RETIREMENT FUND TAXATION
Part A: Overview of the Commission's Approach
8.1 INTRODUCTION: SIZE AND STRUCTURE
8.1.1 This part of the chapter is intended to give a broad account of certain aspects of the retirement industry - its size, composition and current tax regime, and why that regime is in urgent need of reform. It is also intended to serve as a non-technical introduction to Part B, which contains a detailed analysis of the Commission's proposals for reform.
8.1.2 By all the usual tests, the industry is a large one. Some 14 000 funds between them control assets of almost R500 billion, a figure in excess of the likely Gross Domestic Product for 1995. The assets comprise the retirement savings of some 7 million members. (The published figures are higher, but contain a degree of double counting resulting from multiple membership.) The annual contribution flow, from members and their employers, currently exceeds R25 billion and appears to have stabilized at about 6 per cent of GDP. The way such an industry is taxed has profound consequences for the rest of the economy.
8.1.3 The funds themselves are run by a variety of institutions: the State itself, local authorities, industrial councils, insurers and private firms. Those run by the State, by local authorities and by a surprisingly wide range of parastatals are funds established by law. They enjoy a tax regime of their own which differs in some important respects (notably as to permitted contribution rates and in the availability of tax-free lump sums on retirement) from that to which funds approved by the Commissioner for Inland Revenue are subjected.
8.1.4 The structure of the industry is more complicated than that. Funds, whether approved or established by law, may either be pension or provident funds. The distinction between them is mainly that, on retirement, pension funds require at least two thirds of the benefit to be taken as a pension, whereas provident funds allow the whole to be withdrawn as a lump sum. Pension funds may be either ordinary pension or retirement annuity funds. Membership of the former is restricted to employees, whereas self-employed persons are admitted to the latter. As "resignation" and "retirement" are difficult concepts to apply to the self-employed, access to the benefits of retirement annuity funds is restricted by age. Currently benefits must be taken between the ages of 55 and 70.
8.1.5 Provident and ordinary pension funds may be structured on either a defined benefit or a defined contribution basis, though occasionally one finds hybrids. Briefly, defined benefit funds determine the benefit payable by multiplying an average (or final) salary by the member's years of service and an accumulation rate (typically about 2 per cent). Any shortfall in the fund is remedied by adjusting contribution rates. By contrast, there can never be a shortfall in a defined contribution fund. The benefits available to members are determined by fund performance and are divided among them in proportion to their individual contributions (whether made personally, or by the employer on their behalf).
8.1.6 The complex structure of the industry is reflected in the tax regime to which it is subjected. To this we now turn.
8.2 CURRENT TAX REGIME
8.2.1 The fundamental principle on which our income tax is based is that income is recognized for tax purposes when it accrues to the taxpayer. This principle is breached in most of the retirement industry, where recognition is deferred until the income is actually paid in the form of a pension or lump sum.
8.2.2 The deferral of tax involves a sacrifice of current revenue. The weighted average of marginal tax rates paid by fund members is probably just under 30 per cent. If this rate is applied to the annual contribution flow of over R25 billion mentioned in paragraph 8.1.2, the loss of current revenue is in the region of R7,5 billion a year.
8.2.3 This concession to the retirement industry is usually justified on the grounds that it is essential to encourage people to save for retirement in order to reduce the risk that they become burdens on the State in old age. The Commission does not wish to dispute this, but notes that reducing a risk involves a cost, and that balancing the two is no easy matter.
8.2.4 In paragraph 8.2.1 it was indicated that deferral was permitted in most of the retirement industry. The exception is in respect of members' contributions to provident funds. They have to be made out of after-tax income. (In recognition of this they are refundable tax-free on withdrawal or retirement.) Within certain limits, all other contributions to retirement funds, whether made by employers, employees or self-employed persons, are made out of pre-tax income. That is to say, the contribution is deductible from income before the latter is taxed.
8.2.5 The fact that limits are imposed on the extent of tax-deductible contributions is implicit recognition that deferral can be carried too far. The actual limits currently applied were discussed in paragraphs 8.4.7-17 of the Commission's first Interim Report and will not be repeated here. It is sufficient to note that they are complex and inconsistent. They differ between ordinary pension and retirement annuity funds; they do not apply to funds established by law; and employer contributions are sometimes lumped with contributions to other benefit funds that have nothing to do with retirement. Moreover, there are significant difficulties in applying limits to the deductibility of employer contributions to defined benefit funds. They cannot be apportioned to individual members (who do not benefit from them directly) and may in any case be deductible under the standard deduction formula in so far as they represent contractual liabilities.
8.2.6 The usual expression used to describe the regime on which the taxation of our retirement industry is based is "Exempt, Exempt, Taxed", or EET. The first E refers to the exempt (pre-tax) status of contributions; the second to the exempt status of fund income; and the T to the levying of tax when benefits are eventually received from the fund. We have noted that the first E is only partially true of provident funds and that, except for funds established by law, nowhere true without limit. We must now examine the second E.
8.2.7 Fund income consists of dividends, interest, rentals and, possibly, some trading income. Dividends are exempt throughout the economy. The other three items are exempt in terms of the second E. If they were to be taxed normally at, say, the 30 per cent rate used in paragraph 8.2.2, the yield would be approximately R3,5 billion. This figure excludes the State funds.
8.2.8 The T in the EET formula represents the taxation of benefits in the hands of pensioners and other beneficiaries. It is the mechanism whereby the tax previously deferred on contributions and fund income is meant to be recovered, at least in part. If a pensioner is in a lower tax bracket than when working, and old enough to qualify for the rebate granted to those over 65, recovery is at best likely to be poor. If, in addition, part of the benefit is taken in the form of a tax-free lump sum, this conclusion is reinforced.
8.2.9 Recent amendments to the Income Tax Act, which took effect in September 1995, have provided for the more effective taxation of lump sums taken from approved funds. It is too early to judge their effect.
8.2.10 The encouragement to save for retirement given to men and women of working age through the EE part of the EET formula is purchased at high cost. The amounts estimated in paragraphs 8.2.2 and 8.2.7 add up to an annual loss of current revenue of R11 billion. It is not for the Commission to say whether or not, in terms of national priorities, the money could have been better spent.
8.2.11 What should be said, however, is that the incidence of the concession is regressive. Firstly, it is available only to those whose earnings are high enough to bring them into the income tax system. Secondly, within that group, those who earn more, and are taxed at high marginal rates, gain more from deferral than those who earn less and are taxed more lightly.
