A. Taxation Laws Amendment Act, 2014
1. Retirement benefit accrual date
Current position
Lump sum benefits which are payable on members’ retirement or death are deemed to accrue to members for tax purposes, on the earliest date on which:
- An election is made
- A transfer takes place
- The date of death, or
- The date retirement.
Changes effective from 1 March 2015
With effect from 1 March 2015, the date on which a lump sum benefit accrues to the member at retirement will no longer depend on the fund’s normal retirement age. From 1 March 2015, the lump sum retirement benefit will accrue on the date that the member elects to receive their lump sum retirement benefit, for tax purposes.
As a result, retirement benefits will not necessarily have to be paid to members at normal retirement date. This provision will make it easier to preserve retirement benefits at retirement.
Funds will still need to apply to SARS for a tax directive on the retirement benefit, but only on the date the member makes their election. The lump sum benefit communicated to SARS must match the amount in the fund at the member’s chosen retirement date.
Provisions of the Income Tax Act which change from 1 March 2015
Definition of “Retirement Date”: This provides that a member’s retirement date will be the date on which he or she elects to retire, in terms of the rules of their fund.
Definition of “Retirement Interest”: This is now defined as the member’s share of fund per the fund’s rules, on the date on which “he or she elects to retire”.
Paragraph 4(1) of the Second Schedule of the Income Income Tax Act (“the ITA”) will be amended and subpara (d) 1 will be deleted.
2. Tax-Free savings accounts
Current position
Not implemented as of yet.
Changes effective from 1 March 2015
- Individuals may contribute up to R30 000 pa into a tax exempt savings accounts, with a lifetime contribution limit of R500 000
- The investment returns on these savings will not be subject to income, dividends withholding or capital gains tax.
- Individuals may open multiple tax free savings accounts
- Individuals can withdraw funds from the tax free savings accounts, but may not replace these withdrawals
- Contributions above the annual or lifetime contribution limit will be taxed by SARS at 40% in the tax year the excess contribution is made.
3. Disability and life policies
Current position
- The taxation of premiums and payouts in respect of lump sum disability/group life policies and income replacement disability policies is not aligned.
- Premiums paid on lump sum disability and group life policies are not tax deductible and payouts are tax-free.
- Premiums paid on income replacement benefits are tax deductible but the monthly income benefit is taxed.
Changes effective from 1 March 2015
- To align the tax treatment, all disability and life policies will now be taxed in the same way
- Premiums paid in respect of lump sum disability, group life and income replacement policies will not be tax deductible, but payouts will be tax-free
- If the policy is in the name of the employer and the premiums attract fringe benefits tax, then benefit will be paid out tax-free.
B. Information Letter 4 of 2014 on the taxation of income protection policies from 1 March 2015
The Registrar of Long-term and Short-term Insurance issued Information Letter 4/2014 to long-term and short-term insurers on 10 December 2014. This Information Letter sets out the implications of the amendment to the Income Tax Act (the Act) effective from 1 March 2015, relating to income protection policies and provides clarity on concerns raised with the Registrar.
In addition to drawing attention to the changes on how income protection policies will be taxed. It further clarified the following:
- Insurers must communicate the tax changes to all policyholders before 1 March 2015
- All future marketing material relating to these policies must include these tax changes
- Commission will be clawed back if the sum assured is reduced. This could impact the financial advice given by intermediaries. However, the Information Letter reminds intermediaries that they are bound by the FAIS General Code of Conduct and must act in accordance with the code at all times.
C. SARS Binding General Ruling 25 (“BGR25”) and the Taxation Laws Amendment Act, 2014: Taxation of pensions and lump sums where service has been performed outside of South Africa (“SA”)
On 14 November 2014 the South African Revenue Service (“SARS”) issued Binding General Ruling 25 (“BGR25”). This clarifies the income tax exemptions which apply to fund benefits from a foreign source.
If a fund member performs services outside of SA, the source of the service will be considered to be outside of SA for the portion of services performed outside of SA and will be exempt from tax in South Africa. Retirement funds are no longer required to be “foreign retirement funds” to obtain the exemption.
However, the Double Taxation Agreement with the country of the members’ residence will control which country can levy the tax, whether or not the income is from a South African source.
Section 9(2)(i) of The Income Tax Act
Section 9(2)(i) of the Income Tax Act applies to non-SA residents. In the past it applied to pension income only. However, the Taxation Laws Amendment Act, 2014 provides that this will apply to lump sums too, in respect of that part of the member’s service performed in SA. This change is effective from 1 March 2015.
Section 10(1)(gC)(ii) of The Income Tax Act: Clarification of “Source outside of SA”
The SARS has clarified that “source outside of the Republic” in section 10(1)(gC)(ii) of the Income Tax Act refers to where the services have been rendered. The portion of a pension which relates to services performed outside of SA, is exempt from income tax.
Effect on pensioners’ tax assessments:
- Future pensions: pensioners who are affected must approach SARS for a directive every year, regarding their PAYE tax
- Past tax assessments: affected pensioners should take advice on whether they should re-open tax assessments
- Future tax assessments: if pensioners have not been assessed yet but PAYE has been withheld and paid to SARS, pensioners will need to claim a refund from SARS.
D. Taxation of severance and retrenchment benefits
This not a new legal development, but rather a reminder on the tax treatment of severance amd retrenchment benefits.
Since 1 March 2011, special tax rates apply to severance benefits, based on the retirement lump sum tax table. This means that the first R500 000 is not subject to tax, the next R200 000 is taxed at 18%, the subsequent R350 000 at 27% and all amounts above R1 050 000 at 36%. Leave pay and pro-rata bonuses that are paid at the time of the employment is terminated do not form part of a severance benefit and are subject to normal income tax. To qualify for this special “severance” tax rate, the employer must pay the employee a lump sum as a result of their employment having been, amongst other things, terminated or lost, for example if:
- the employer stops (or intends to stop) trading; or
- the employer embarks on a general reduction in personnel (not applicable to restructuring of employees).
It is important to understand that this severance benefit is, for tax purposes, treated as a retirement lump sum payment. This has the following consequences:
- The employer must submit a tax directive application to SARS before the lump sum amount can be paid
- The amount taxed in terms of the retirement lump sum tax table is reduced by previous lump sum benefits received
- The lump sum benefit received reduces the lump sum tax benefit available at a subsequent withdrawal or at retirement from a retirement fund
The retrenchment benefit refers to the withdrawal from an occupational retirement fund at retrenchment (as per the above criteria). Such a retrenchment benefit is also taxed per the retirement lump sum tax table, again subject to the cumulative value of any previous retirement fund withdrawals made.
Important caveat: If the retrenchment benefit is transferred to a preservation fund, it loses its “identity” as a retrenchment benefit. Although the employee will be entitled to make one full or partial withdrawal from the preservation fund before retirement (earliest age 55), this will be taxed as a normal withdrawal from the preservation fund, per the withdrawal lump sum tax table: the first R25 000 is not taxed, the balance to R660 000 is taxed at 18%, the balance to R990 000 at 27% and the remainder at 36%.
This is an important consideration. Employees who choose to preserve with the intention of accessing this money before retirement, lose out on the-tax free benefit they could have enjoyed, either at the time of retrenchment or at retirement.
