be used for all Retirement Funds and is a contra to the Employee Contribution greater than Allowed Amount ED Code.
Tax Code ‘9998’
This is an internal Tax Code which will be programtically updated when running a salary calculation to the correct SARS Tax Code, determined by the Fund Type (i.e. Pension, Provident or RA)
Calc Method ‘6’

See example below of a typical example

4. Earning /Deduction Detail {FPRG-7}

All new ED Codes that have been defined on {FPRG-6} must be linked to the applicable Appointment Types on {FPRG-7}

5. Retirement Fund ED Structure {FPRG-12}

All ED Codes relating to each Retirement Fund must be linked to the Retirement Fund ED Structure on {FPRG-12}.
A typical Example would be:

Date	System Version	By Whom	Job	Description
05-Feb-2016	v03.0.0.0	Sakhile Ntimane	t209237	New manual format.
30-Jan-2017	v04.0.0.0	Sakhile Ntimane	t219225	Change Images to Integrator4.