Johannesburg, 15 Jul 2009
While many people are already familiar with the proposed adjustments made to personal income tax, few are aware of the changes to the taxation of retirement annuity and medical aid contributions proposed in the 2009 budget, says Rob Cooper, a Softline VIP Director and Chairman of the Payroll Authors` Group.
Cooper says the 2009 budget was the first in many years that had to deal with such a gloomy outlook for economies throughout the world, and presented a serious challenge to former finance minister Trevor Manuel and his team.
"By now, everybody knows of the welcome adjustments proposed to personal income tax brackets, the primary rebate and some thresholds to compensate for the effects of higher inflation during 2008, and to provide real tax relief. What is perhaps less publicised, but of great importance to both employers and employees, are the proposals to change the taxation of contributions to retirement annuities and to medical schemes."
Under the current legislation, employer-paid contributions to a retirement annuity fund for the benefit of employees, are included in the gross income of the employees but are not deductible by the employees. Though there has been some debate in recent times around this issue, Cooper believes this is the correct interpretation of the current legislation, even though it results in the employee being prejudiced by not being allowed the deduction.
To rectify this unfair situation, it is proposed that these contributions should be deductible, subject to existing limits, so that they are placed on par with other retirement annuity fund contributions made directly by employees.
In terms of medical scheme contributions, the budget proposes that the cap portion of employer-paid contributions to a medical scheme will cease to qualify as a deduction. In future, all contributions paid by an employer will be fully taxed as a fringe benefit, and the employee will be permitted to claim a tax deduction for actual and "deemed" contributions up to the cap amount.
The budget states that "the net tax effect of this step should be neutral for both employee and employer". Cooper says this is true for the employee because the tax relief is limited to the cap amount, irrespective of whether it is paid by the employer or the employee.
However, there are certain advantages and disadvantages for the employer to be aware of if the employer contributes to the medical scheme. These are:
* Firstly, the cost to the employer of the Skills Development Levy and Unemployment Insurance Fund (UIF) contribution remains the same irrespective of whether the employer or the employee contributes to the medical scheme. The skills levy and the employer`s contribution to UIF are both calculated at 1% of remuneration as defined by the Fourth Schedule, and are a direct cost of employment to the employer.
"The current legislation provides that if the employer pays the contribution, only the portion in excess of the cap amount is deemed to be a fringe benefit, and included into Fourth Schedule remuneration. This means that by paying the medical aid contribution, the employer saves skills levy and unemployment insurance contribution costs to the amount of 2% of the total cap amount of all employees, assuming that the medical aid contribution is not less than the cap amount. Depending on the numbers, this could be a substantial saving to the employer. However, once the budget proposal is legislated, it makes no difference whether the employer or the employee pays the contribution," Cooper says.
If the employer contributes, the employee`s full salary would be reduced by the contribution amount (thereby reducing remuneration), but the full employer contribution becomes a fringe benefit, and the same amount is added back to remuneration.
If the employee contributes, the employee`s full salary must include the contribution amount, and the remuneration amount is then exactly the same as when the employer contributes. The employer`s skills levy and UIF contribution costs are therefore the same in both cases.
* Secondly, a point against having an employer contribution is that SARS, in practice, allows employer contributions to retirement and benefit funds up to 20% of approved remuneration as a tax deduction for the employer.
A medical scheme fund is a benefit fund, so these contributions are accumulated along with employer contributions to retirement funds. If they exceed 20%, the excess is disallowed as a deduction.
"Remember that this total could increase because of employers deciding to pay contributions to retirement annuities on behalf of employees as a result of the budget proposal discussed above. If the total employer contribution exceeds 20% of approved remuneration, the employer should then change from an employer-paid to an employee-paid contribution to the medical scheme," Cooper says.
* Thirdly, in favour of employer-paid medical scheme contributions, is the effect that it has on reducing overtime costs.
The Basic Conditions of Employment Act (BCEA) defines the wage amount as being the payments made in cash for normal hours worked. The wage amount is then used to determine the overtime rate.
If the employee contributes, then the salary must include a provision for the contribution amount. The wage (and by extension, the overtime rate) is therefore calculated on a cash salary that includes the medical contribution.
Employer contributions are not cash payments and are not included in wage, thereby lowering the cost of overtime to the employer compared to an employee contribution.
However, remember that labour law will not look kindly on artificial changes that prejudice employees, and care should be exercised before changing from an employee to an employer contribution if the reason is to reduce overtime costs.
In conclusion, Cooper says that more changes are in the pipeline for 2010 that will change the way in which tax relief is calculated for medical contributions and expenses. "But at this early stage, it seems that this will not be influenced by the person who makes the contribution. On balance, there is not much in it, but it seems advisable to change from an employer to an employee contribution to medical schemes."
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