SimplePay has built-in items to accommodate the special tax and reporting requirements related to retirement funds. A detailed discussion of the tax implications of retirement funds is provided further down.
There are three types of retirement fund:
- pension fund
- provident fund
- retirement annuity fund (RAF)
To add any of these items, go to an employee’s profile and click on Add next to Regular Inputs. Under Deduction you can then choose between Pension Fund, Provident Fund and Retirement Annuity Fund. The next steps are listed below for the different funds:
- Select “Fixed amount” or “% of Retirement Funding Income”, depending on how you want the contribution to the fund to be calculated. After you have selected one of the two options, you also have to specify the fixed amount or percentage to be contributed by the employee and employer, respectively. If the contribution is based on a percentage, you will need to configure the RFI, as detailed below.
- You can then select the Beneficiary from the drop-down menu if you have already set up beneficiaries. To set up beneficiaries, go to Settings > Beneficiaries and click Add under the relevant fund.
- The last input that is applicable to Defined Benefit (DB) and hybrid funds only, is the Category factor.
The nature of the fund is determined by its rules. You should contact your fund administrator in order to determine the nature of the fund. As a rule, all RAFs will fall under the Defined Contribution (DC) category with most provident funds doing the same. Pension funds could fall under either DC or DB.
Please note: if an employee is part of a DB fund, and the fund has not issued a Contribution Certificate, you should request this as a matter of urgency. This certificate contains pertinent information about the fund, including the Category Factor used in the DB and hybrid benefit formula.
If the pension or provident fund contributions are calculated as a percentage of RFI, you need to indicate what payslip components form part of RFI. To do this:
- Go to Employees and click on the employee’s profile.
- Select Edit Info > Retirement Funding Income.
- Select the RFI Determination. ‘Percentage per Income‘ should only be used if only a portion of the income is included in the RFI that the percentage for retirement contributions is applied to. For example, if a pension fund contribution is calculated as 7% of half of the employee’s basic salary, you would use ‘Percentage of Income‘ to capture 50% of the basic salary. The 7% would have already been captured when adding the pension fund under Regular Inputs for the payslip.
- Click Save.
- Enter the Amount per month that is to be contributed to the fund.
- Enter the Portion contributed by employer.
- Check the box next to Employee handles the payment if the employee will take care of the payment.
- If the checkbox is left blank, you will have the option to select the Beneficiary from the drop-down menu if you have already set up beneficiaries. To set up beneficiaries, go to Settings > Beneficiaries and click Add under the relevant fund.
The contributions will be reported under the following codes:
- 4472: Employer Pension Fund Contributions
- 4473: Employer Provident Fund Contributions
- 4475: Employer RAF Contributions
Tax Implications of Retirement Funds
On 1 March 2016 uniform tax treatment came into effect for all three types of retirement fund, which simplifies things significantly compared to the previous situation.
Taxable Fringe Benefits
All employer contributions give rise to a taxable fringe benefit, the calculation of which is discussed below.
The distinction between DC, DB and hybrid funds (discussed above) is important as it impacts the value of the fringe benefit arising from employer contributions:
- DC funds: fringe benefit = value of employer contribution
- DB funds: fringe benefit is calculated according to a formula*
- Hybrid funds (which contain elements of both a DC and a DB fund): fringe benefit is calculated using the DB formula*
Fringe benefit = (A x B) – C
A = fund member category factor (provided in Contribution Certificate)
B = employee’s RFI
- RFI – Fourth Schedule Remuneration; only includes the taxable portion of the travel allowance and company car benefit
C = employee’s own contribution, excluding voluntary contributions
The fringe benefits will be reported under the following codes:
- 3817: Employer Pension Fund Contributions
- 3825: Employer Provident Fund Contributions
- 3828: Employer RAF Contributions
Taxable Income Deduction
Contributions to retirement funds can be made by the employer and / or the employee. For tax purposes, the employer contribution is deemed to be a contribution paid by the employee.
The total contribution (actual plus deemed) to all retirement funds is allowed as a deduction up to 27,5% of remuneration* (as defined), with an overriding monetary cap of R350 000 annually.
*Remuneration will include the value of any fringe benefits such as employer contributions to retirement funds.
The recommended treatment of the monetary cap involves spreading / averaging it over the tax year, using a cumulative calculation. Any unused cap (percentage or monetary) is carried forward each month and also into the following tax year if necessary.
Retirement Deduction Trace
The Retirement Deduction trace provides you with information on how the taxable income deduction for retirement contributions is calculated for an employee. To view the Retirement Deduction trace, go to an employee’s profile and navigate to the relevant payslip. Open the web view for the payslip by clicking on More next to Preview (draft payslips) / View (finalised payslips). Under Taxable Income Deductions, click on Retirement Deduction to view the trace.
The deductions will be reported under the following codes:
- 4001: Pension Fund Contributions
- 4003: Provident Fund Contributions
- 4006: RAF Contributions