Proposed tax levies on early withdrawals from retirement funds

Proposed tax levies on early withdrawals from retirement funds. Connie Bruwer from PC Bruwer and Partners gives advice on this important topic. 

Question:  The National Treasury is currently looking at the impact of the proposed tax levies on early withdrawals from retirement funds. This comes after the public submissions to the parliamentary portfolio committee on finance on the latest proposed amendments to the revenue laws. Tell us more about it, Connie.

Connie:  Mr. Cecil Morden, head of taxation at the National Treasury, says if necessary, these proposals will be adjusted.

In submissions to the parliamentary portfolio committee, tax experts from the private sector pointed out that the proposed changes will seriously especially affect people in the lower and middle income groups with long service period.

At present, taxpayers can withdraw an amount of R1 800 and any contributions from after-tax funds, from a pension fund.

Question:  How is the rest taxed?

Connie:  The rest will be taxed at the average prevailing rate in the year in which the money is received, or at the applicable rate of the previous year, depending on when the highest rate is paid.

Question:  What is the Treasury’s aim of the proposed changes?

Connie:  The Treasury’s aim of the proposed amendments is to simplify the system and discourage people from withdrawing money from their pension funds before retirement.

Under the proposed amendments, the amount that can be withdrawn without taxation will be increased to R23 000 (plus other contributions from after-tax money).

The rest of the withdrawal will be taxed at the current marginal rate of tax in the year the money is withdrawn.

Mr. Le Roux Roelofse director in the tax department of Deloitte, said tax at the marginal rate of 41% can affect especially people in the lower and middle income groups who have contributed to pension funds for long periods.

Roelofse said the proposals would cause that the tax burden in some cases will be as high as 66%.

Question:  What is the reason for this, Connie?

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Connie:  This is because the average tax rate of people in the lower and middle income groups is between 18% and 20% and they will have to pay in the new dispensation up to 41% tax.

Roelofse says it is unfair to people who withdraw money from their pension funds because they pay much higher taxes than the exemptions they got on the contributions.

In this regard, the current system of taxation is better because taxes are paid at the average rate of the individual.

The tax paid on early withdrawals, in terms of the system will be more in line with tax benefits that the individual enjoyed when he contributed to the pension fund.

Morden said the proposed new tax on early withdrawals will benefit people who have contributed to pension funds for a period of between five and ten years.

Roelofse agree with the Treasury that it is necessary to encourage people to keep their pension money until retirement, but questioned if the Income Tax Act the right medicine is to achieve this goal.

Morden said Treasury believes that the Income Tax Act is not the right medicine.

Other measures are needed to encourage people to keep their savings, and are part of the regulatory reform process for contractual savings.

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