In our last newsletter we expressed our opinion that Inland Revenue is contravening section 37A of the Pension Funds Act when claiming arrears tax, or a tax debt, from a benefit.
Namfisa approached Inland Revenue about these topics. The following specific concerns were raised in this context:
If a member borrows for housing purposes as contemplated in section 19(5) of the Pension Funds Act, a fund may not be able to recover the loan from the member where a benefit becomes payable to the member and the member has a tax debt with Inland Revenue.
In its response Inland Revenue advises that it acts well within its powers in doing so and suggests that funds should obtain from Inland Revenue a ‘goodstanding certificate’ before granting a loan to a member.
Our comment here is that the member’s tax status may change over time since the time the loan was granted, as a result of which this problem cannot be addressed effectively by this procedure. The current state of affairs dictates that funds should no longer grant housing loans at all, negating the intention of the legislator (with section 19(5) of the Pension Funds Act) and the undeniably positive impact on the economy that such loans have.
We believe that this matter warrants further investigation by funds.
If a provident fund member passes away and has not submitted tax returns, his or her beneficiaries will not be paid a benefit as Inland Revenue does not issue a tax directive where any tax returns are outstanding. It was suggested that Inland Revenue should issue a directive applying the maximum tax rate.
In its response Inland Revenue is rather unsympathetic to the plight of the beneficiaries, mostly minor children and insists that it will not issue a directive and wants to also use this opportunity to collect any tax debt.
Inland Revenue does not distinguish between ‘current tax’ (i.e. PAYE) and tax debt, where one view is that a tax debt may not be deducted from a pension fund benefit in terms of section 37A of the Pension Funds Act.
Inland Revenue’s response is that ‘tax’ is defined in the Income Tax Act as ‘any levy or tax levied under the Act’. It is of the opinion that via the appointment of an agent in terms of section 91 of the Act it has the powers to lay its hands essentially on any moneys of a person under the control of the agent (in our case the administrator).
Our comment is that section 83 of the Income Tax Act, which deals with recovery of tax, makes reference to tax due becoming a debt to the Government of Namibia. It goes on to advise how this tax may be recovered from that person by the Minister filing a statement with a clerk or registrar of a competent court a statement, and such statement shall have the effect of it being a civil judgement. Read in the context of section 37A of the Pension Funds Act, our argument of the debt not being contemplated as an allowable deduction from a pension fund benefit, should become more plausible.
We believe that this matter warrants further investigation by funds or an aggrieved tax payer.
With regard to tax on death benefits from a pension fund, the questions of, firstly, who is taxable on the benefit and, secondly, under what section of the definition of gross income this benefit is taxable, were raised. The latter question is very important for the purpose of establishing whether the amount is subject to the average or the marginal rate of tax of the tax payer.
Inland Revenue responded by merely expressing its surprise that this matter was unclear to the industry. It indicated that it might consider amending the Income Tax Act.
Our comment is that this matter appears to be unclear even to Inland Revenue officials as we experience totally inconsistent treatment of such benefits between different Inland Revenue offices and between different officials. Our view is that a maximum of 34% should be taxable as a cash withdrawal benefit, provided no dependants pensions’ become payable in consequence of the member’s death; and that the taxable benefit is taxable in the hands of the beneficiary. We have received written confirmation of this interpretation from Inland Revenue (except for our view that the taxable portion represents a cash withdrawal benefit), but this is not applied consistently. It is to be noted that this is quite different where the benefit is paid by a provident fund.
Inland Revenue appoints administrators as an agent to collect tax on tax exempt benefits e.g. retirement commutation and amounts to be transferred to another approved fund in terms of section 16(1)(z).
In response Inland Revenue states that the employer is obliged to obtain a tax directive in respect of any amount referred to in paragraph (d) of the definition of gross income but seemingly bases its argument on ‘accrued’ as the key word. Thus even if an amount is tax exempt in terms of this paragraph (or section 16(1)(z)) for that matter, a tax directive has to be obtained and in the event of there being a tax debt, again the appointment of an agent would give it the right to collect any tax debt.
