Can your employees deduct voluntary contributions to the fund?
The contract of employment.
One principle of the Income Tax Act is that expenses can only be claimed for tax purposes if they were incurred in the production of income (refer section 17(1)(a).
In the case of employees, Inland Revenue will not accept any claim for discretionary expenses the employee incurs. An employee can only claim expenses he is required to incur in terms of his employment contract. In other words, your salary depends on your incurring certain costs. These costs are incurred in the production of income as contemplated in section 17(1)(a).
Suppose an employer can formulate the employment contract in such a way that a pension contribution in respect of the employee's bonus is an obligation. In that case, the employee should be able to claim that expense. If the decision is left to each employee, the employer should find it is impossible to formulate it in the contract as an obligation. It does not mean that every employee has to have the same employment contract. Specific employee categories or certain employees can have a special provision in their employment contract that others do not have, to make the contribution obligatory.
The fund rules
Most fund rules provide for voluntary contributions by members. We caution against using this clause as the heading is problematic, referring to 'voluntary'. As pointed out above, the word 'voluntary' means the employee is not required to make the contribution and would thus not be incurred as a condition of employment to produce income from employment.
It is crucial that the rules of the fund mirror the employee's employment contract. Thus, if a contribution calculated on a member's bonus is a condition of employment, it should not be referred to as 'voluntary contribution' in the fund's rules.
The Income Tax Act and fund contributions
The definition of 'pension fund' in subsection (b)(i) requires that the rules of a fund provide that '…all annual contributions of a recurrent nature of the fund shall be per specified scales…'. The definition of 'provident fund' also lays down this requirement. Typically, this refers to the contribution percentages at which members contribute monthly, but it can also be fixed amounts. The definitions do not make any reference to any other contributions.
Employees may currently deduct a maximum of N$ 40,000 per annum for contributions made to all approved funds and study policies. The Minister of Finance recently tabled an amendment in the Parliament to increase the N$ 40,000 to N$ 150,000 per annum.
Section 17 of the IT Act deals with 'General deductions allowed in determination of taxable income'. Section 17(1)(n)(i) sets out that the employee may deduct '…by way of current contributions [which are required to be according to specified scales per definition of 'pension fund' and 'provident fund'] in the year of assessment and directs that '…such contribution is a condition of employment…' The IT Act contains no other specific provision that allows any deduction for contributions to a pension fund, and we do not refer to a transfer of accumulated contributions to another fund.
Conclusion
As set out above, the principle of the IT Act militates against an employee deducting any expense that he was not required to incur in the production of income [and that can only be achieved through the contract of employment].
The above sets out the dilemma of employers or funds wanting to allow staff to make additional contributions to their fund. It indicates what route the employer and the fund should take to achieve their goal of employees contributing at a higher rate to the fund or on ad-hoc remuneration amounts.
We caution employers and funds not to create an impression toward employees those voluntary contributions are tax-deductible. It is worse to offset voluntary contributions from an employee's salary in determining the taxable income unless it is confirmed that Inland Revenue will allow such a deduction for tax purposes. The employer runs the risk of these contributions being added back to the employees' taxable income by the Receiver of Revenue! Ignoring the IT Act prescriptions could result in penalties and interest being levied against the taxpayer and a fund losing its tax-approved status
Article Written by: Tilman Friedrich is a chartered accountant and a Namibian Certified Financial Planner® practitioner, specialising in the pensions field. He is co-founder, shareholder, and Chairman of the RFS Board and retired chairperson, and now a trustee of the Benchmark Retirement Fund.