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For member contributions to be tax deductible it is essential that these are made in terms of the rules of the fund. The Income Tax Act granting the concession to members to make tax deductible contributions to a fund requires that membership of the fund must be a condition of employment and that regular contributions must be in accordance with specified scales. The Income Tax Act does not link the employer contributions to an individual member’s pensionable salary but rather to his/her total approved remuneration. Remuneration is a wider term than pensionable salary and can include other costs of employment relating to the employee.

Pensionable salary is normally defined in the rules of a fund as the basis for determining the contributions to be made to the fund by the member and by the employer.

Most rules of funds would define pensionable salary as -

“The MEMBER'S basic annual salary or wages and any other regular amounts paid to such MEMBER as are regarded as pensionable by the BOARD OF TRUSTEES at the request of the EMPLOYER”

As far as the rules are concerned, contributions must thus be linked to pensionable salary. Whether or not a salary is paid during maternity leave is usually set in the conditions of employment.

Scenario 1 – No salary is paid to member on maternity leave

Where no salary is paid, there should be no contribution by either member or employer, based on the definition of pensionable salary.

If the employer does not continue to pay any regular amount to the member while on maternity but wishes to continue contributing this would be in contravention of the rules. It would essentially be a voluntary contribution by the employer, posing the risk that the Receiver might disallow it for tax purposes. It is unlikely though that the employer would exceed the total that the Income Tax Act allows the employer to deduct for tax purposes in respect of such member, it being based on the wider concept of total remuneration per Income Tax Act, rather than the narrower definition of pensionable salary in fund rules.

Scenario 2 – employer continues to pay a salary to the member on maternity leave

If the employer continues to pay any regular amounts to the member on maternity leave, both parties should contribute based on such regular amount. In this scenario the failure of the member to contribute while on maternity leave is a contravention of the fund rules and must be recorded as a debt to the fund. The member’s record would be built up by the administrator from month to month as if that contribution was received. How that debt will be disposed of, is a matter between the fund and the employer.

The risks faced by the fund and the employer under this scenario of suspending the member contribution though is minimal. If an agreement has been reached between employer and member to do so, the member has very little argument to challenging the employer as this actually benefits the member at the time of maternity leave.

Conclusion

Both scenario 1 and scenario 2 pose potential risks, where the rules of a fund do not provide for members on maternity leave. The potential risks posed by scenario 1 and scenario 2 are small. The rules should preferably be amended to correctly reflect the employer’s employment practice in this regard.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (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 Retirement Fund Solutions.

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