In our opinion by including all benefits payable by a pension fund, but specifically excluding the lump sum on retirement, ill-health or death in paragraph (d) of the definition of gross income, these amounts in essence do not ‘exist’ for the purposes of the Income Tax Act and hence there cannot be a requirement to obtain a tax directive as contemplated in paragraph 9(3) of part II of Schedule 2 to the Act. As far as a benefit due to be transferred to another fund is concerned we would agree that the amount represents gross income in the first instance and would be exempt when transferred but it does create the opportunity for Inland Revenue to intercept these moneys at the time of issuing a tax directive that must be obtained by the fund administrator in respect of such moneys.
If Inland Revenue means to say that tax directives have to be obtained in respect of lump sums that are not gross income in terms of paragraph (d) of its definition, which is not clear from its response, we believe that this matter warrants further investigation by funds or an aggrieved tax payer.
Download the letter from Inland Revenue to Namfisa on these industry concerns, here...
- Larger well-established employers continue to join umbrella funds;
- The average ‘sub-fund’ in an umbrella fund has 484 members and R 297 million assets;
- 12 out of 100 stand-alone funds surveyed in 2014 indicated their intention to transfer in the next 12 months, 55 indicated they have considered it;
- Costs and reputation are the main factors influencing employers’ choice of fund;
- Main reasons for the transfer are cost savings, administrative convenience and fiduciary risk;
- There is an increased awareness of costs but understanding the cost complexities remains unsatisfactory;
- 64% of employer’s remuneration packages are based on total cost to company;
- Average employee contribution rate is 5.6% of salary;
- Average employer contribution rate is 8.5% of salary;
- Average cost of death benefits is 1.6%;
- Average cost of disability benefits is 1.2%;
- Average cost of administration is 0.8% of salary;
- Average allocation towards retirement is 10.5% of salary;
- 66% of employers provide risk benefits as part of the umbrella fund;
- Average death benefit is 3.1 times salary;
- 47% of sub funds deduct fund expenses (FSB levies, auditing fees and trustee reimbursements) from member accounts, 14% from contingency reserve and 16% include it in the administration fees;
- 83% of respondents indicated that the trustees are assisted by an investment consultant;
- 52% of respondents indicated that their consultant was independent of the sponsor;
- 31% of consultants are remunerated via commission, 24% via a negotiated fee;
- 64% of respondents felt that remuneration was commensurate with the consulting services provided;
- 69% of sub funds have a formalised strategy for rendering financial advice;
- 74% of employers offer member directed investment choice;
- 98% of sub-funds indicated that an appropriate default strategy was available for members who do not want make investment choices;
- 53% of sub funds offer life stage mandates as default strategy;
- Only 35% of employers target a pension and of these 57% target 80%+;
- 93% of employer are satisfied or very satisfied with the investment choice for these being a good variety;
- Investment feedback is provided annually by 32% of funds, half-yearly by 13%, quarterly by 37% on investment returns (77%), returns vs benchmarks (66%), portfolio asset allocation (63%), economic overview (60%) and risk analysis (41%);
- Majority of member communication is via printed material on investment performance (87%), benefit structure (87%), legislative changes (61%);
- 77% of funds make use of an internet facility;
- 42% of funds offer a net replacement ratio calculator;
- 34% of employers indicated that the umbrella fund has determined an appropriate default annuity product or are working on it, 15% have determined a product and 47% of these have selected the living annuity, 40% the guaranteed annuity;
It is concerning that 90% of members do not reassess their choices after making their initial decisions.
On Friday 16 May Namfisa issued a 'request for SIH return'. This return is a short version of the return elaborated on in the next topic. It comprises of one schedule to sheet QFR 1 for each asset manager the fund employs, sheet QFR 2 and sheet QFR 3.
The information required is largely held by funds' asset managers and should therefore be submitted by the asset managers in the prescribed format. Following are urgent action items for Principal Officers:
- Principal Officers are urged to liaise with their service providers as soon as possible should they require assistance to compile consolidated reports from the returns submitted by each of the fund's asset managers.
