Medium-Term Budget Policy Statement speech and Taxation Laws Amendment Act
The Medium-Term Budget Policy Statement speech was delivered by the Minister of Finance on 11 November 2021, during which the Taxation Laws Amendment Bill (TLAB) was released. The Taxation Laws Amendment Act, 20 of 2021 was subsequently promulgated on 19 January 2022.
The noteworthy changes are the following [also refer to Retirement Matters 5/2021, when the draft Taxation Laws Amendment Bill was released]:
Allowing members to acquire more than one annuity on retirement
Clarification was made in the Income Tax Act that a combination of annuities may be purchased or provided when a member retires. Members will therefore be able to use their retirement benefit to purchase a combination of living and guaranteed/life annuities. These annuities may be provided by the fund, it may be purchased from an insurer, or through a combination of those methods.
If a member purchases more than one annuity with his/her retirement benefit, each annuity’s value will have to be at least R165 000 when it is purchased. The effective date of the changes is 1 March 2022.
It was further confirmed in Binding General Ruling (BGR) 58 published by SARS, that an annuity provided on retirement may not be transferred, assigned, reduced, hypothecated or attached by creditors and must be compulsory, non-commutable, payable for and based on the lifetime of the retiring member. The BGR applies from 26 February 2021, being the date of the withdrawal of SARS General Notes 18 and 18A.
Members of retirement funds have the option to delay receipt of their retirement benefits to a date later than their actual retirement from employment. The reason for this is that retirement benefits only accrue for tax purposes when a member elects to start receiving the retirement benefit. Therefore, a member’s retirement benefit may be deferred in his/her fund for as long as allowed in the fund rules.
In 2017 and 2019, the tax laws were amended to allow deferred retirees to transfer their benefits tax-free to a retirement annuity fund, or to a preservation fund after their actual retirement from employment, but before they elected to receive their retirement benefit from the fund.
As a result of those amendments, the tax legislation unfortunately provided that if a member of a preservation fund transfers his/her benefit to another preservation fund after the age of 55, the transfer would be subject to taxation.
The tax policy is not to tax transfers from a preservation fund to another preservation fund in respect of members after the age of 55 and clarity has now been provided in the TLAA that transfers between preservation funds after members have reached the age of 55 will be tax-free. The effective date is 1 March 2022.
Clarifying the calculation of the fringe benefit in relation to employer contribution to a retirement fund
Self-insured risk benefits will going forward be classified as defined contribution benefits, meaning the fringe benefit (to be taxed in the hands of employees) will be based on the actual contribution made to a fund and not on the prescribed formula for defined benefit funds. The effective date is 1 March 2022.
Tax treatment of pensioners with two or more sources of employment income
Changes were introduced to tax laws in 2019 to ensure that in a case where a pensioner receives two or more sources of employment income (one source being a retirement fund or an insurer paying a pension), the tax rebate which taxpayers are entitled to, will only be applied once during the tax year and not on both income streams.
The initial effective date of this change was previously extended to 1 March 2022.
It is now confirmed that SARS will consider all the affected taxpayers and provide the effective tax rate, which will be a fixed percentage. SARS will then issue tax directives before the end of the tax year to the entity paying the pensions (the administrator of the fund or the insurer), instructing the tax rate at which PAYE must be calculated. SARS has recently sent communication to all stakeholders, in which they set out how this will be implemented in practice. SARS also previously indicated that they would communicate to those pensioners, explaining the changes.
Where a pensioner’s circumstances change during the year, such as where other employment income ceases or the pensioner dies, the retirement fund administrator may apply the normal PAYE withholding rate, as opposed to the withholding rate provided by SARS, with effect from the month in which the administrator becomes aware of the change in circumstances.
Applying tax on retirement fund interest when an individual ceases to be a tax resident
When the first draft of the TLAB was released in July 2021, one of the proposals was regarding the application of tax when a member ceases to be a tax resident. Refer to Retirement Matters 5/2021: It is proposed that when a member of a retirement fund ceases to be a SA tax resident, it will be deemed that the member has withdrawn from the fund on the day before he/she ceases to be a SA tax resident as defined. Those benefits will therefore be subject to tax in SA at the prevailing withdrawal or retirement tax rates and the value of the benefit will be determined on the day before SA tax residency is ceased. The onus of ensuring a valuation from the fund on that date, as well as notifying SARS that they have ceased being a SA tax resident, will rest with the member.
