March 17, 2020

1 of 2020

The Taxation Laws Amendment Act and Tax Administration Laws Amendment Act

The Taxation Laws Amendment Act, 34 of 2019 and the Tax Administration Laws Amendment Act, 33 of 2019 were promulgated on 15 January 2020.

The noteworthy changes are as follows:

Reviewing the tax treatment of pensions

A new paragraph 2B is added to the Fourth Schedule to the Income Tax Act to cater for individuals who receive an annuity and also receive income from another employer. The policy rationale regarding this amendment was initially to assist surviving spouses. Upon the death of a member of a retirement fund, the surviving spouse may be entitled to receive a monthly spouse’s pension from the retirement fund, which is taxable in the surviving spouse’s hands. If the surviving spouse also receives a salary or other income, that salary or other income is added to the spouse’s pension to determine his or her correct tax liability on assessment.

The result on assessment is often that the surviving spouse has a tax liability that exceeds the employee’s tax withheld by the employer and retirement fund(s) during the year of assessment since the tax rebate was applied to the multiple sources of employment income and the aggregation of income may result in a higher tax bracket being applicable. The surviving spouse may not foresee the additional tax liability which creates a cash flow burden and tax debt for the surviving spouse.

As taxpayers other than surviving spouses are also impacted, the legislative changes were extended to apply to any taxpayer receiving two or more sources of employment income, provided that one of those sources is a retirement fund or an insurer paying a pension. In order to alleviate the financial burden, the tax rebate will be disregarded by the annuity provider when calculating PAYE, where SARS issues a directive that the amounts must be disregarded. Annuity providers will therefore have to apply for tax directives on all the annuities payable to annuitants every year.

The effective date for the amendment is 1 March 2021 to afford SARS, retirement funds and insurers sufficient time to implement the changes.

Exemption relating to annuities from a provident or provident preservation fund

Members of provident funds receiving an annuity find themselves in a position where any non-deductible contributions made during active membership could only be off-set against the lump sum received on retirement and the balance of the non-deductible contributions in excess of the lump sum received is forfeited or lost. In order to promote uniform tax treatment of all retirement funds, provident fund members who receive annuities will also qualify for the exemption on any non-deductible contributions when determining the taxable portion of annuities.

The amendment will apply in relation to annuities received on or after 1 March 2020.

With effect from 1 March 2021, a further provision may be introduced namely that provident and provident preservation fund members may only qualify for the exemption where not more than one-third of the member’s benefit was taken as a lump sum.

Aligning the effective date of tax neutral transfers between retirement funds with the effective date of all retirement reforms

The annuitisation requirements for provident funds have repeatedly been postponed and each postponement of the effective date requires several consequential amendments to various provisions of the Income Tax Act. An oversight occurred with the latest postponement which resulted in tax-free transfers from pension funds to provident or provident preservation funds with effect from 1 March 2019. In order to correct this, changes are made to align the effective date of the tax-free transfers from pension funds to provident funds or provident preservation funds with the current effective date of annuitisation related reforms, which is 1 March 2021.

Reviewing the measures aimed at avoiding estate duty

Retirement benefits are excluded from estate duty upon death. In 2015, changes were made in section 3(2) of the Estate Duty Act to prevent individuals from avoiding estate duty by making a large contribution into a retirement fund. However, it erroneously includes not only excess contributions in terms of sections 11(k), 11(n) or 11F of the Income Tax Act, but also amounts which are not taken into consideration as a deduction in terms of the Second Schedule of the Income Tax Act. In order to rectify this, retrospective changes are made to provide that all contributions made to a retirement fund which was allowed as a deduction in terms of paragraph 5 of the Second Schedule when the taxable portion of the lump sum benefit is determined in respect of the deceased, will attract estate duty.

This means that all amounts that qualified for a deduction before the deceased’s death, will be exempt from estate duty and amounts that only qualify for a deduction in calculating the taxable portion of the lump sum death benefit, will attract estate duty. The amendments shall be deemed to apply to any contributions made on or after 1 March 2016 and will apply in respect of the estate of a person who dies on or after 30 October 2019.

Transfers from a provident fund to a pension fund with the same participating employer

The Income Tax Act provides that membership of a fund throughout the period of employment must be a condition of employment. The effect of this is that a member cannot choose to terminate his or her membership in his or her provident fund in order to transfer to a pension fund during his or her period of employment.

The amendment affords employees the ability to elect to transfer from a provident fund into a pension fund prior to retirement, provided that the same employer is participating in the provident fund and the pension fund.

This amendment came into effect on 1 March 2019.

Tax treatment of bulk payments to former members of closed funds

The Income Tax Act read together with a notice published by the Minister of Finance, makes provision for extraordinary lump sum payments made by registered, active retirement funds to qualify for tax exemption. When the notice was published by the Minister of Finance, some retirement funds were no longer registered. These deregistered retirement funds had already paid the extraordinary lump sum payments to the fund administrators. The fund administrators had not yet paid these extraordinary lump sum payments to the affected members and/or beneficiaries. These lump sum payments are currently still held by the respective fund administrators.

Extraordinary lump sums (as prescribed in par 2C of the Second Schedule) currently held by administrators on behalf of deregistered funds will also qualify for tax-exempt treatment.

The amendment came into effect on 15 January 2020.