The Income Tax Act offers the most valuable tax benefits to retirement fund arrangements, not offered to any other investment product. Firstly, while employer contributions would be tax deductible as an expense incurred in producing income, the same cannot be said about employee contributions. While an employee generally cannot deduct any expenses from his salary, pension fund contributions are explicitly tax deductible. Secondly, any person whose endeavours are intended to generate an income must pay tax on his taxable income determined per the Income Tax Act prescriptions. In contrast, a pension fund is tax-exempt despite endeavouring to generate investment income for its members. Lastly, in the case of pension funds, the general tax principle of taxing any income derived from tax-deductible expenditure, and vice-versa, is diluted. When a pension fund returns an employee’s tax-exempt contributions with tax-exempt investment returns and sometimes insurance policy proceeds funded from the employer’s tax-deducted pension fund contributions, only a portion of the benefit is taxable.

These income tax incentives for retirement funds only apply if the fund meets certain conditions in the Act. Most importantly, NAMFISA must have registered it, and NamRA must have approved it. Furthermore, NamRA must be notified of all rule amendments, and the fund must have complied with its rules. Notably, under the Income Tax Act, the NamRA approval of a fund is only valid for the year of assessment. Legally, NamRA must re-approve a fund for every year of assessment. Although this is not NamRA’s practice, it can invoke the practice at any time.

If a fund has not received NamRA’s confirmation of a rule amendment submitted for approval, it cannot be applied from a tax perspective. However, once NAMFISA registered a rule amendment, the fund must apply it from a legal perspective. Effectively, NamRA would argue that, by applying an unapproved amendment, the fund has not complied with the NamRA-approved rules. From a tax perspective, the fund does not meet the requirements of the Income Tax Act and is not entitled to the tax benefits under the Act.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of RFS.

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