8.3 FUNDS AS TAX SHELTERS
8.3.1 The use of tax-exempt institutions to shelter taxable income from tax is as old as the income tax system itself and certainly not confined to South Africa. The methods employed can range from simple pre-funding to aggressive schemes of avoidance; the institutions involved from local authorities to churches and charities. The sheer size of the retirement fund industry has made its participation in the process almost inevitable. Three examples follow.
8.3.2 Pre-funding occurs when the flow of tax deductible contributions to a fund is accelerated. Alternatively, if a building is rented from the fund, rentals may be set above market levels. The money accumulates in the fund, earning interest on which no tax is paid. In later years compensating reductions may be made in the contributions or rentals, which will mean that smaller deductions can then be claimed. However, a deferral of tax will have been achieved.
8.3.3 A more aggressive scheme, now outlawed, used to be as follows. Subsidiary A in a group of companies would borrow from fellow subsidiary B, claiming the interest as a deduction. B would cede its interest entitlement to the group pension fund, receiving dividend income in return. Both categories of income being tax free in the pension fund's hands, it would be left in a neutral position. But A would get a deduction and B would receive dividends, which are tax free in the hands of a company.
8.3.4 Where a tenant is obliged in terms of a lease to erect buildings on leased land, the tenant is entitled to a deduction and the landowner becomes liable for tax on the value of the buildings. But if the group pension fund owns the land, and the tenant is a subsidiary, the deduction is available without any corresponding liability. If, at the end of the lease, the property is sold to another subsidiary at a favourable price, the group will in effect have been able to erect the building with pre-tax money without placing the pension fund in a worse position than it would have been with a more normal lease.
8.3.5 It must not be assumed that the examples just given are widespread. Some have provoked legislative response and are no longer tax effective. But experience throughout the world has shown that where exempt institutions exist ways will be found of using them to shelter income. Outlawing the methods used invariably occurs too late to prevent significant loss of revenue and seldom succeeds in preventing their continuance in slightly modified form.
8.3.6 Exempt institutions exist in all income tax systems, but do great damage to their structure. They also result in higher rates having to be levied elsewhere to regain revenue. For these reasons informed tax reform seeks to limit their number to the absolute minimum.
8.4 PROPOSALS FOR REFORM
8.4.1 The Commission's recommendations are developed in detail in Part B and listed in section 8.14 at the end of it. The paragraphs that follow are introductory and incomplete. Their intention is to indicate no more than the main thrust of the proposals and the direction in which they point.
8.4.2 A Committee under the chairmanship of Mr Guy Smith was appointed during the year by the Minister of Finance to investigate various matters pertaining to the retirement industry. It was asked to liaise with the Commission where these impinged on taxation. It has formulated a set of principles, ten in number, to serve as a framework for retirement funding that should be supported by the tax system. These principles are annexed to this Chapter as Appendix 1. The Commission is in agreement with the principles and has sought to give effect to them, but has achieved only partial success with the tenth.
8.4.3 The Smith Committee's tenth principle says in essence that there should be freedom of choice in regard to the form (lifetime pension or lump sum) in which a benefit is taken on retirement, but that the State has a preference for the former, and that tax incentives should be targeted accordingly.
8.4.4 The Commission has succeeded in designing a system in which there is a significant incentive to choose a lifetime annuity (that is, a pension) over a lump sum when the capital value of the benefit emerging on retirement exceeds R50 000. It has not been able to provide an incentive when the capital value is below that figure. It is of course precisely at the bottom of the range that it is important that a pension be chosen, so as to reduce the potential drain on the State's old age assistance program. Unfortunately tax incentives work well only when the recipient is within the tax system. If not, other methods of resolving the problem must be sought. The Commission understands that the Smith Committee may come forward with recommendations, consistent with freedom of choice, that offer a solution.
8.4.5 In framing recommendations a balance has to be struck between a theoretically correct structure and the realities of the South African economy. The Commission has sought to find a solution more internally consistent than the current one, that would not undermine to an unnecessary extent the progress made with private retirement provision over the past few decades, that would bring the contribution by the State into sharper focus and would limit the extent of the advantage presented to high income earners. It has found that combining structural coherence with appropriate incentives is no easy task.
8.4.6 As a result, the proposals have to be seen as an entity. No single part stands alone. Any attempt to adapt one element will cause some imbalance elsewhere. The proposals also have to be seen in relation to the rest of the tax system. This is particularly important where specific tax rates and bands are suggested, as they are in relation to the taxation of lump sums and other benefits taken on retirement. There has to be a coherence between them and the rates and bands of the personal income tax system. Great care has been taken to achieve this. If either is adjusted the other must be adjusted too.
8.4.7 In its first Interim Report the Commission recommended that a "cap" in monetary terms be placed on the tax deductibility of contributions to pension funds. This was to soften the perception that inappropriate advantages were being conferred on high income earners by the existing cap that was expressed as a percentage of income. The recommendation met with strong opposition. Following representations, the Joint Standing Committee on Finance asked the Commission to revert to the matter as part of a wider investigation of the retirement industry.
8.4.8 The Commission recognises that placing monetary limits on contributions is no simple matter and has come to the conclusion that the same objective can be pursued by other means. That is the basis for its recommendation in Part B that a maximum accumulation rate be set for defined benefit funds; and, possibly, a maximum benefit, defined in terms of final average salary. It is also the basis for the progressive rates suggested for the taxation of the capital value of benefits emerging on withdrawal or retirement.
8.4.9 The remaining recommendations in Part B may be summarized under four headings. They relate to system integrity, uniformity of treatment, taxation of benefits and the availability of tax-free pensions. They are discussed very briefly in what follows.
8.4.10 Integrity of the income tax system demands the elimination of areas of exemption that can be used for arbitrage or to shelter income. That means that retirement funds should be brought into the income tax net and that tax should no longer be deferred on their interest and trading income.
8.4.11 Uniformity of tax treatment for all retirement funds means just that. Among its implications are that members' contributions to provident funds should become tax deductible; and that the public service funds (the "funds established by law") should be subjected to the same tax regime as private sector funds.
8.4.12 Appropriate taxation of benefits emerging on withdrawal or retirement is essential if the current revenue sacrificed by allowing contribution deductibility is ever to be recouped. It is suggested that the tax should be based on the capital value of the benefit - roughly, the value that would be available as a lump sum if no pension were taken. It is also suggested that the tax should be at a progressive rate that bears a close relationship to the rate of progression ruling in the income tax system.
