The finance ministry has issued a decree on the calculation of the 75% of salary limit indicating a possibly excessive promise reflecting future salary rises.
Employee pension provisions must be calculated in accordance with the plan and be based on the facts as they existed on balance sheet date. They may not therefore take future salary increases into account. The Supreme Tax Court has established a limit of 75% of present salary as a rough and ready rule of thumb to reveal attempts to bring current pension costs forward by making "excessive" pension promises. The ministry of finance has now issued a decree on some of the details of this calculation and its import.
- Present salary includes all emoluments and other benefits in cash or in kind. It can only include future increases that are certain at balance sheet date. Variable benefits (bonuses, commissions etc.) are taken as an average over the past five years.
- The pension promise should not give the employee a retirement income, including the state old-age pension if applicable, of more than 75% of present salary.
- Commutation of salary to a pension promise reduces the current salary level, but does not increase the deemed pension promised.
- The 75% limit is increased or reduced according to salary changes reflecting changes in an employee's duties and responsibilities.
- The 75% rule does not apply if the original intention was to give the employee an "excessive" retirement income.
- It also does not generally apply to pensions being currently paid.
- The (more restrictive) rules on pension promises in favour of the spouse of the proprietor are reserved.
- If the 75% rule is found to apply and has been exceeded, the excess is reflected in a partial disallowance of the current pension cost derived from the calculation of the pension provision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.