It was confirmed that the proposed amendments will be withdrawn in the 2021 TLAB and further amendments will be considered in the next legislative cycle to address the complexities raised through the comment cycle.
Early access and compulsory preservation (the “two-pot system”)
The early access and compulsory preservation proposals/framework was not included in the Medium-Term Budget Policy Statement speech, as expected. Instead, National Treasury published two papers on 14 December 2021, on proposed further retirement reforms for public comment – Encouraging South African households to save more for retirement and Governance of umbrella funds.
Government recognises the financial difficulty many South Africans are facing due to the Covid-19 pandemic and has engaged with the regulators and other key stakeholders to work out relief measures for consumers. Even though retirement savings should preferably only be used for their intended reason, namely retirement provision, Government recognises that there might be a need to allow some access to accumulated retirement savings before retirement and limited pre-retirement withdrawals are therefore being considered. Only allowing members access to their retirement savings on withdrawal, creates an incentive for employees to resign, making them vulnerable to financial problems should they be unable to find employment again.
Pre-retirement withdrawals must however, still allow for safeguarding of retirement savings. Encouraging South African households to save more for retirement therefore makes provision for partial access to retirement funds through a “two-pot” system. Retirement contributions will be channelled to two pots, where one pot of two-thirds is to be preserved until retirement, while the other one-third would enable pre-retirement access. It is proposed that one-third of any future contributions should go into the accessible pot and the other two-thirds into the preservation pot.
The accessible portion of future contributions from implementation date, will be available at any time, but can only be withdrawn once a year, depending on the fund’s ability to effect withdrawals and possibly subject to a minimum amount such as R2 000. Members should not feel compelled to make a withdrawal every year, as the option will still be available to them in future. It is also proposed that a second withdrawal be allowed within the year for any remaining amount if the member only made a partial withdrawal (i.e., did not withdraw the full access pot) – this is to mitigate the risk of members withdrawing the full amount in the fear of not having another opportunity to withdraw. The cost of any withdrawal would be paid by the withdrawing member to avoid other members having to pay for it. A member may also need to undergo retirement benefit counselling before a withdrawal may be made and members would be encouraged to increase contributions to make up for the amount withdrawn.
National Treasury also considers allowing an initial access amount, which will be in the form of the “opening balance” of the access pot, which would be available immediately, but does not have to be taken as a withdrawal.
Preservation funds and retirement annuity funds will also be required to implement a two-pot system, where transfers into preservation funds would mirror the structure in the transferring fund and the once-off withdrawal for the two-thirds preserved pot would be removed for contributions/transfers made after the implementation date.
It is also proposed that all defined benefit funds are included in the two-pot system, although the complexity of this is acknowledged by National Treasury.
The tax considerations which are under discussion includes adding withdrawals from the access pot to taxable income in the year of withdrawal; to rather tax the contributions to the access pot (in effect creating a tax-free savings account); to move to a flat deduction percentage for contributions and withdrawals; or to maintain the current tax position.
If a two-pot system is introduced to allow partial access to savings, preservation must accompany such access, to ensure sufficient retirement provision and avoid old-age poverty and reliance on the state. Encouraging South African households to save more for retirement further concerns the boosting of household savings by increasing preservation before retirement. Many members of retirement funds do not preserve their benefits, but rather “cash out” every time they change jobs. Even if members preserve their savings in a preservation fund, they are still allowed a 100% once-off withdrawal prior to retirement. The two-thirds access pot will have to be preserved until retirement, but vested rights will be honoured and members will still be able to withdraw the vested rights portion should they resign from employment. The vested rights portion will probably be the amount available to withdraw had the member resigned from employment immediately before the implementation date. The vested pot would follow a member should the member transfer to any other fund.
Currently, unless it is a condition of employment, membership of a retirement fund is voluntary. Consideration is therefore also being given to introducing automatic enrolment into the retirement system, backed by strong (tax) incentives. Not all employers provide a retirement benefit for their employees. Unless these employees self-enrol in a retirement annuity fund, they are left with no provision for retirement. The paper introduces a brief overview on what can be done to ultimately have every working person in South Africa covered in some scheme for retirement, or similar, benefits, including more vulnerable workers such as contract workers or non-unionised workers (for example domestic workers and Uber drivers).