8.4.13 Once the capital value of the benefit has been taxed, it should be available as a lump sum or to use to buy a lifetime annuity. (It is suggested that the design of the tax be such that there is an incentive to buy the annuity). Annuities purchased with after-tax money from a retirement fund that is itself being taxed on income should be available to pensioners in a form that is exempt from further taxation - that is to say, as tax-free pensions. It is suggested that they be made available by appropriate amendments to the Act.
8.4.14 The suggestions in the preceding paragraphs are developed in Part B and reduced to 29 formal recommendations. They nevertheless represent, in the simplified form presented here, key elements in the Commission's approach to retirement fund taxation. It is an approach designed to reconcile the needs of the industry with those of the entire system. It retains sufficient fiscal incentive to encourage saving for retirement and at the same time effects important structural reforms. These reforms are primarily designed to eliminate opportunities for tax avoidance and arbitrage, thereby improving the effectiveness of the corporate tax system. They will also lead to greater equity and neutrality between the various categories of saving institution. Most importantly, the enhanced flow of current revenue to the fiscus will enable major reforms to be made to the personal income tax system, especially for the benefit for those with lower incomes.
8.5 TAX DEFERRAL AND TAX LOSS
8.5.1 Due to the complexity of the issue, and the resultant poor level of understanding, the Commission made a particular study of the deferral and loss of tax inherent in the current system.
8.5.2 It is widely believed, even by those closely involved in the retirement industry, that the "EET" system of taxation merely defers the State's revenue flow. Within the system, it is believed, any loss is simply a function of inadequate taxation of benefits or a reduction in the rate of tax applicable to them as a result of lower incomes after retirement.
8.5.3 Close examination of the facts, however, reveals that, even were benefits to be taxed appropriately, the "EET" system would result in a significant loss of tax to the State, due to the need to allow for interest on the tax deferred as a result of contribution deductibility. Neutrality is achieved only if the value of tax foregone on contributions to and the investment income of retirement funds equals the value of tax on benefits. As illustrated below, this is not achieved even when benefits are taxed in full within the "EET" system. At best, the value of tax deductions on contributions can equal the value of tax on benefits. The price to the State of fiscal encouragement for the occupational retirement funding system is at least equal to the tax foregone on the investment income earned by the funds.
8.5.4 That tax neutrality is not achieved even when tax is levied on benefits at full marginal rates is not easily accepted. In order to demonstrate this, the Commission submits the following simplified example:
8.5.5 It is the exemption from tax of investment earnings of retirement funds that gives rise to the major problems with the system as a whole, once the obvious "leaks" arising from inadequate taxation of benefits have been addressed. In order to return integrity to the system, it is necessary to attempt to ensure a greater degree of neutrality, without destroying the incentive to contribute to occupational retirement arrangements. The Commission has therefore sought to design a system that would retain a significant element of tax deferral, while limiting, to some extent, the tax loss inherent in the "EET" system. In effect it would be an "ETT" system, which would have the important additional advantage of limiting the opportunities for tax arbitrage.
8.5.6 Reverting to the numerical example discussed in 8.5.4, the "ETT" system would work as follows: R100 invested for a year would yield R15 pre-tax and R9 after tax. The R109 paid out of the fund would be taxed at 40 per cent to leave R65,40 in the hands of the pensioner. This is the same result as for the TTE system under which normal private savings takes place, as analysed in 8.2.4.2, and confirms the neutrality of the overall regime.
8.6 OVERVIEW OF RECOMMENDATIONS
8.6.1 The recommendations may be summarised as follows.
8.6.2 Encouraging Participation:
It is the belief of the Commission that the acceptance and consistent application of these principles will provide significant encouragement for participation in the retirement funding system. The full implication of (c) is discussed at some length below.
8.6.3 Towards Structural Coherence:
A tax on fund income achieves several objectives, including limiting opportunities for tax arbitrage. Based on the work undertaken by the Commission, it is clear that neutrality requires both (a) and (b) above, together with full deductibility of contributions, within broad limits.
8.6.4 Taxation of Benefits from Public Sector Funds: After careful consideration, the Commission has concluded that it is essential that steps be taken to eliminate the tax concession on lump sum payments from public sector funds (more precisely, funds established by law), with an appropriate provision for accrued rights.
8.6.5 The principles enunciated in paragraphs 8.6.2 to 8.6.4 above are designed, within the context of retaining technically correct principles, to achieve equity, a reduction in tax avoidance and a greater degree of coherence in numerous respects. They are all elaborated on below in greater detail.
8.7 CONTRIBUTION DEDUCTIBILITY
8.7.1 In the Commission's first Report, the issue of "rand capping" deductible contributions to pension and retirement annuity funds was raised, a topic that provoked significant opposition. Many of the points raised earlier were repeated in the submissions to the Commission, and it has taken note of the comments and the overall impact of the balance of its recommendations in concluding that "capping" of contributions in monetary terms should not be pursued.
8.7.2 What gave rise to the previous recommendation on "capping" was the concern that upper income individuals were being afforded a State subsidised incentive to provide for retirement, and that this was felt to be an inappropriately granted benefit. However, the difficulties with "rand capping" are significant, and given a tighter basis for the taxation of benefits, part of the basis for this concern falls away. Furthermore, the other objectives which were sought to be achieved by the monetary capping of contributions may now be achieved by some of the recommendations contained in this report.
8.7.3 Excluding for the moment the issue of investment income, and comparing the relative value of tax on deductible contributions and benefits, it is possible to demonstrate that the major relative beneficiaries of the proposed system are the middle and low income groups; put simply, they benefit most from the reduction in average tax rates after retirement, while the wealthy generally pay tax (or should, given a more efficient system) at a similar rate before and after retirement.
8.7.4 The Commission has therefore reviewed its previous recommendation and has amended its view on imposing limitations on monetary amounts of permitted deductions, but recommends a focus on much tighter management of the maximum employer deduction to approved funds. In practice, these amounts are included with contributions to all forms of benefit funds, and are loosely managed within a limit of 20 per cent of remuneration. This is, of course, in addition to the 72 per cent deductible contribution by the employee.
