News

Posted on February 27th, 2009 in Industry News

The Revenue Laws Amendment Act, promulgated on 8 January 2009, has brought about many changes in the way that retirement fund benefits are taxed. These changes will particularly affect members who withdraw or transfer out of a retirement fund, as well as those who are divorced or who are planning on getting divorced. Death benefits and beneficiary funds are also affected.

1. Retirement Fund Withdrawals

With effect from 1 March 2009, the tax-free amount in respect of withdrawal and dissolution benefits will be increased from R1 800 to R22 500. The R22 500 will be reduced by any previous tax-free amounts enjoyed on or after 1 March 2009 over the member’s lifetime i.e. pre-retirement withdrawals will be taxed on a cumulative basis (subsequent pre-retirement withdrawals will be added and taxed at higher rates, as per the table below).

The balance of the withdrawal or dissolution benefit (other than amounts transferred tax-free to other funds) will be taxed as follows:

It also appears that the R300 000 tax-free amount upon retirement or death will be reduced by the R22 500 tax free amount, as well as any previous lump sum withdrawal or dissolution benefits received by or accrued to the member on or after 1 March 2009. We are still seeking more clarity on this issue and will inform you accordingly.

2. Divorce

The treatment of divorce benefits is undergoing a transition at the moment, with the result that, depending on the date of the divorce and the date at which the non-member spouse elects payment, tax treatment varies significantly:

Our article Your Retirement Fund and Divorce in this newsletter provides more detail on this matter and illustrates the tax calculation in a number of scenarios.

3. Withdrawal Accrual Date

Regardless of the provisions of the rules of any fund, a lump sum withdrawal benefit accrues to the member on the earliest of the following dates:

• the date that the member elects to have the benefit paid to them, or;
• the date on which the benefit is transferred to another fund; or
• should the member die after withdrawal, but before making an election, the date of the member’s death.

Previously, the date of withdrawal (e.g. resignation) was normally regarded as the accrual date.

4. Pension To Provident Fund Transfer

Any transfer from a pension fund (or pension preservation fund) to a provident fund (or provident preservation fund) will be taxable in full as a withdrawal benefit. In the past, it was possible to transfer employer contributions tax-free from a pension fund to a provident fund in respect of members who remained in the service of the employer.

5. Death Benefits

Where a lump sum death benefit becomes payable in terms of the rules of the fund, but the dependants or nominees elect an annuity that is purchased or provided by the fund, the benefit is not seen as a lump sum and no tax is therefore payable in terms of the Second Schedule to the Income Tax Act.

Any lump sum death benefit will only be taxable on the date of payment in terms of Section 37C and not necessarily in the year the member died.

Lump sum death benefits from a retirement fund will no longer be subject to estate duty where the member dies on or after 1 January 2009.

6. Beneficiary Funds

Beneficiary Funds were introduced by the Financial Services Laws General Amendment Act in 2008 as funds that receive, administer, invest and pay death benefits in terms of Section 37C of the Pension Funds Act. These funds now replace Trusts.

A retirement fund may pay the death benefit to a beneficiary fund. For tax purposes, no lump sum is deemed to accrue at this point. When the beneficiary receives payment from the beneficiary fund, the beneficiary will be taxed. Where the benefit previously formed part of a trust and was transferred to the beneficiary fund, it will not be taxed again.

7. Surplus Payments To Pensioners

Previously, it was uncertain whether tax free surplus apportionment lump sums could be paid to pensioners or whether the surplus had to be included in their pensions. The definitions of “pension fund” and “provident fund” have been amended to allow the payment of, among others, lump sums to pensioners following a surplus apportionment in terms of section 15B of the Pension Funds Act and these lump sum payments will now also be tax free.

8. Unclaimed Benefits

From 1 January 2009, where a lump sum benefit is paid to a preservation fund as an unclaimed benefit, no lump sum benefit will be deemed to have accrued (payment into the unclaimed benefit fund is tax free).

Withdrawal benefits from these unclaimed benefit funds will become taxable:

• on the date the member elects to have the benefit paid;
• on the date on which the benefit is transferred to another fund;
• on the date of death.

whichever is the earliest.

GN35 (dealing with the taxation of the unclaimed benefit) will no longer apply.

Withdrawal benefits, retirement benefits and death benefits may be paid from an unclaimed benefit fund and these benefits are taxed in the same way as exits from a pension or provident fund.

February 2009
This article was written by Adri du Plessis.

Adri du Plessis

Legal and Compliance Manager

Adri completed her B.Comm (Law) and B.Proc degrees at the University of Port Elizabeth (now the NMMU).  She commenced employment in the Employee Benefits industry in 1997 as a legal documents drafter for a small Employee Benefits Administrator, Multisure (Pty) Ltd, in Johannesburg. When Multisure (Pty) Ltd was sold to PSG she became a Legal Co-Ordinator at PSG, before being appointed as the Compliance Manager for Hollard Employee Benefits in 2000.  She obtained her LLB part-time through the University of South Africa in 2001 and also obtained her CFP in 2002.  She moved to Port Elizabeth and worked at Moonstone Compliance (Pty) Ltd in 2005, before joining South City Employee Benefit Consultants (Pty) Ltd later that same year.

Adri is a member of the Pensions Lawyers Association and the Financial Planning Institute of South Africa.