Lize de la Harpe, Senior Legal Advisor at Sanlam Corporate
On 1 August 2024 National Assembly published the Revenue Laws Amendment Bill, 2024 (“the RLAB”).
The RLAB proposes technical changes to the Revenue Laws Amendment Act, 2024, which established the Two-pot system coming into effect on 1 September 2024.
The reasons for the changes are as follows:
- Clarification was needed of the existing language as set out in the RLAA.
- The need to simplify the directives system and to cater for speedy implementation of this reform.
- Corrections required to the treatment of the vested component upon the member ceasing to be a tax resident.
The proposed changes
Section 37D deductions
The RLAA allows for section 37D deductions, as outlined in the Pension Funds Act of 1956, against the savings component, vested component, and retirement components. However, while section 37D deductions are typically taxed under paragraph 2(1)(b) of the Second Schedule to the Income Tax Act, maintenance orders are taxed under section 7(11) of the Income Tax Act. The RLAB clarifies that maintenance orders are not taxed the same way as other section 37D deductions.
The RLAB proposes drafting changes to enhance clarity and precision in the wording to ensure that amounts that are allowed to be deducted from a benefit, in accordance with section 37D (1)(a), (b), (c) or (d)(i) of the Pension Funds Act, are proportionally deducted from each component. The sum of these amounts deducted from each component is deemed to be a lump sum benefit contemplated in paragraph 2(1)(b) of the Second Schedule to the Act. Therefore, this proposal will apply to all three components.
The RLAB also proposes consequential amendments relating to the alignment of the Income Tax Act with amendments made by Pension Funds Amendment Act, 2024 as section 37D(1)(d)(iB) of the Pension Funds Amendment Act refers to interim maintenance orders granted by the court in terms of rule 43 of the High Court rules or rule 58 of the Magistrates’ Court rules made under section 6 of the Rules Board for Courts of Law Act, 1985.
Commutation upon ceasing to be a tax resident
Prior to the RLAA, only members of preservation funds and retirement annuity funds could commute their fund value upon ceasing to be a tax resident for an uninterrupted period of 3 years. The RLAA extended this to pension fund and provident fund members. The amendments however were drafted as such that the vested components and/or savings component of certain funds are also subject to the 3 year non-residency requirement.
The RLAB clarifies the position with regards to the vested components of the pension and provident funds and all savings components being that these components are not subject to the 3 year non residency rule.
Transfers between components
The RLAA amendments proposed the introduction of tax-free transfers between components as well as the introduction of paragraph 6B of the Second Schedule to the Income Tax Act, dealing with these transfers wherein, members are allowed to make intra-fund transfers at any time and these transfers will be treated as tax-free transfers and be subject to the fund obtaining a tax directive.
In order to simplify the directives system for both administrators and SARS for speedy implementation, the RLAB proposes that the requirement to obtain a tax directive when transferring the seeding amount from the ‘vested component’ to the ‘savings component’ be removed.
In addition, it is proposed that reallocations of amounts between the three components within the same fund is not treated as transfers for income tax purposes and that the requirement to obtain a directive for reallocations between the three components within the same fund be withdrawn.
Conclusion
The deadline for public comment on the RLAB is 31 August 2024.
The industry was hoping to see further clarity on a few outstanding issues (for example the exclusion of members of liquidating funds as well as unclaimed members of funds), but the RLAB only addresses the above.
ENDS