8.7.5 The following data was obtained from the Financial Services Board and reflect the total contribution, by both employer and employee, required to fund future service benefits and cover administration costs for a sample of defined benefit funds:
|
Contribution Range |
Number of Funds |
| 0-10 % | 3 |
| 10-15 % | 36 |
| 15-20 % | 64 |
| 20-22 2% | 25 |
| 222-25 % | 18 |
| 25-27 2% | 11 |
| >272 % | 8 |
| Total | 165 |
8.7.6 The Commission is of the view that a more active management of the employer contribution is the key to maintaining the integrity of the system, and to ensuring that the objective of the tax incentives, namely to encourage appropriate provision for retirement, is not abused through excessive provision or simple income deferral. It is therefore recommended that the overall (i.e. employer plus employee) contribution rate to approved funds be limited to 222 per cent of remuneration, of which the employer contribution is limited to 15 per cent of aggregate remuneration and the employee to 72 per cent.
8.7.7 Associated with this would be the need to limit the benefits provided by defined benefit arrangements in order to prevent the funding of fund deficits caused by overly generous benefit structures. A limit on the rate of accrual of some 22 per cent per year of service, perhaps further subject to an overall limit, would seem to be appropriate. The definition of "final average salary" should be such as to minimise the opportunity for manipulation. The structuring of such limits would have to be discussed with bodies such as the Actuarial Society of South Africa and there would be a need for a phasing-in period, while retaining accrued benefits, for funds where the current benefit structure exceeds the maximum.
8.7.8 The key impact of this would be to eliminate many of the "top hat" schemes run on a salary sacrifice basis and using the umbrella of the overall employer contribution rate.
8.7.9 There are a number of implications of the recommendations, including the following:
8.7.10 Deductible allowances would have to be set separately for benefit funds, including medical aid schemes, and careful consideration will have to be given to this aspect.
8.7.11 At the same time, the Commission considered the anomaly of the non-deductibility of employee contributions to provident funds. Permitting the deduction of such contributions would be a major change from current practice, but the reality is that provident funds are used extensively for retirement funding purposes. To the extent that there is a concern about their use, it seems to lie in the form (i.e. lump sum) in which the benefits are taken. Any restriction on the use of provident funds would be a major limitation in choice. The Commission is therefore of the view that employee contributions to provident funds should be deductible in exactly the same way as contributions to pension funds. Comments on the implications of such a step are set out in section 8.10 below.
8.8 TAXATION OF INVESTMENT AND TRADING INCOME
8.8.1 The tax free nature of the investment and trading income earned by retirement funds lies at the heart of the tax arbitrage arrangements involving retirement funds with both corporate bodies and individuals. Furthermore, as illustrated in paragraph 8.5.4 above, the tax on such income foregone by the State is never recovered under the "EET" system. Thus, in order to improve the overall coherence of the system, this matter needs to be satisfactorily addressed.
8.8.2 Views have been expressed that the taxation of interest, rental and other trading income (capital gains and dividend income are excluded because of their current non-taxable status) in the hands of retirement funds is inequitable because it means the taxation of income on behalf of members who, in their own right, may not normally be subject to significant levels of tax. This would appear to be the most compelling reason not to apply tax to the investment income of a fund.
8.8.3 Furthermore, provided an appropriate rate were chosen for the taxation of interest and rental income, the benefit in tax arbitrage schemes would be limited, if not eliminated. Here it should be noted that in the present tax regime arbitrage is possible and profitable between any approved fund and individuals, corporations or other insurance funds subject to a different rate of tax.
8.8.4 The Commission has concluded that the application of a flat rate tax on the "taxable income" earned by retirement funds would be a key element of the proposed new tax system and central to achieving a much greater degree of fiscal "neutrality". "Taxable income" would be defined on a similar basis to that used for taxed policyholder funds within life assurers, and would permit an offsetting of appropriate expenses. In deciding on a rate, the rate applied to the taxed policyholder funds of life assurers, currently 30 per cent, presented itself as the most suitable rate, mainly because it minimises the opportunity for arbitrage within taxed funds in the contractual savings industry.
8.8.5 In deciding to submit this recommendation, the Commission is aware of a number of possible counter-arguments, including the following:
8.8.6 Notwithstanding these considerations, the Commission believes that the taxation of interest, rental and trading income earned by retirement funds is appropriate. Together with the recommended change in the basis for taxing retirement benefits recommended in section 8.9 below, a system that is biased in favour of middle and low income earners should result while retaining a significant element of incentive for those at the upper end of the range.
8.8.7 The proposal to tax interest, rental and trading income in the hands of the funds presents certain difficulties with regard to existing funds held to back pensioner (post retirement) liabilities. In particular, there are certain insured annuities, where the contract terms were set on the basis of supporting assets earning a tax free income, and with the annuitant paying tax on either the full or a portion of the benefit. The Commission, while mindful of the temporary difficulties that this will cause, recommends that existing pensioners be given the option to remain in a closed, old, fund, where investment income would be free of tax and the benefit taxable in the hands of the pensioner, or to transfer to a new pensioner fund, as envisaged in paragraph 8.9.3 below, where the fund income would be taxed, but benefits would accrue free of tax in the hands of the pensioner. Any such transfers from an old to a new fund would be subject to the taxation of benefits as recommended in section 8.9 below.
8.8.8 While no specific action is being recommended, the change in the nature and use of medical aid schemes and other non-retirement benefit funds, particularly as funding vehicles, has been noted by the Commission, and steps may have to be taken to apply a similar taxation regime on the accumulation of funds within them. This matter, however, needs further consideration at an early stage.
8.9 TAXATION OF BENEFITS
8.9.1 As mentioned above, the current basis of taxation of benefits emerging from a retirement fund results in significant loss to the fiscus without supporting government policy for the retirement funding system in South Africa. Concessions abound, and, until the change that became effective on 1 September 1995, opportunities for tax planning were such as to make the payment of any reasonable tax on lump sum benefits at retirement simple to avoid.
8.9.2 Benefits are taxed when they are paid. This has the effect of spreading the impact of benefit taxation, and, due to the significant reduction in income after retirement for most pensioners, reducing the recoupment of the tax concessions provided prior to retirement. Furthermore, the mixture of the forms of benefit, as lump sums or income, makes it difficult to target an incentive effectively so as to encourage of annuities. With this in mind, and taking into account the current and likely future trend towards greater access to lump sum benefits, the Commission recommends a change to the way in which benefits emerging from retirement funds are assessed for tax and, as a consequence, the tax rates applicable to such benefits.
