In with the New and Out with the Old. A Closer Look at Section 11F
Revisiting the old: Section 11(n), 11(k) and 11(l)
In the context of retirement annuities, the deduction was initially introduced in 1961 by way of the (now repealed) section 11(n).) At the time of its introduction, the deduction was limited as it was only allowed to be deducted against income from trade. Marius explained that during the 1980s it was extended to allow the deduction to be made against income not from trade. A further feature of the dispensation was that a contribution that did not rank for deduction was deemed to be a contribution to the next succeeding year (“pushed forward”). If not deductible in a year, it was continuously pushed forward, and in the end it could be deducted against the lump sum benefit that crossed its way.
Pension fund contribution deductions were allowed under sections 11(l) and section (k). Contributions that did not rank for deduction in a particular year were also pushed forward. Where there was an amount in excess of the allowable deduction, it was deemed to be paid in the next succeeding year of assessment.
Marius pointed out that the location of the deduction as a sub-section under Section 11, i.e. section 11(k), was problematic. Section 11 is an overarching provision that deals with the general deductions that are allowed in the determination of taxable income of a person, particularly the taxable income derived by a person from carrying on a trade. The first problem was therefore that due to the introductory sentence of Section 11, the deduction appeared to now be limited to income from trade. This was subsequently addressed by the amendment of the wording of the subsection to allow the deduction also to be deducted against income not from a trade. However, a problem remained, namely that due to its particular location under section 11, an assessed loss could arise.
Section 11(k) was therefore repealed and a new section, standing on its own, inserted, Section 11F. It was introduced by the Taxation Laws Amendment Act, 17 of 2017, published on 18 December 2017. The section is, however, deemed to have come into effect from 1 March 2016.
The new: Section 11F
Marius explained that the section now requires three limitations to be considered (instead of two), and has been simplified in that it is the lesser of these three that will determine the deduction.
The amount of the deduction in a particular year of assessment is therefore limited by section 11F to the lesser of: (smaller of A, B and C below):
27,5% of the higher of the person's
(i) remuneration as defined in fourth schedule (EXCLUDING any RFLB RWB and severance benefit); or
The taxable income of the person BEFORE the section 11F deduction and also BEFORE inclusion of the taxable capital gain.
Importantly, it has been clarified that while one can calculate the potential deduction by including taxable capital gains, when then applying the limitations above to derive the allowed deduction, the deduction will be limited to the taxable income before the taxable capital gain. Viewed from another angle, the taxable capital gain (and the eventual tax arising from it) cannot be eliminated or reduced by the deduction under section 11F for retirement contributions.
Marius also highlighted some problems in respect of the interpretation of the taxable income referred to in C above, and further discussions were held. On the main, however, it seems agreed that the legislature has taken the workable parts of the older section to form this new addition.
While some changes appear to happen swiftly – such as the changes from sections 11(n), (l), (k) to section 11F – some take much longer. A case in point is the harmonisation of the annuitisation of provident funds and pension funds, which has again been postponed, with the date set to 1 March 2019.
Presentation by Dr. Marius Botha
Write-up by Karin Muller, Milpark Education
19 Jul 2018