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Taxes And Approved Fund Like Fiji National Provident Fund

Taxes And Approved Fund Like Fiji National Provident Fund
September 05
09:42 2015

Approved fund – the term is not so widely known when put like that.

But when we say an example of approved fund includes money paid to the Fiji National Provident Fund – then it becomes more clearer.

And so this week in our Tax&You column, we interviewed Fiji Revenue and Customs Authority chief executive, Jitoko Tikolevu, to learn more about what this is.

An approved fund is established for the benefit of its members and is employer-funded. The funds are for members to be used in the event of the retirement or permanent disability of the member.

Or it is the provision of benefits to dependents of members in the event of the death of a member of the employer.

So let’s get more details about approved funds.

Can employers apply to operate an approved fund?
Yes, employers can apply to operate an approved fund. We are very vigilant when assessing applications for an approved fund.
The conditions are intended to ensure that the tax concessions for approved funds are not the subject of tax avoidance arrangements.
In particular, the intention is to ensure that the concessions cannot be used as a means of diverting additional tax-free remuneration to executives.
What is the advantage of an approved fund?
Firstly, the employer is entitled to a deduction for contributions made to an approved fund in respect of employees. No deduction is allowed in respect of contributions to non-approved funds.
An employer contribution in respect of an employee to an approved or a non-approved fund is an exempt fringe benefit of an employer.
In the case of employer contributions to approved funds, the exemption is a tax concession and, in the case, of employer contributions to non-approved funds, the exemption avoids double taxation as the contribution is effectively taxed through the non-deductibility rule in section.
Secondly, the income of an approved fund is exempt income and thirdly any pension or lump sum paid out to members is exempt income.

How much can an employer claim as a deduction in terms of the employer contribution to FNPF or an approved fund?
The deduction for a tax year is limited to 50% of the employer contributions paid in respect of the employee for the year.
The limit in relation to each employee is equal to 50% of the total contribution made by the employer during the tax year to the FNPF and an approved fund for the benefit of the employee.
The limit is based on the total contributions made by the employer for the benefit of an employee to both the FNPF and an approved fund.
Under the Fiji National Provident Fund Act, it is compulsory that 18% of the salary or wages of an employee be contributed to the FNPF with 8% employee contribution and 10% employer contribution.
The employers are only entitled to claims as a deductible expense 50% of the 10% employer contribution.

What if the employer decides to increase the employer contribution to 12%?
Where an employer makes additional contributions to the FNPF for the benefit of an employee, the deductible amount will be half of the total contribution made by the employer including the additional contribution.
If, for example, the employer contribution to the FNPF is 12% of the annual salary and wages of an employee, the deductible amount will be 50% of the statutory contribution, hence, in this case it is only 5%.

Will the excess FNPF contribution benefit by the employer be subject to Fringe benefit Tax or PAYE?
Any FNPF contribution in excess of the FNPF statutory contribution will be subject to PAYE.
This is taken a cash benefit rather than a non-cash benefit as the employee will eventually receive it in the form of cash through pension etc.
However, employers are required to correctly deduct the corresponding PAYE before remitting the excess FNPF.

To be an approved fund, the following conditions must be satisfied:

– The fund is established under irrevocable trusts solely for either or both of the following purposes:

(a)
The provision of benefits to members of the fund in the event of the retirement or permanent disability of the member.

(b)
The provision of benefits to dependents of members in the event of the death of a member of the employer.
Membership of the fund is confined to employees of the employer who established the fund or employees of an associate of the employer who established the fund.

The fund can accept contributions only from the employer, an associate of the employer, employees of the employer, and employees of an associate of the employer.

Members of the fund must have been fully informed of their rights to receive benefits from the fund.

The rights of members and dependents to receive benefits from the fund in respect of employer and member contributions, and income accruing thereon, are fully secured.

The retirement ages for benefits specified for members of the fund are not less than those specified in the Public Service (General) Regulations 1999.

The benefits to which members or dependents are entitled are not excessive having regard to:

(a) The average remuneration paid to the member prior to retirement or death;

(b) The period of service;

(c)
Other benefits that may be provided to the member or a dependent of a member by the employer or associate of the employer (such as a lump sum gratuity or an employer-paid pension).

The fund is not permitted, under the governing rules of the fund, to lend monies to members or dependents of members of the fund.

Why do you allow only 50% of the 10% employer contribution as a deduction and not the full 100%?

This is a policy decision which has been deliberated thoroughly by our policy makers.  For tax purpose, where there is a deduction there should be a corresponding tax.
Employers and companies claim a deduction on the employer statutory contribution which is correct and in the spirit of taxation.
However, from the Tax Administration point of view, where there is deduction, someone has to pay the tax, so that there is a net off.  However, the 10% employer’s deduction has no tax implication as the FNPF pension is exempt.
Normally under principals of tax law, where an income is exempt, the deduction should not be allowed at all.

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