8.9.3 In order to give effect to the reform recommended by the Commission, it will be necessary for retirement (pension, provident and retirement annuity) funds that pay pension annuities to retired members to establish, within each fund, a "pensioner fund". This pensioner fund will contain the assets needed to back the liabilities in respect of pensioners, and, although the income on this part of the fund will be taxed in the same way as the rest of the fund, a separate return for tax purposes will be needed. To establish these funds will not be a trivial exercise, but is critical for the important reforms envisaged.
8.9.4 The Commission is of the view that matters would be simplified if an equivalent lump sum could be determined for all annuity type benefits, for the purposes of determining a tax liability. Cash withdrawal benefits are by definition lump sum benefits. For benefits payable on death and retirement, it is possible to determine a capital value of the benefits, even when the benefit is payable in the form of an annuity. The Commission proposes that this value, termed the capital sum in this Chapter, be deemed to accrue to the beneficiary at death or on retirement, that tax be determined at a progressive rate on this amount in accordance with the proposed scales, subject to the exemptions and concessions outlined below, and that the tax due be paid at that stage. As a result, any further benefits payable will be after tax, allowing a significant restructuring of the taxation of such benefits.
8.9.5 The determination of this capital sum is relatively straightforward where the benefit is expressed as a lump sum, or where the amount available for the purchase of an annuity arises from a cash purchase arrangement. Where the benefit is a defined benefit pension, the basis for calculating the amount of the capital sum will need to be determined, but, given the existence of commutation factors used to determine partial lump sum equivalents, this should not be a difficult matter. It will, however, have to be discussed with bodies such as the Actuarial Society of South Africa.
8.9.6 Lest there be concern at the financing of what could be a significant tax liability at date of retirement in respect of pension benefits, the Commission points out that because the full capital sum is deemed to accrue to the pensioner, it would be possible for a payment to be made by the fund on behalf of the pensioner to meet this liability, with a consequential adjustment to the pension benefit. Where the benefit is in the form of a lump sum, there is no difficulty with regard to cash flow.
Tax Free Amounts
8.9.7 The Income Tax Act contains a number of formulae that determine tax free portions of lump sum benefits. There is no place for such exemptions in a pure "EET" system, and the matter is made worse to the extent that investment income escapes tax.
8.9.8 However, it is believed by the Commission that the availability of the tax free amounts is an attractive concession that is an important part of the incentive to contribute to approved retirement funding instruments. As a result, it recommends that steps be taken to ensure the ongoing relevance of the incentives by way of a regular review of the monetary amounts. Furthermore, the approach of capitalising future benefits set out in paragraph 8.9.4 above presents an opportunity to target more effectively concessions aimed at supporting the broader principles as proposed by the Smith Committee.
8.9.9 The approach recommended by the Commission requires deductions from the capital value arrived at, in order to determine the taxable amount of the benefit. Although a different presentation of the incentive, it is identical, in effect, to the concept of tax free amounts that is in use and widely understood in the current tax system. The application of this concept is demonstrated in the example set out in paragraph 8.9.12 below.
Deductions from the Taxable Lump Sum
8.9.10 The Commission therefore recommends that the gross taxable income in respect of benefits payable on death, withdrawal and retirement be determined as the capital sum (as described in paragraph 8.9.3 above), and that the following amounts be allowed as deductions before arriving at the taxable amount.
As can be seen from the example set out below, this is, in effect, an increase from R1800 to R2000 in the current tax free amount on withdrawal.
8.9.11 It is specifically recommended that consideration be given to specifying minimum criteria attaching to the annuity in order for the deduction recommended above to qualify. It must also be noted that these deductions are cumulative, and can be claimed only once whether for retirement or death.
8.9.12 Set out in the following table are a number of examples of the application of these deductions on benefits of varying size, and showing the difference in the taxable amount, for the same gross benefit, depending on whether or not some of the benefit is applied to purchase an annuity.
|
A |
B |
C |
|
| Capital Value of Benefit |
R60 000 |
R180 000 |
R450 000 |
| Option 1 | |||
| Amount to be Applied to Annuity |
R20 000 |
R100 000 |
R250 000 |
| Allowable Deductions |
R60 000 |
R150 000 |
R235 000 |
| Taxable Amount |
R nil |
R 30 000 |
R215 000 |
| Option 2 | |||
| Amount to be Applied to Annuity |
R0 |
R0 |
R0 |
| Allowable Deductions |
R50 000 |
R 50 000 |
R 50 000 |
| Taxable Amount |
R10 000 |
R130 000 |
R400 000 |
8.9.13 The taxable amount is then subject to tax at the rate determined according to the schedule set out in 8.9.15 below.
Non Deductible Employee Contributions
8.9.14 There are instances, for example in many provident funds, where employee contributions have not been deductible for tax purposes. Under the current arrangements, such contributions are added to any tax free amount. This should remain unchanged, but would be given effect to by adding the value of such contributions to the R2000 for withdrawal benefits and the R50 000 for death and retirement benefits when determining the deduction for tax purposes.
Tax Rates for Capital Sums
8.9.15 In principle, the Commission is of the view that marginal, rather than average, rates of tax should apply to capital sums, in order to recoup more effectively the tax concession on contribution deductibility. This is, however, not an easy principle to put into practice. To simplify matters, the Commission recommends the adoption of a standard scale of taxation for the final determination of tax due on the capital sum determined in respect of withdrawal, death and retirement benefits. Bearing in mind the nature of the amount to which the tax rate will be applied (that is, net of allowable deductions), the following tax rates are proposed:
|
Tax Rate |
Withdrawal |
Death and Retirement |
|
15% |
Less than R25 000 | Less than R150 000 |
|
25% |
R25 000 to R75 000 | R150 000 to R450 000 |
|
35% |
R75 000 to R125 000 | R450 000 to R750 000 |
|
45% |
More than R125 000 | More than R750 000 |
These rates should be applied, at each level, to that part of the taxable amount that falls within each band.
8.9.16 As an illustration of the effect of these tables on retirement benefits, they have been applied to the examples in paragraph 8.9.12 above in the following table.
|
A |
B |
C |
|
| Capital Value of Benefit |
R60 000 |
R180 000 |
R450 000 |
| Option 1 | |||
| Amount to be Applied to Annuity |
R20 000 |
R100 000 |
R250 000 |
| Allowable Deductions |
R60 000 |
R150 000 |
R235 000 |
| Taxable Amount |
R nil |
R 30 000 |
R215 000 |
| Tax Due |
R nil |
R 4 500 |
R 38 750 |
| Option 2 | |||
| Amount to be Applied to Annuity |
R0 |
R0 |
R0 |
| Allowable Deductions |
R50 000 |
R 50 000 |
R 50 000 |
| Taxable Amount |
R10 000 |
R130 000 |
R400 000 |
| Tax Due |
R 1 500 |
R 19 500 |
R 85 000 |
The differences in the Tax Due shown for options 1 and 2 above should provide an incentive for a significant part of the benefit to be converted into annuities.
