In the previous two newsletters we reported on the gauntlet thrown down on provident funds by the regulator. A meeting should have taken place between Inland Revenue, NAMFISA and industry participants. As we had to find out two month further on, this meeting never took place. In the meantime NAMFISA put down its foot by rejecting rules and rule amendments of provident funds that offer any benefits suspected to be inconsistent with the Income Tax Act. Where new rules are rejected it means the fund is not registered, is not a legal entity and cannot operate. In one instance it took close to a year to resolve queries of NAMFISA relating to how the rule amendment was communicated to the members. Eventually that hurdle was crossed just to find out about the gauntlet just thrown down on provident funds by the regulator.
There has never been any official communication between Inland Revenue (IR) and NAMFISA or anyone else for that matter, setting out Inland Revenue’s position with regard to certain matters relating to the Income Tax Act that NAMFISA has now taken issue with. The whole matter had its origin in a communication between Inland Revenue and an umbrella provident fund where IR questioned the provision of funeral benefits for family members of the fund member and the corresponding deductibility of contributions towards such benefits by the employer. This fund took up the matter with RFIN which in turn involved NAMFISA.
We enquired with the principal officer of this provident fund, whether Inland Revenue has taken any action with regard to rules of or rule amendments by the fund that indicate a change in its position by IR from the status quo that has prevailed up to the time the first questions arose. The principal officer confirmed that there has been no change in the status quo as far as IR is concerned. He mentioned however that rule amendments by the fund relating to funeral benefits were turned down by NAMFISA. In passing the principal officer mentioned that NAMFISA now also has an issue with additional voluntary contributions that are not tax deductible according to its website. Although I agree with this interpretation, the question may be posed whether it should really be NAMFISA to raise a concern rather than IR.
To get clarity on this issue from the ‘horse’s mouth’ so to speak we had a teleconference with Mr Sepo Shigwele and Mr Vivian de Koe of IR on the tax issues relating to provident funds that NAMFISA has of late taken as justification for turning down rules and rule amendments of provident funds. The following sets out the conclusions reached during this teleconference:
Funeral benefits: Funeral benefits for family members of a provident fund member cannot be provided by a provident fund in terms of the definition of ‘provident fund’.
Employer contributions: Employer contributions towards an approved fund are not tax deductible to the extent that they are made to cover benefits that cannot be offered by the relevant fund in terms of the relevant definition in the Income Tax Act e.g. funeral benefits for family members of a fund member following their passing away.
Resignation benefits: Inland Revenue took note that it can be read into the definition of ‘provident fund’ that such fund cannot offer termination benefits. Inland Revenue does not take this view, which is also corroborated by section (dB)(ii) of the definition of ‘gross income’.
Disability benefits: Disability lump sum benefits can be offered by a provident fund in terms of section (dB)(i). The two officials also agreed that a disabled provident fund member can remain a member of the fund where the insurance company assumes the role of the employer of paying the fund member a monthly income while the member is disabled. We did not go into more detail but it is reasonable to assume that the provident fund itself cannot pay the disability income when one applies the definition of ‘provident fund’ nor does the definition of ‘gross income’ refer to such benefit from a provident fund specifically. Inland Revenue was very specific on the point that a provident fund cannot offer annuities.
Death benefits: Death benefits for fund members or their spouses, children, dependants or nominees cannot be annuities but only lump sum benefits. These are taxed in the hands of the estate of the deceased member and can then be paid to the beneficiaries without any further tax being deducted.
Approval of rule amendments: Rejecting rules or rule amendments on the basis of being inconsistent with the Income Tax Act is the responsibility of Inland Revenue.
We impressed upon Mr Shigwele the dilemma the industry is facing as the result of NAMFISA refusing to register rules and rule amendments as described above. He advised that he will try to arrange a meeting with NAMFISA for the second week of September still
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.