The Taxation Laws Amendment Bill, 2020 (“the Bill”) has been introduced to Parliament. The amendments affecting retirement funds are as set out below. All references to “the Act” are to the Income Tax Act.
Annuitisation of retirement benefits from provident funds and provident preservation funds
[Applicable provisions: The definitions of the various types of retirement funds in section 1 of the Act]
The Bill confirms that the compulsory annuitisation of provident fund and provident preservation fund retirement benefits, also known as T-day, will go ahead on 1 March 2021. From T-day members of provident funds and provident preservation funds will be compelled to annuitise at least two-thirds of their retirement benefits (excluding vested benefits), as is currently the case with pension funds, pension preservation funds and retirement annuity funds.
Should the member retire early or due to ill health, the same rules as with normal retirement would apply, i.e. the early or ill health retirement benefit is subject to compulsory annuitisation, with the exclusion of vested benefits.
Vested benefits, as referred to above, refers to that part of a benefit that is not subject to annuitisation upon retirement, and that can in other words be taken in cash. A member’s vested benefit depends on his/her age at 1 March 2021.
If the member is younger than 55 on 1 March 2021, his/her vested benefit is his/her contributions to a provident fund prior to 1 March 2021, plus growth. At least two-thirds of all contributions (plus growth) after 1 March 2021 will have to be annuitised, except if the value thereof does not exceed the commutation threshold of R247 500.
If the member is 55 or older on 1 March 2021, contributions made to a provident fund, or transfers made to a provident preservation fund, on or after 1 March 2021 (and growth thereon) can also be taken in cash, provided that the member remains a member of the provident fund or provident preservation fund of which he/she is a member on 1 March 2021. If the member transfers to another fund after 1 March 2021, all contributions to the provident fund of which he/she was a member on 1 March 2021, plus growth, up to the date of transfer will remain exempted from annuitisation. At least two-thirds of all contributions to the transferee fund (plus growth thereon) will however have to be annuitised, except if the value thereof does not exceed the commutation threshold of R247 500.
If a member’s fund value consists of a vested and non-vested portion, any deduction in terms of section 37D of the Pension Funds Act will be recovered proportionately from the vested and non-vested portions.
Withdrawing from a preservation fund or retirement annuity fund upon emigration
[Applicable provisions: The definitions of “Pension Preservation Fund”, “Provident Preservation Fund” and “Retirement Annuity Fund” in section 1 of the Act]
Currently the definitions of “pension preservation fund”, “provident preservation fund” and “retirement annuity fund” in section 1 of the Act make provision for payment of lump sum benefits when a member of any of these funds withdraws from the fund due to him/her emigrating from South Africa, on condition that such emigration is recognised by the South African Reserve Bank for exchange control purposes.
As stated in the 2020 Budget Review, the government will be modernising the foreign exchange control system, and one of the changes will be the phasing out of the concept of emigration for exchange control purposes. The Bill proposes that the definitions of the aforesaid funds be amended to replace the requirement that the emigration must be recognised by the Reserve Bank for exchange control purposes with a new test. The proposed new test will allow payment of lump sum benefits when a member ceases to be a South African tax resident (as defined in the Act), and such member has remained non-tax resident for at least three consecutive years. The proposed implementation date of these amendments is 1 March 2021.
Postponement: Disregarding tax rebates if pensioner has other source of remuneration
[Applicable provision: Paragraph 2B of the Fourth Schedule to the Act]
Paragraph 2B briefly entails that if a taxpayer receives remuneration from more than one source (including a pension from a retirement fund or insurer), the tax rebates applicable to the taxpayer are not to be taken into account by the retirement fund or insurer when calculating the taxes to be withheld on the pension. Any pay-as-you-earn (PAYE) excessively withheld will be refunded by the South African Revenue Service (SARS) upon assessment.
The Bill proposes that the implementation of paragraph 2B be postponed from 1 March 2021 until 1 March 2022.
Clarifying deductions in respect of contributions to retirement funds
[Applicable provisions: Paragraph 5(1)(a) and 6(1)(b)(i) of the Second Schedule to the Act]
Paragraphs 5(1)(a) and 6(1)(b)(i) of the Second Schedule to the Act make provision for a deduction of retirement fund contributions that did not qualify for a deduction in terms of section 11F of the Act, when calculating the amount of lump sum benefits to be included in the member’s gross income. These paragraphs refer to “own contributions”, which inadvertently prevents employer contributions to a retirement fund on behalf of employees (made on or after 1 March 2016) from qualifying for a deduction under either paragraph. It is proposed that the Act be amended to remove this anomaly, by replacing the reference to “a person’s own contributions” with a reference to “any contributions”. The effective date of the proposed amendments is
1 March 2016, which aligns with the effective date of section 11F.
Deduction of previously non-deductible contributions from qualifying annuities
[Applicable provision: Section 10C of the Act]
Previously non-deductible retirement fund contributions, which were also not used as a deduction against retirement fund lump sums, can be deducted from a “qualifying annuity”, which is a compulsory annuity paid upon retirement.
“Qualifying annuity” with regard to a provident fund and provident preservation fund is currently defined as“the amount of the retirement interest of a person payable in the form of an annuity (including a living annuity) by a provident fund or provident preservation fund”. This is accordingly limited to a pension paid directly by a provident fund and provident preservation fund, and does not include a pension purchased from an insurer. This has been corrected by defining “qualifying annuity” in the case of a provident fund and provident preservation fund as “an annuity (including a living annuity) as contemplated in paragraph (b)(iv) of the proviso to the definition of ‘provident fund’” and “an annuity (including a living annuity) as contemplated in paragraph (e) of the definition of ‘provident preservation fund’”. “Qualifying annuity” with regard to a provident fund and provident preservation fund will therefore now include a pension purchased from an insurer.
Section 10C further currently only refers to “own contributions”, which inadvertently prevents employer contributions to a retirement fund on behalf of employees (made on or after 1 March 2016) from qualifying for a deduction in terms of section 10C. It is proposed that section 10C be amended to remove this anomaly, by replacing the reference to “own contributions” with “any contributions”.
The above amendments will apply from 1 March 2021.
Living annuity paid to a trust
[Applicable provisions: The definition of “living annuity” in section 1 of the Act and a new paragraph 3B of the Second Schedule to the Act]
A new paragraph (eA) is added to the definition of “living annuity” to allow for a lump sum payment to a trust when a trust in receipt of a living annuity is in the process of being terminated. This means that the lump sum will be taxed on the retirement fund tax table for retirement and death. A new paragraph 3B is also added to the Second Schedule, in terms of which the lump sum shall, on the date of payment thereof, be deemed to have accrued to the trust immediately prior to the date of termination of the trust.
The above applies from 1 March 2021.
Previously non-deductible contributions deducted from death benefit: deemed asset for estate duty purposes
[Applicable provisions: Section 3(2)(bA) of the Estate Duty Act and a new section 3(3)(e)]
Section 3(2)(bA) of the Estate Duty Act currently includes as property of the deceased previously non-deductible contributions to a retirement fund that were allowed as a deduction from the deceased’s death benefit. It is proposed that section 3(2)(bA) be deleted, and be replaced by a new section 3(3)(e), the effect of which would be that the aforesaid amount will for estate duty purposes no longer be regarded as property, but as deemed property.
The above will be deemed to have come into operation on 30 October 2019 and will apply in respect of the estate of a person who dies on or after that date, and in respect of contributions made on or after 1 March 2016.
Sanlam is currently in the process of getting their Administration systems ready for this implementation and will communicate to all their Clients shortly.