8.9.17 Because of the nature of the schedule set out in paragraph 8.9.15 above, a convention needs to be established for determining the manner in which the tax liability is off-set against the components of the capital sum. The Commission recommends that the following sequence be followed for the off-set:
Taxation of Pension Annuity Benefits
8.9.18 Under the current tax system, pension annuities are taxed as income. Following the introduction of the approach outlined above, the tax capital sum available as the consideration for the pension annuity will be an "after tax" amount, unlike the current system, where it is "before tax". The taxation of pension annuities should thus change to reflect this.
8.9.19 The new basis for taxation would simply have to ensure the interest content of the annuity is taxed. However, the assets backing pensioner liabilities will be held within approved funds, which, in terms of the recommendation in section 8.8 above, will be subject to tax on their own income. Pension annuities will therefore be paid "after tax", there being no liability for tax in the hands of the pensioner. This should be a significant relief for the administration of the tax system.
8.9.20 The above, simplified, process works only once the capital sum has been subject to tax at a progressive rate. The feasibility of extending the option to existing pensioners by having the capital sum quantified, and payment made by their funds, on their behalf, of any tax due, should be examined.
8.9.21 To the extent that it is impossible to move existing pensioners onto the new basis, for example as a result of contractual relationships, such old funds should be closed to further contributions, and all new pensions established within the new environment. The old funds would have to retain their "untaxed" status, with investment income accruing on an untaxed basis, and the full pension would have to remain taxable in the hands of the pensioner.
8.9.22 The Commission is concerned that the approach outlined above may not, by itself, provide sufficient incentive for retirees to choose pension annuities rather than lump sums. For low income earners, the tax system is not a particularly effective vehicle for such an incentive, and Government may have to consider some alternatives including, perhaps, a direct subsidy, should it feel strongly about the need to encourage pension annuities. Should this happen, the R50 000 deduction proposed in 8.9.10(b) above may need to be reconsidered. Further consideration will have to be given to this important topic in the deliberations that will follow the publication of this Report.
Lump Sum Payment on Termination of Service
8.9.23 Lump sum payments on termination of service are something of an anomaly, and derive their tax treatment from sections 7A(4A) and 10(i)(x) of the Act. The Commission recommends that any such payments be treated in the same way as retirement benefits, and be included in the amounts to which the table set out in paragraph 8.9.15 above is applied.
Fund Benefits on Retrenchment
8.9.24 In submissions to the Commission a case was made for a more generous treatment of withdrawal benefits paid as a result of redundancy. While there are already provisions in the Act for redundancy payments, there is also a practice whereby Inland Revenue can treat redundancy payments from a pension or provident fund after the age of 55 years as a retirement for the purposes of determining the tax liability. It is recommended that this limit be reduced to 50 years, but that there be no further concessions in this regard.
Transitional Arrangements
8.9.25 The structure for the taxation of benefits proposed by the Commission is significantly different from that currently in operation. It is difficult to judge the overall impact, as it can only be calculated on the basis of the particular circumstances of a particular individual. In particular, the Commission is aware of the need to consider carefully the phasing in of the change to the tax free lump sum on death and retirement from the current basis to that proposed in 69 above. However, the Commission's view is that the speedier the implementation, once the details have been resolved, the better.
8.9.26 The recommendations in this section (8.9) will demand significantly improved administration capability within Inland Revenue, in order to monitor the deductions from the capital sum claimed by a taxpayer. Inland Revenue are confident that they can deal with this.
8.9.27 In general, it will be seen that an aggressive taxation of lump sum benefits is being recommended, while benefits in the form of pension annuities are being encouraged. It is believed that this approach is central to the structural coherence of the overall system, and provides a better balance between the concession and the recoupment of tax by the fiscus. It is also supportive of the principles suggested by the Smith Committee.
8.10 PROVIDENT FUND CONTRIBUTIONS
8.10.1 The last few years have seen a rapid escalation in the number of new provident funds. While these were mainly as a result of negotiations between organised labour and employer groups during the 1980s, provident funds became more attractive to employers in the early 1990s. As a result, they are currently widely used. However, employee contributions to provident funds are not deductible for tax. A wide range of arrangements are found (for example salary sacrifice, dual pension and provident fund structures), all attempting to accommodate this situation. What is clear is that the current tax regime is not inhibiting the formation of new provident funds.
8.10.2 Conceptually, there appears to be no justification for having disparate tax regimes for pension and provident funds. Conversely stated, there are good reasons for having uniform tax principles governing all retirement funds. However, it is probable that, were the two vehicles to enjoy identical tax treatment, there would be a further significant shift away from pension funds, with their obligatory pension benefit, to provident funds, where a pension or a lump sum is optional.
8.10.3 Concerns have been expressed regarding the appropriateness of lump sum benefits paid from retirement funds. In particular, there are concerns that this form of benefit erodes the support for the State old age assistance system that should be given by occupational retirement plans by allowing people either to dissipate or to shelter any lump sum benefit. As a result, some are of the view that retirement funds should be compelled to provide at least a minimum benefit in the form of a pension. However, provident funds, as has been noted, are in widespread use, and it is likely that, should there be moves to encourage pensions rather than lump sums, some further incentive would have to be offered by government. The Commission understands that this important policy issue is being considered by the Smith Committee.
8.10.4 From a tax point of view, however, there is no justification for the distinction between pension and provident fund contribution deductibility. This is particularly true if benefit taxation is tightened up and the tax on interest, rental and trading income is introduced. To allow employee provident fund contribution deductibility would simply ease some of the convoluted steps currently being undertaken to achieve exactly the same end and, arguably, would have but a minor impact on tax revenue. It would also eliminate what can be argued to be a discriminatory practice.
8.10.5 The Commission therefore recommends the deductibility from taxable income of provident fund contributions by employees. It is emphasised that this suggestion goes hand in hand with the tightening of the taxation of lump sum benefits, as discussed above, which should, in itself, offer some encouragement for the benefit to be taken as an annuity rather than a lump sum.
