This month’s Xpress article comes from the pen of Chartered Employee Benefit’s Head of Legal, Compliance and Technical, Raschin Naidoo. He alerts us to tax changes that are coming to us from Treasury.
Over the past few years, Government, through its economic policy managing arm, National Treasury, has introduced several tax changes, the effects of which have been largely positive for the retirement fund industry.
Treasury commenced the reform of the retirement industry in 2012, when it requested Cabinet approval to publish several key papers to improve the private retirement industry.
The latest tax changes announced by Treasury, issued under the draft Taxation Laws Amendment Bill (TLAB) 2018, highlighted the following matters of relevance to retirement funds.
- From 1 March 2019, members of preservation funds will be allowed to withdraw their full lump sum benefit when they emigrate from South Africa.
- From 1 March 2017, surplus transfers or transfers within or between retirement funds of the same employer will not create a taxable fringe benefit for the employee.
- From 1 March 2019, transfers to a pension preservation or provident preservation fund on or after reaching normal retirement age, but before retirement date, will be allowed.
- A deduction from tax will be allowed when a member transfers from a provident preservation fund to a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.
- Clarity will be given that the tax-free status of a pre-1 March 1998 amount in a public sector fund will only be maintained for one transfer out of a private sector fund.
Emigration benefit from a preservation fund – effective 1 March 2019
Currently, members belonging to pension or provident preservation funds are restricted from withdrawing their benefit when they emigrate from South Africa.
The draft TLAB proposes amending the definitions of ‘pension preservation fund’ and ‘provident preservation fund’ to allow members to withdraw their full lump sum benefit when they emigrate from South Africa. That emigration must be recognised by the South African Reserve Bank for exchange control or upon repatriation on expiry of the work visas.
Tax treatment of actuarial surplus between retirement funds – effective 1 March 2017
Employer contributions to a retirement fund for the benefit of an employee is a taxable fringe benefit. This means that a transfer of actuarial surplus from one employer retirement fund to another employer retirement fund is a taxable fringe benefit in the hands of employees.
To address this unintended anomaly, surplus transfers or transfers within or between retirements funds of the same employer will not create a taxable fringe benefit for the employee.
Tax treatment of transfers to pension and provident preservation funds after normal retirement age but before retirement date – effective 1 March 2019
Since 1 March 2015, “retirement date” is triggered only when an election to retire is made by the member of the fund.
Currently, transfers to a pension preservation fund and a provident preservation fund are excluded after normal retirement age; only withdrawal benefits can be transferred.
The draft TLAB proposes to allow for transfers to a pension preservation or provident preservation fund on or after reaching normal retirement age, but before retirement date.
Note: The one withdrawal applicable to preservation funds before retirement date will not apply to amounts transferred after reaching normal retirement age in terms of the fund rules, but before an election to retire.
The general rule is that a transfer of a benefit from one approved fund to another is an accrual event for tax purposes. However, a deduction is provided in the law which results in the amount transferred being untaxed.
The only exception is where a pension fund or pension preservation fund benefit is transferred to a provident fund or provident preservation fund; these transfers are not tax deductible.
It is proposed to allow a tax deduction when a member transfers from a provident preservation fund into any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.
Transfers from public to private sector funds – effective 1 March 2018
From 1 March 2018, the Income Tax Act was amended to allow the tax-free status of the pre-1 March 1998 amount to be retained on the next transfer to another private sector fund, but not to any further transfers.
The wording of the legislation is ambiguous: it potentially contemplates more than one transfer being permitted. The draft TLAB aims to clarify that it applies only to one transfer out of the private sector fund.
Though the proposed tax changes contained in the draft TLAB are pragmatic, the most contentious issue arising from the previous TLAB proposed tax changes (the annuitisation of retirement benefits from provident funds) was not addressed.
The law currently says that annuitisation of provident funds will go ahead on 1 March 2019; however, Treasury reported that the consultation process at the National Economic Development and Labour Council (NEDLAC) is taking longer than anticipated and that Government may introduce further legislative amendments related to the start date of 1 March 2019 once the NEDLAC process is completed (expected by end October).
With national elections looming, it will be interesting to watch developments in this regard.