The Joint Tax Board (JTB) recently issued a public notice (the Notice) on the perceived abuse of voluntary pension contribution (VPC) scheme by employees as a means of avoiding personal income tax.
This Notice is intended to address the seeming ambiguity created by Section 10(4) of the Pension Reforms Act 2014 (PRA or the Act).
Section 10(4) of the PRA appears to leave room for varying interpretations by stakeholders and creates tax planning opportunity for taxpayers.
The Section states that "without prejudice to the provision of subsection 2 of this Section, any income earned on any voluntary contribution made under Section 4(3) of this Act shall be subject to tax at the point of withdrawal where the withdrawal is made before the end of 5 years from the date of the voluntary contribution was made".
Consequently, some taxpayers make tax-deductible VPC to their retirement savings account (RSA) and subsequently withdraw same from the RSA without accounting for tax.
The JTB intends to discourage this practice by ensuring that taxpayers who withdraw their VPC from their RSA before retirement account for appropriate taxes. This is premised on the following:
- This practice by taxpayers would be treated as artificial transactions in line with the provisions of Section 17 of Personal Income Tax Act (PITA).
- Early and unregulated withdrawals will be considered to fall outside the tax exemptions granted by Section 10(3) of the PRA, which exempts amounts payable as "retirement benefits".
The above implies that the relevant tax authorities may direct that tax is accounted for when withdrawals are made from RSA. This Notice did not specify how the applicable tax (if any) is to be collected. We are however aware that Lagos State Internal Revenue Service has issued a public notice on how it intends to enforce compliance in this regard.
We would continue to monitor developments in this space and provide updates as soon as they become available. You may refer to Deloitte InsideTax article for information on the tax impact of VPC.
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.