8.10.6 Given the ongoing debate on the merits of provident funds as an appropriate retirement funding vehicle when viewed from the perspective of the State, the Commission's stance may give rise to some concern. It is reiterated that the Commission's recommendation does not attempt to pre-empt any view on this key policy issue. It is simply recognising the reality of what is happening and ensuring consistency of treatment. There remains ample opportunity for government to influence the trend should it wish to do so.
8.11 EQUALITY BETWEEN PRIVATE AND PUBLIC SECTOR FUNDS
8.11.1 The Income Tax Act currently permits the exemption from tax of lump sum benefits, irrespective of size, paid by "funds established by law". As noted in paragraph 8.11.3(b) below, these cover a wide range of employees in the public sector. The Commission is of the view that the taxation bases for benefits paid by private and public sector funds should be brought into line. While at least one submission to the Commission suggested that this be by way of permitting a tax free gratuity for the private sector, the Commission believes that this should be achieved by the removal of the exemption from tax of lump sum benefits paid by funds established by law.
8.11.2 There were a number of submissions from public sector bodies. They noted the origins of the practice, as well as the role it plays in the overall public sector remuneration package. However, the anomalous position of the tax free lump sum benefits was conceded, and there seems to be an acceptance of the logic for a change, provided the position of "accrued rights" is effectively dealt with.
8.11.3 There are many reasons for recommending a change, including:
8.11.4 It is therefore recommended that the exemption provided on lump sum benefits from funds "established by law" be withdrawn, and that accrued rights be retained by reference to the service of the member up to the date of the change with regard to death and retirement benefits. Withdrawal benefits, unless transferred to another approved fund, should be subject to the normal tax scales.
8.11.5 It may be thought that this is a generous basis for accrued rights, as these rights will grow in value in line with salary adjustments between the date of the change and death or retirement. However, it is considered that it is the principle that is important, even if a relatively concessionary basis is established for determining "accrued benefits".
8.11.6 If this change is accepted, it would be incorporated into the proposed new system, for benefits paid from Afunds established by law, by setting the initial deduction in paragraph 8.9.10(b)(i) as the greater of R50 000 and that proportion of the lump sum benefit that is deemed, in terms of the approach set out in 8.11.4 above, to be in respect of service up to the date of change.
8.11.7 The application of the tax on income to public sector funds needs to be considered. While there does appear to be a case for the exemption of certain funds established at central government level, the Commission is of the view that such exemptions should be avoided in order to retain uniformity of treatment and limit the opportunities for tax arbitrage. In so far as structural coherence is important as an objective, it would be significantly eroded by any such exemptions.
8.11.8 However, if it is decided that certain public sector funds should be exempted, it is the firm view of the Commission that this should not be extended to any fund where the trustees or the employer, subject to the rules of the fund and generally applicable investment regulations, have the freedom to invest in any available asset. Expressed differently, government constraints on the nature of the assets would be a necessary, but not a sufficient condition for any such exemption. In particular, no defined contribution type arrangement should qualify for exemption. Exemption would thus require the determination of appropriate principles, the explicit application of the fund for exemption and the publication, by the Commissioner for Inland Revenue, of a list of such exempt schemes in order to ensure ongoing transparency.
8.11.9 With the proposed limitations on private sector retirement fund contributions, care will have to be taken to ensure that public sector funds comply with similar limitations. In particular:
8.11.10 Failing to comply with such restrictions should invoke sanctions such as denying tax deductibility of employee contributions and, in the case of defined contribution schemes, deeming employer contributions a fringe benefit, and hence taxable, in the hands of affected employees.
8.11.11 Exceptions in the public sector have bedeviled retirement fund policy for many years, and steps should be taken to limit such exceptions in the future.
8.12 MISCELLANEOUS ISSUES
Retirement Annuities
8.12.1 Retirement annuities are a special category of pension funds, and are affected by all the proposals relating to pension funds set out in the preceding paragraphs. There are, however, a number of implications flowing from the Commission=s recommendations that warrant highlighting.
8.12.2 As a consequence of paragraph 8.7.6 above, the maximum rate of contribution to a retirement annuity fund should be increased to 222 per cent from the current 15 per cent. Historically, there has been a reluctance to increase this limit, due to the overall cost to the fiscus, but with the package of recommendations relating to benefit taxation and the taxation of fund income, it is appropriate to increase this limit to the same overall limit that applies to persons in the employment of others.
8.12.3 Following on from the previous point, and the limitation recommended in paragraph 8.7.9(a) above, the basis for determining the maximum deductible contributions by employed persons to retirement annuity contracts should be amended to equal the sum of 222 per cent of non-retirement funding income (as defined) and the difference between 72 per cent of retirement funding income and allowable contributions to an occupational fund. This, together with the previous paragraph, would have the effect of putting employed and self employed persons onto an equal footing with regard to maximum deductible contributions.
8.12.4 Paragraph 8.7.11 above recommends the deductibility of provident fund contributions. There is currently no provident fund type vehicle available to self employed persons, and it is recommended that the rules determining acceptable benefits from retirement annuities be amended to allow for lump sum benefits, or equivalently, the full commutation of pension benefits.
Distinction between Pension and Provident Funds
8.12.5 If the tax deductibility of provident fund contributions is accepted, there will be no reason to continue to distinguish between pension and provident funds within the Income Tax Act, and references to both could be simplified by reference to an approved retirement fund. This would imply a careful review of the current tax legislation applicable to pension and provident funds. Suggestions for a general review were made in a number of submissions, where it was pointed out that legislation drawn up many years ago was still being used to guide modern day practices; it may be appropriate to combine such efforts.
Non-Retirement Benefit Funds
8.12.6 It will also be necessary to examine the tax treatment of non-retirement benefit funds and to ensure consistency with that proposed above.
Registration of Funds
8.12.7 The Margo Commission made certain recommendations regarding the process of approving retirement funds for tax purposes. This Commission endorses the proposal that the registration and approval process be rationalised, and would encourage efforts in this regard.
8.13 SUMMARY
8.13.1 The suggestions in the preceding paragraphs form the basis for a substantial restructuring of the tax regime for retirement funds. It is likely that they will yield additional revenue to the State, yet this was not the prime motivation for the changes. They may be key in facilitating some desirable changes to the overall burden of personal tax rates for the lower and middle income taxpayers, and may provide support for any further tax incentive for pension annuity benefits.
