Tax Treatment Of Voluntary Pension Contributions And Withdrawals Therefrom
Recently the tax authorities have observed the practice of employees allocating a substantial portion of their monthly salary as voluntary pension contributions (“voluntary contributions”) to their retirement savings accounts (“RSA”), and then almost immediately withdrawing the voluntary contributions after such contributions/income have enjoyed exemption from tax. In most cases, this practice, which the tax authorities consider as abusive, results in the employees paying significantly lower personal income tax. Accordingly, the Joint Tax Board (“JTB”) and the Lagos State Internal Revenue Service (“LIRS” or “Service”) have respectively issued public notices to the effect that this practice is a breach of the relevant provisions of the Pension Reform Act (“PRA”). The public notice from the JTB, which was issued on 21 August 2017, is titled “Abuse of Voluntary Pension Contribution Scheme”; whilst that of the LIRS, also issued on 21 August 2017, is titled “Tax Relief on Voluntary Pension Contributions”.
In its notice the JTB noted that the withdrawal of voluntary contributions from RSAs breached s. 16 of the PRA (which governs withdrawals from RSA), just as deducting more than one third of an employee’s salary and remitting same to his RSA breached s. 5(8) of the Labour Act (which restricts maximum monthly deduction from an employee’s salary to one third of the salary). The JTB resolved to treat this practice as artificial transactions pursuant to s. 17 of the Personal Income Tax Act (“PITA”); such that any payments made to individuals from their RSAs under the practice would be subject to tax.
In its notice, on the other hand, the LIRS whilst acknowledging that “[a]n employee can opt to make withdrawals, at any time, from such contributions which is a tax free benefit”, however concluded that any payments made by any Pension Fund Administrator (“PFA”) to individuals other than in compliance with s. 16 of the PRA would be subject to tax; and that the Service would periodically audit withdrawals of voluntary contributions authorised by each PFA (relying on s. 17 of the PITA) and recover tax due on those that did not comply with s. 16 of the PRA, with interest and penalties thereon.
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