Automatic enrolment could be the first step towards mandatory enrolment, starting with coverage for formal employment and progressing to include informal sector workers.
Government will propose legislation to compel all employers to deduct contributions to a retirement fund for all their employees. Employers would not be required to establish new funds, but will enrol their employees into existing funds, which will have to bid for the provision of retirement services or products.
The Governance of umbrella funds paperseeks to improve governance in retirement funds in general, but particularly for commercial umbrella funds. Consolidation of the retirement sector into a smaller number of bigger funds can bring cost savings to smaller employers due to economies of scale, as well as improved governance and disclosure.
The following are inter alia suggested:
The umbrella fund management board must conduct ongoing assessment of value for money for members, as shall be prescribed.
Exemption from the requirement of having 50% employee representation in a commercial umbrella fund and inclusion of more independent board members.
Board members must not serve on more than three boards in any year, so that they are not spread too thinly.
Independent board members may not be contracted to any consultant or service provider involved in the fund.
Formalisation of joint forums, to assist with the difficulty that is faced during employer and employee nomination and election of trustees to a board of an umbrella fund.
Introduction of an auction system, where umbrella funds are required to bid for the right to be a default consolidation or auto enrolment fund.
Standardised provision of information on charges to enable comparison between funds and to promote effective competition.
Comments on this paper were requested by 31 January 2022. The intention is that draft legislation will be published in line with the 2022 Budget process. The implementation year is anticipated to be 2023.
Draft Joint Standard: Cybersecurity and Cyber Resilience
The Financial Sector Conduct Authority (FSCA) and the Prudential Authority published the draft Joint Standard: Cybersecurity and Cyber Resilience Requirement for consultation on 15 December 2021. The Joint Standard sets out the minimum standards for sound practices and processes of cybersecurity and cyber resilience for specified financial institutions, which include insurers and retirement funds. It seeks to ensure that these financial institutions implement processes, and have tools and technology, which will prepare them for cyber-attacks, as well as to respond to, and recover from, such attacks. It is stated in the draft Joint Standard that it will be the responsibility of the governing body of a financial institution to ensure that the financial institution meets the requirements set out in the Joint Standard on a continual basis.
The Joint Standard is open for comments until 15 February 2022.
Draft Financial Sector and Deposit Insurance Levies Bill
In February 2021, National Treasury published the Financial Sector Levies Bill for comment. On 15 December 2021, it published the draft Financial Sector and Deposit Insurance Levies Bill (“the Levies Bill”). The Levies Bill is a revised version of the Bill published in February, having considered the comments received.
Under the funding model that will be established by the Levies Bill, the operations and functioning of the Prudential Authority, the FSCA, the Financial Services Tribunal, the Ombud Council, the Pension Funds Adjudicator, and the Office of the Ombud for Financial Services Providers will be funded by levies imposed in terms of the Levies Bill, as well as through fees charged in relation to specific functions or services performed by the aforesaid bodies. The levies payable by life insurers, retirement funds, retirement fund administrators and financial services providers are set out in the schedules to the Levies Bill.
The Levies Bill is open for comments until 7 February 2022.
FSCA three-year Regulatory Strategy document
The FSCA has released its Regulatory Strategy document which outlines its key priorities for the next three years, as is required by the Financial Sector Regulation Act. The strategic objectives and outcomes of the next three years are:
Improve industry practices to achieve fair outcomes for financial customers;
Act against misconduct to support confidence and integrity in the financial sector;
Promote the development of an innovative, inclusive, and sustainable financial system;
Empower households and small businesses to be financially resilient;
Accelerate the transformation of the FSCA into a socially responsible, efficient, and responsive organisation.
On 17 November 2021, National Treasury and the FSCA released their Retirement Fund Economies of Scale report. The report was commissioned by Nedlac to assist with its discussions on social security and retirement reforms. It uses a dataset on retirement funds up to 2018 to study the relationship between their size and costs. Data used includes detailed information on administrative expenses, membership, assets, fund type, fund class, fund status, benefit structure, member contributions and benefits paid.
The findings of the report show:
A general decrease in the number of funds;
An increase in the average fund size;
An increase in average administrative expenses per member; and
The optimal size of funds is 300 000 members. Most funds in SA are below this optimal size, while only 0.4% are above this figure.