8.13.2 The proposed tax regime for retirement funds is likely to be more flexible than the old, without in any significant way deviating from the essentials of the structures that have facilitated the growth and development of a retirement funding system that has served, and will continue to serve, the country well.
8.13.3 Finally, the Commission's proposals, while retaining significant encouragement for the continued development of the retirement savings industry, do go some way towards ensuring greater neutrality between the various forms of savings institutions.
8.13.4 There is much in these recommendations that will require significant deliberation and consultation before implementation. While the Commission believes that it has provided the holistic review called for, it is aware that further discussion is essential to ensure wide acceptance.
8.14 SUMMARY OF RECOMMENDATIONS
Contribution Deductibility
8.14.1 The idea of "capping" rand values of deductible contributions should not be pursued. Deductible contributions should be limited to 15 per cent of aggregate remuneration in respect of employers and 72 per cent of taxable income in respect of employees. [paras. 8.7.1; 8.7.6]
8.14.2 Separate deductibility limits should be set for benefit funds and Medical Aid arrangements. [para. 8.7.10]
8.14.3 A basis should be established for limiting the scale of benefits that can be offered by defined benefit funds. [para. 8.7.7]
8.14.4 As part of an employer's tax return, a schedule should be required in support of any claim for retirement fund contributions and in which details are disclosed of:
8.14.5 Simultaneous membership by an employee of more than one approved fund offered by his or her employer should be disallowed. [para. 8.7.9(c)]
8.14.6 The feasibility of allowing "balance of cost" schemes to be recognized should be investigated. [para. 8.7.9(d)]
Taxation of Fund Income
8.14.7 It is recommended that approved funds be taxed on interest, rental and other "trading" income ("fund taxable income") at a flat rate of 30 per cent. [para. 8.8.4]
8.14.8 Existing "pensioner funds" should be given the option to convert from the "old" to the "new" tax regime. [para. 8.8.7]
8.14.9 The taxation of income accruing to Medical Aids and other benefit funds should be further investigated. [para. 8.8.8]
Taxation of Benefits
8.14.10 Within each retirement fund that pays pension annuities to retired members, it is proposed that a "pensioner fund" be formed to hold assets backing the liabilities in respect of pensioners. [para. 8.9.3]
8.14.11 It is recommended that a value be determined of all benefits deemed to accrue on death or retirement, whether lump sum or in the form of an annuity, and that tax at a progressive rate be determined on this "capital sum" and that the tax due be paid at this stage. [para. 8.9.4]
8.14.12 In arriving at the taxable amount of the "capital sum", the following deductions should be allowed:
8.14.13 The monetary amounts and schedules to be used in determining the taxable amount and tax due should be regularly reviewed. [para. 8.9.8]
8.14.14 Consideration should be given to establishing minimum criteria in terms of which pension annuities will qualify for the deduction envisaged. [para. 8.9.11]
8.14.15 The taxable amount arising from the net "capital sum" should be taxed according to the following schedules, the rates to be applied to that part of the taxable amount that falls within each band, without any offset against any other tax losses of the taxpayer:
|
Tax Rate |
Withdrawal |
Death and Retirement |
|
15% |
Less than R25 000 | Less than R150 000 |
|
25% |
R25 000 to R75 000 | R150 000 to R450 000 |
|
35% |
R75 000 to R125 000 | R450 000 to R750 000 |
|
45% |
More than R125 000 | More than R750 000 |
8.14.16 There should be a convention for the sequence to be used to allocate the tax liability to different parts of the "capital sum", as follows:
8.14.17 Pension annuities should be payable free of tax in the hands of the pensioner once tax is paid on the "capital sum" and income of the fund has been subject to tax. To the extent that it is impractical to move existing pensioners onto the new basis, old funds should be closed to further contributions and would retain their "untaxed" status and pensions paid would remain taxable in the hands of recipients. [paras. 8.9.19; 8.9.21]
8.14.18 Lump sum payments on termination of service, including payments in respect of "deferred compensation" arrangements, should be treated as if they were retirement benefits, and included in the "capital sum" for the purposes of determining tax liability. [para. 8.9.23]
8.14.19 The minimum age at which benefits paid on retrenchment are treated as retirement benefits for tax purposes should be reduced from 55 to 50. [para. 8.9.24]R>
Equality between Private and Public Sector
8.14.20 Exemptions from tax of lump sum benefits payable from "funds established by law" should be withdrawn. [para 8.11.4]
8.14.21 Accrued rights to exempt lump sum benefits should be recognised and determined by reference to the service of members up to the date of the change. Withdrawal benefits, unless transferred to another approved fund, should be subject to the normal tax scales. [paras. 8.11.4; 8.11.6]
8.14.22 The Commission favours the same tax treatment of the income of public sector retirement funds as it recommends for the private sector. If, on consideration, it is decided that certain public sector funds should be exempted, such exemption should apply only to funds which by their nature have extensive restrictions on their investment policies. Exemptions should be subject to appropriate principles, explicit application for exemption and publication by the Commissioner for Inland Revenue of the names of exempt schemes. [paras. 8.11.7-8]
8.14.23 Public sector funds should comply with similar limitations on deductible member contributions, multiple membership and employer contribution rates as private sector funds. A framework should be established for the control and monitoring of defined benefit funds in the public sector. [para. 8.11.9]
Retirement Annuities
8.14.24 The maximum contribution rate to retirement annuities should be increased to 222 per cent of taxable income. [para. 8.12.2]
8.14.25 Employed persons should be permitted to contribute the sum of 222 per cent of "non-retirement funding" income (as defined) and the difference between 72 per cent of "retirement funding" income and allowable contributions to an occupational fund to retirement annuities. [para. 8.12.3]
8.14.26 The rules determining acceptable benefits from retirement annuities should be amended to allow for lump sum benefits, or equivalently, the full commutation of pension benefits. [para. 8.12.4]
Miscellaneous
8.14.27 As part of a general review of the legislation applicable to pension and provident funds, the relevant tax legislation should be revised. The distinction between pension and provident funds in the Income Tax Act should be abandoned in favour of reference to "approved retirement funds". [para. 8.12.5]
8.14.28 The tax treatment of non-retirement benefit funds should be reviewed to ensure consistency with the proposed treatment of retirement funds. [para. 8.12.6]
8.14.29 The registration and approval process for retirement funds should be rationalized. [para. 8.12.7]
APPENDIX 1: PRINCIPLES FOR RETIREMENT FUNDING
The following points are proposed by the Smith Committee as the framework for retirement funding that should be supported by the tax system: