Retirement reform

On 14 December 2021, Treasury issued two Discussion Papers, for consultation:

Discussion Paper one: Encouraging South Africans to save more for retirement – which deals mainly with the two-pot system and auto-enrolment; and
Discussion Paper two: Governance of umbrella funds.

We did not see anything new on these proposals in the Budget. It would be premature for Treasury to release further details, at this stage, as it still in in the consultation phase related to the two Discussion Papers. Treasury states that “Public comments on the tax treatment of contributions to the two pots are being reviewed in preparation for public workshops, to be followed by legislative amendments”.

Something I found interesting in the Budget was that Treasury stated that Discussion Paper two proposes that “members of a commercial umbrella fund should elect at least 50 per cent of the members of the board of trustees. At present, this is not a requirement for commercial umbrella funds, unlike in other occupational funds”. (Own emphasis.)

I did not read this proposal into the Discussion Paper. My understanding was rather that Treasury was considering, among other things, legislating committees akin to the current umbrella fund management committees (similar to the UK concept of Independent Governance Committees) which would work alongside fund boards and have specific powers and obligations. However, it is early days to claim to have an understanding of exactly what Treasury intends from the proposals. We have a long way to go still…

Regulation 28 to the Pension Funds Act and infrastructure

The Budget Review notes that the amendments have been through two rounds of public consultation and will be gazetted into law by March 2022.

Offshore allowance

Local “insurance, retirement and savings funds” may invest up to 45% (previously 30%) of their capital offshore. This is inclusive of the 10% allowance for investments into other African countries.

When can we expect tabling of the Conduct of Financial Institutions Bill (“COFI”)

Treasury has revised COFI based on feedback from stakeholders; and
that the Bill is expected to be tabled in Parliament in early 2022.

Transformation

The Financial Sector Conduct Authority (“FSCA”) will publish its strategy for public comment, in February 2022, outlining its approach to financial sector transformation and how it fits into legislation, including the COFI requirements. Consultations will then be held with stakeholders
Targets in the Financial Sector Code are being reviewed and will be submitted to the Financial Sector Transformation Council for approval in 2022. These will be published for comment.

Financial inclusion strategy

In 2020, Treasury published a draft policy paper, “An Inclusive Financial Sector for All”, for public comment. It aims to establish a policy framework for financial inclusion, especially of individuals; to extend access to financial services for SMME;, and to leverage a more diversified provider and distribution base for financial services.

Comments have been received and workshops held with stakeholders in 2021 which resulted in the policy framework being revise. This will be finalised for formal adoption. National Treasury will work with industry and others to develop a financial inclusion strategy to implement the new policy framework from 2023 to 2033, by setting targets as well as monitoring and evaluation mechanisms.

Crypto assets

In June 2021, the Intergovernmental Fintech Working Group published a position paper on crypto assets, setting out an approach to regulating crypto assets. Based on this paper, authorities work currently includes:

Including crypto asset service providers as accountable institutions within the Financial Intelligence Centre Act (2001) (“FICA”) to address money laundering and terror risk financing through crypto assets. In addition, to align to the standards set by the Financial Action Task Force. The proposed amendments to FICA are expected to be finalised during 2022; and
Protecting consumers by considering the declaration of crypto assets as a financial product under the Financial Advisory and Intermediary Services Act (2002) (“FAIS”). Any person providing advice or intermediary services related to crypto assets would then have to be recognised as a financial services provider under FAIS. This work is expected to be finalised during 2022.

Non-tax residents in South African funds

Background

The draft tax changes that were previously proposed, for individuals who have ceased to be tax resident in South Africa and who are still members of a fund in South Africa, fizzled last year as Treasury took comments on board and considered that multiple tax treaties would need to be revised to make the change happen.

Treasury concern is that if a member of a fund ceases to be a tax resident and later retires from the fund or dies, the Income Tax Act deems such amounts to be from a South African source, thus remaining within South African tax jurisdiction, despite the member no longer being a South African tax resident. However, the member is already a tax resident of another country and the benefit may be subject to tax in that country and not South Africa as a result of a tax treaty.

Government has not given up on this initiative and intends to start these tax treaty negotiations this year.

Technical amendments for retirement funds

There were a number of technical amendments to the Income Tax Act that were proposed:

To allow retirement annuity fund members to transfer one or more contracts in a particular retirement annuity fund, subject to certain conditions.
So that transfers into public-sector funds of vested rights related to compulsory annuitisation will remain protected.
To correct the anomaly whereby a member of a provident fund, who is younger than 55, retires from the provident fund for reasons other than ill health, any lump sum received is taxed as a withdrawal benefit rather than a retirement benefit.
To ensure that contributions to a pension fund made before 1 March 2021 are also tax‐neutral on transfer.

What we didn’t see in Budget 2022 and would have been nice (ok… great)

Clarifications in relation to uncertain compulsory annuitisation issues.
Softening on the issue of compulsory annuitisation and members who are 55 years and older. If these members start participating in a fund after 1 March 2021 (that they were not members of on 1 March 2021) their ongoing contributions to that new fund will not be vested. Unfortunately, there has been no indication that this will change and so this will continue to affect portability of these members.
There is no increase in the contribution limits for tax-free savings accounts.

There were obviously other relevant sections and we will have to tease these all out over the coming days.

ENDS