Exploring the Angelic Blessings within the triangular tax system (2): A tax planning perspective

By Fred Kwasi ANOKYE, Ph.D.

In the first article, I discussed mortgage interest tax concession as a tax planning opportunity embedded in the triangular tax system of Ghana. This current article exposes taxpayers to the tax benefits within individual pension contributions and donations made.

Allowable deductions in respect of social security contributions

The National Pensions Act, 2008 (Act 766) as amended provides for a three-tier pension scheme consisting of:

1. A mandatory basic national social security scheme – Tier 1
2. A mandatory fully funded and privately managed occupational pension scheme – Tier 2
3. A voluntary fully funded and privately managed provident fund and personal pension scheme – Tier 3

Tier 1 contributions – It is important to note that the 5.5% of monthly basic salary contributions made by employees towards tier 1 is an allowable deduction for tax purposes (Section 104 of Act 766).

Tier 3 contributions (Provident Fund) – Similarly, for tax purposes, where an employee contributes to tier 3, the law allows a deduction up to a maximum of 16.5% of their monthly basic salary (Section 112 of Act 766).

The tax planning tip for employees is that where your employer has no tier 3 scheme in place, it is advisable to take personal steps to initiate contributions (max of 16.5%) to an approved private pension fund company. Even when your employer has a tier 3 scheme, but the percentage contribution from both employer and employee is not maximized, employees should consider a top up to the maximum of 16.5%.

For e.g. if both employer and employee contribute 5% each, it will be tax beneficial for the employee to top-up with additional 6.5%. This will help minimize monthly PAYE tax and guarantee a comfortable retirement life due to the increased pension contributions.

As a simplified illustration, consider these same details of two employees working in the same entity. Akua Achiaa and Kwadwo Sarfo (Monthly Basic salary – GH?10,000; Employer’s tier 3 contribution – 5%; Employees tier 3 contribution – 5%).

Sarfo strategizes by increasing contribution by 6.5%. All other things being equal, and assuming a marginal tax rate of 25%, Sarfo will enjoy a monthly tax blessing/saving of GH?162.5 and at the same time enjoy enhanced pension contributions for a comfortable life in future. See scenarios below:

 SCENARIO 1 – SAME TIER 3 CONTRIBUTION OF 5% FOR BOTH                                         

DETAILS	AKUA ACHIAA	KWADWO SARFO
	GH?	GH?
Basic salary	10,000	10,000
Less: Provident fund (5%*10,000)	500	500
Taxable income	9,500	9,500
Tax liability (25%*9,500)	2,375	2,375

 

SCENARIO 2 – SARFO INCREASES CONTRIBUTION BY 6.5%

DETAILS	AKUA ACHIAA	KWADWO SARFO
	GH?	GH?
Basic salary	10,000	10,000
Less: Provident fund (5%*10,000)	500	500
Less: Additional Provident fund (6.5%*10,000)	0	650
Taxable income	9,500	8,850
Tax liability (25%*9,500)	2,375	2,212.5
Tax blessings/savings (2,375-2,212.5)		162.5

 

Tier 1, 2 & 3 contributions by self-employed individuals in the informal sector – Individuals operating in this sector can have up to 35% of their declared income granted as an allowable deduction for tax purposes (Section 112(3) of Act 766). Given the fact that such individuals are not mandatorily required to contribute towards tier 1 & 2, they can take a bold initiative to make voluntary contributions.

The tax planning strategy for the self-employed in the informal sector is for them to voluntarily contribute 18.5% of their income towards tier 1 & 2 and 16.5% towards tier 3, securing them the maximum deduction of 35%.

Tax implications of withdrawals from tier 3 contributions – Any withdrawal before 5 years of contributions (by informal sector contributors) and 10 years of contributions (by formal sector contributors) shall be subjected to a final tax of 15% (Section 112(5) of Act 766; Regulation 25 of L.I. 2244).

The tax planning tip is for individuals to make contributions for the minimum number of years before any withdrawals to escape the tax.

Deductions in respect of contributions and donations to a worthwhile cause

For tax purposes, an individual is allowed to claim a deduction for donations or contributions made towards a worthwhile cause approved by government (Section 100 (1) of Act 896). The amount of deduction allowed is the quantum of donation or contribution made towards the worthwhile cause. As stipulated by Section 100(2) of Act 896 and the Practice Note on contribution or donation to a worthwhile cause, below are the worthwhile causes approved by government.

1. A charitable organisation which meets the requirements of section 97 of the Act 896 – The charitable organisation should have an unexpired written approval from the Commissioner-General to merit this status. For e.g. a donation to an entity called Fredizzo StreetLife, an NGO dedicated to providing for street children would qualify for deduction if the NGO meets the requirements of Section 97 of Act 896.
2. A scheme of scholarship for an academic, technical, professional or other course of study – There is the need for a written attestation from the Minister for Education confirming the scheme to be a worthwhile cause. For instance, if Ms. Ewurama Awotwe Ocran donates GHS100,000 to an approved scholarship scheme called Adesuay3, she can make a claim for deduction once the Minister attests to it.
3. Development of any rural area or urban area – The Minister for Local Government should issue a written attestation confirming the activity as a worthwhile cause. For e.g. if Agyedabi, an indigene of Asante Mampong donates light poles to support rural electrification project in the Municipality, a deduction can be claimed once the Minister attests to it.
4. Sports development or sports promotion – The Minister for Youth and Sports should issue a written attestation confirming the activity as a worthwhile cause. For e.g. if Aba Brown, a table tennis fanatic, donates GHS50,000 to the Ghana Tennis Federation, she can claim a deduction once the Minister attests to it.
5. Any other worthwhile cause approved by the Commissioner-General – For such approvals, the Commissioner-General will be guided by such factors like whether the activity or event addresses obvious socio-economic needs in society, whether the need can be costed, whether the activity or event maintains the sanctity of social life and the environment, and whether the benefits from the activity or event are non-discriminatory in nature. For e.g. if Sarfo Agyemang donated GHS70,000 towards the COVID-19 Fund, he could make a deduction claim since it can be considered as a fund that addresses some socio-economic needs of the nation.

The tax planning strategy is for individuals to direct their donations/contributions towards the allowable ones per section 100 of Act 896.

Procedures for claiming the deduction

1. Pick a claim form from any GRA tax office.
2. Complete and submit the completed form to your tax office.
3. Support the claim with a written acknowledgement from the beneficiary of the donation.

CONCLUSION

I conclude by saying that strategically plan a comfortable retirement and simultaneously reduce your PAYE tax by maximizing tier 3 pension contributions. Also, be intentional about your donations to secure maximum tax advantage. Watch out for the third article which will discuss personal tax reliefs.

REFERENCES

• Income Tax Act, 2015 (Act 896) as amended
• Income Tax Regulations, 2016 (L.I. 2244).
• The National Pensions Act, 2008 (Act 766) as amended
• GRA Practice Note on Contribution or a Donation to a Worthwhile cause under the Income Tax Act, 2015 (ACT 896).
• GRA Practice Note on Gains or Profits from Employment under the Income Tax Act, 2015 (Act 896).

 The writer is an Academic, an Accounting and Tax Professional with considerable experience in Lecturing, Research and Tax administration. He is a Chartered Accountant, a Chartered Tax Practitioner and an Adjunct Lecturer at the University of Ghana Business School.

Email: [email protected]

Tel: 233249713272

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