The capping of the deductibility of retirement contributions for tax : a comparison between South Africa and developed countries

Abstract

In the Taxation Laws Amendment Act of 2013 the deductibility of retirement contributions for taxation purposes in South Africa was changed. This changed the way in which pension fund contributions, provident fund contributions and retirement annuity fund contributions are treated for tax purposes. These adjustments include the capping of the amount of retirement contributions that will be deductible for income tax purposes. The cap amounts to R350 000 annually. In this study the amended South African tax consequences, specifically the capping of retirement contributions, are compared to the tax legislation of developed countries, which include Australia, Denmark and Ireland. These countries are selected from the Melbourne Mercer Global Pension Index (MMGPI) as this index lists the best countries in terms of three sub-indices. The countries selected have the highest index amounts for the adequacy sub-index. This sub-index takes into consideration the tax consequences of retirement savings. As such, the South African tax consequences are compared to the best pension systems in the world according to the MMGPI to determine whether the South African tax legislation is in line with of those of developed countries. Quantitative analyses are performed to determine the income tax consequences in all selected countries for individuals in different income categories. Based on the findings in this study, it can be reasonably concluded that, for each of the selected countries some adverse tax implications will result from contributions above the imposed limits. With the introduction of the cap of contributions to the South African tax legislation, South African taxpayers will now be subject to similar limits as in the selected developed countries. Therefore the legislation is now more in line with the legislation of the aforementioned countries.