The Draft Taxation Laws Amendment Bill (TLAB), 2015 was released for public comment on 22 July 2015. National Treasury and SARS formally responded to the public comments received on 15 October 2015. These comments have been taken into account in the revised Bills. Below we highlight the comments related to retirement reform.
Retirement reforms: some will happen in 2016
The reforms were meant to come into effect on 1 March 2015 but were delayed almost at the last minute. The stumbling block was NEDLAC, who wanted the changes to be tied to Social Security reform. It also had concerns on the mandatory annuitisation of provident funds, even though vested rights would be protected.
In its response, Treasury establishes an important principle: the tax deduction for retirement fund contributions is designed to encourage retirement savings and at the same time promote preservation and annuitisation. The tax deduction should not be allowed where there is no annuitisation.
Despite ongoing consultation with Government, NEDLAC (or any of its constituencies) has not submitted any proposals to delay or amend the implementation of the harmonisation and annuitisation reforms. NEDLAC has indicated that they will only engage on any retirement reform once government releases the Social Security Reform paper.
Government therefore intends to proceed with the broader objective of tax reform, to ensure more equity on tax deductions between high and low-income tax payers.
As from 1 March 2016 the 27.5% or R350 000 tax deduction including taxing employer contributions in the hands of the employee will be implemented.
Government is also committed to implement the proposed preservation and annuitisation of retirement funds. To this end the Minister of Finance will meet with NEDLAC in late October to discuss this. Two options are on the table:
- Implement the annuitisation requirement (and recognising vested rights) for all provident funds on 1 March 2016, but with a possible increase in applicable thresholds;
- Delay the annuitisation requirement for provident funds to 1 March 2017, with a transitional measure to limit any adverse impact of the tax reform on members of provident funds by allowing for a limited deduction (from 10% to 15% for provident funds).
Government plans to release the Social Security Reform paper later this year so that the consultations on annuitisation and preservation can resume. In any event, the current legislation only deals with annuitisation, not with preservation.
Compulsory annuitisation: fund transfers for over-55’s
The reforms provide that provident fund members over the age off 55 (at implementation date) would be exempt from the annuitisation requirements. There was some uncertainty as to whether the vested right relating to additional contributions would be protected if they subsequently moved funds.
Government confirms that these will be protected on transfer to another provident fund. However, if the transfer is to a pension fund, then subsequent contributions to the pension fund will have to be annuitized.
The apportionment of s37D deductions
Section 37D of the Pension Funds Act provides for a registered fund to make certain deductions from pension benefits. The question was: will the deduction be off the vested right or from subsequent contributions?
Government holds that all deductions from retirement benefits in terms of section 37D of the PFA will reduce the vested right. However, in divorce cases the deduction will proportionally reduce the vested and non-vested rights, to allow the vested right to be attributed in a fair manner between the ex-spouses. Legislation will be amended accordingly.
Allocation of withdrawal benefits
Where a provident fund member transfers to a preservation fund or other type of transferee fund after 1 March 2016, the transfer will have both a vested and a non-vested portion (contributions and growth after 1 March 2016). The question arises as to how a withdrawal benefit (claimed after implementation date) will be allocated between the two.
The legislation will be clarified to indicate that withdrawals from a preservation fund will be treated in the same manner as deductions from a provident fund after 1 March 2016. In other words, withdrawals will be taken off the vested right portion before the non-vested right portion.
Death benefit: avoiding estate duty on contributions not claimed for tax
To close a tax loophole, with respect to death benefits, retirement fund contributions not claimed for tax will be included in the dutiable estate. Objections were raised that this will be tantamount to retrospective legislation if past contributions included in the dutiable value of the estate. Taxpayers should not be penalised for planning their tax affairs according to the legislation at the time.
Government has consequently amended the proposal to only include contributions that were not eligible for a deduction or an exemption that were made on or after 1 March 2015.
