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Comprehensive industry update – several topics

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.

Transfers between retirement funds by members who are 55 years or older

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 ame