- For the purpose of compiling the report we urge Principal Officers to arrange with their asset managers as soon as possible to submit a report in the prescribed format as soon as possible.
- Funds' investment consultants need to advise their clients should any fund have any direct holding in any assets required to be reported on per Sheet QFR3 'Other Assets' and Principal Officers are urged to obtain confirmation from the fund's consultant in this respect.
- Principal Officers' attention is drawn to the content of the covering letter 'Request for SIH Return 16 May 2014', in particular the arrangement for requesting extension (not less than 30 days prior to the due date), the penalty for failure to submit in time and the penalty for failure to comply with regulation 28(5).
Unlisted investments and quarterly reporting (regulations 28 and 29) - due from a date still to be announced
1. Unlisted Investments
On behalf of all our clients we have made enquiry with all asset managers, whether they foresee any obstacles in complying with the requirement to have invested a minimum of 1.75% of their client portfolios in unlisted investments by 31 December 2014. We have not received any concrete responses to this question yet. It seems. However, that Namfisa has not approved any Special Purpose Vehicle and its Unlisted Investment Manager yet. Asset managers are therefore not able to confirm whether they will be able to comply with the requirement to invest a minimum of 1.75% of fund investments by 31 December 2014, but consensus view is that it is unlikely they will be able to meet this due date in view of the fact that no SPV or its unlisted investment manager have been approved yet by Namfisa.
Principal Officers are advised to also make enquiry with your asset manager directly or via their consultant.
2. Quarterly reporting
The latest draft version of the quarterly reporting template was circulated to the industry during March.
2.1 Investment information
- Sheets QFR1 (including schedule 1), QFR3 and AFR2
Third party asset managers are the custodians of the information required to be reported per these sheets. They are thus in the best position to provide this information to Namfisa on behalf of funds, provided the fund affords access to its asset managers as 'submitters' on the ERS system and makes such an arrangement with its managers.
On behalf of our clients we have made enquiry with all asset managers whether they foresee any obstacles in reporting directly to Namfisa should their pension fund clients prefer them to do so. We have not received any concrete responses to this question yet although one manager indicated it would prefer to provide a data dump to their clients for the client to submit the data.
We suggest that Principal Officers take this matter up with their asset managers to agree on who is to submit the data and on the format the information is to be submitted if funds prefer the information to be provided to the Principal Officer.
- Sheet QFR2
This information is retained in the fund's general ledger and the administrator is in the best position to provide this information.
- Sheet AFR1
This information needs to be submitted by the Principal Officer.
Principal Officers are advised to gear up to provide this information.
2.2 Administrative information
- Sheet QFR4, QFR6 (para 6 to 8),
This information needs to be submitted by the Principal Officer.
Principal Officers are advised to gear up to provide this information.
- Sheet QFR5 (including schedule 2), QFR6 (para 1 to 5), QFR7, QFR8, QFR9, QFR10, and QFR11
The administrator is the custodian of much of the information in these sheets. Some information will have to be sourced from other parties through the Principal Officer, such as banks that provide indirect loans and the actuary in respect of the basis of valuation.
Principal Officers are advised to take up this reporting with the administrator of their fund to ensure that the administrator will be able to provide the information, to establish the time the administrator will require to gear up for this task, and to negotiate with Namfisa to provide sufficient time for the fund to provide this information.
3. RFS status of preparation
RFS is liaising with its software vendors to provide reporting as required in respect of the information that is in its custody. Since Namfisa has still not provided a final version of its reporting requirements RFS' programmers are unable to commence programming. It goes without saying that they will require a reasonable notice period from receiving the final version of the reporting requirements to finalising the required programming.
We will keep clients informed of further developments and timelines once Namfisa has provided the final version of its reporting requirements.
We suggest that Principal Officers liaise with Namfisa regarding the issuing of the final version of its reporting requirements and regarding a reasonable timeline for their system programmers to do the necessary programming. This is suggested to be not less than 6 months.
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