Draft Conduct Standard: Conditions for Investments in Hedge Funds
The FSCA issued a draft Conduct Standard in October 2020 (see Retirement Matters 5/2020), the objective of which is to prescribe the conditions that a fund needs to comply with in order to invest in hedge funds. The FSCA had requested comments on the draft Conduct Standard. The FSCA has since published FSCA Communication 20 of 2021 in which it is stated that after further assessment, there is no longer a need to issue a conduct standard on the conditions for investment in hedge funds, as these are already addressed sufficiently in the Pension Funds Act.
The conditions with which preservation funds must comply are set out in the definitions of “pension preservation fund” and “provident preservation fund” in the Income Tax Act. Certain additional conditions were until now also laid down in South African Revenue Service Retirement Fund Practice Note RF 1/2012, including the condition that amounts derived from a pension fund may not be split between more than one pension preservation fund. It was also confirmed in RF1/2012 that a portion of the member’s benefit may be accessed before transferring to a preservation fund.
As a result of the annuitisation provisions, the conditions in RF1/2012 have either become obsolete or are sufficiently covered in the Income Tax Act. As a result, this practice note has been withdrawn with effect from 15 November 2021.
In terms of the provisions in the Income Tax Act, a member who has retired from employment, may still only transfer to one preservation fund and no part cash benefit is payable before transferring to the preservation fund. The reason for this is that in terms of the Income Tax Act, only the retirement interest, which means the full share of the value on the date on which the member elects to transfer, may be transferred to a preservation fund.
FSCA Communication 22 of 2021: Update on development of the cross-sectoral Conduct of Business Return
The FSCA published an update on the development of the cross-sectoral Conduct of Business Return (“Omni-CBR”) planned for financial institutions on 22 December 2021.
One of the objectives of the FSCA in the Financial Sector Regulation Act, is to monitor the extent to which the financial system is delivering fair outcomes to financial customers. To achieve this, the FSCA needs access to meaningful, reliable, measurable and comparable information on key conduct indicators across financial institutions. The Omni-CBR is intended to facilitate streamlined cross-sectoral reporting and will expand on the types of conduct indicators to be reported on by financial institutions, including banks, collective investment schemes, co-operative financial institutions, Financial Service Providers, insurers and micro-insurers, section 13B administrators and retirement funds.
To date, conduct of business statutory reporting has only been formally implemented in respect of insurers. The FSCA has been working on development of a broader Omni-CBR, which was planned for industry consultation in 2021, but according to the FSCA, it will now only engage with the financial services industry in the first quarter of this year.
The FSCA is working on an Omni-CBR roadmap that will form the basis for industry engagement. The roadmap will comprise a package of documentation, including:
A draft Omni-CBR template containing the list of conduct reporting indicators relevant to different financial institutions and financial products;
An explanatory document providing guidance on the completion of the Omni-CBR;
Background on the extensive local and international foundational work that helped inform the content and approach of the Omni-CBR;
Proposed implementation milestones to facilitate an incremental phasing in of harmonised regulatory reporting through the Omni-CBR; and
Details of various general and targeted industry consultation initiatives to solicit feedback on the content, operational impact and implementation of the Omni-CBR.
The FSCA will communicate more details about the roadmap and the engagement process during the first quarter of 2022.
Q Should payment of a death benefit be withheld in the case of an unnatural death until a police report has been received?
A The Pension Funds Adjudicator ruled in Malothane vs Sun International Provident Fund that the bloedige hand-principle should be applied to a section 37C death benefit distribution. This means that a fund should withhold the payment of benefits allocated to an accused person pending the outcome of a criminal/civil investigation and proceed with the allocation of the death benefit to the other beneficiaries of the deceased member. Once the accused has been prosecuted or acquitted, the allocation of the balance of the death benefit should be finalised. Therefore, only once the accused was found not guilty, may a portion of the death benefit allocated to him/her be paid, otherwise it should be reallocated to the other identified beneficiaries. It would be unreasonable for a fund to withhold a death benefit merely due to the fact that the deceased member died of unnatural causes. A fund could only withhold a death benefit in these circumstances if a beneficiary was a suspect in the murder of a deceased member.
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Simeka Consultants and Actuaries
15 February 2022