2 OF 2021
Taxation Laws Amendment Act, 23 of 2020 (TLAA)
The TLAA was promulgated on 20 January 2021.
The noteworthy changes are as follows:
Estate duty
A technical correction has been made to the Estate Duty Act. Contributions that did not previously qualify for a deduction, and then used as a deduction against the retirement fund lump-sum at death, will be added to the deceased’s estate as deemed property for estate duty purposes, unless it is used to purchase an annuity.
Effective date 30 October 2019, in respect of persons who died on or after 30 October 2019 and any contributions made on or after 1 March 2016.
Clarifying deductions in respect of contributions to retirement funds
In calculating the taxable portion of retirement lump-sum benefits, in terms of the Second Schedule to the Income Tax Act (‘Act’), paragraphs 5(1)(a) and 6(1)(b) provide for the deduction of amounts that did not previously qualify for an income tax deduction as a contribution in terms of section 11F of the Act.
However, paragraphs 5(1)(a) and 6(1)(b) only refer to “the person’s own contributions”, which inadvertently prevents employer retirement fund contributions made on behalf of employees since 1 March 2016 from qualifying for a deduction when calculating the taxable portion of retirement lump-sum benefits.
In order to ensure that both employer and employee contributions to pension, provident and retirement annuity funds qualify for a deduction in terms of paragraphs 5(1)(a) and 6(1)(b) of the Second Schedule, changes were made to the paragraphs and the reference to a “person’s own contributions” is replaced with a reference to “any contributions”.
In order to ensure that the proposed changes cater for all employer contributions made on behalf of employees since the introduction of section 11F, the effective date for the amendments was aligned with the effective date of section 11F, which is 1 March 2016.
Withdrawing retirement funds upon emigration
Currently, the definitions of pension preservation fund, provident preservation fund and retirement annuity fund in section 1 of the Income Tax Act make provision for a payment of lump-sum benefits when a member withdraws from the retirement fund due to that member emigrating from South Africa and such emigration is recognised by the South African Reserve Bank (SARB) for exchange control purposes.
The definitions are amended to remove the reference to payment of lump-sum benefits when a member financially emigrates from South Africa. A new test is inserted which will make provision for the payment of lump-sum benefits when a member ceases to be a South African tax resident as defined in the Act and such member has remained a non-tax resident for at least three consecutive years or longer. The amendments will come into operation on 1 March 2021.
However, as a transitionary measure, all complete applications received by SARB before 1 March 2021 will be finalised through the existing process, provided they are approved by SARB before 1 March 2022.
Reviewing the tax treatment of pensions
Changes were introduced in the 2019 tax law amendments to ensure that in a case where a taxpayer receives two or more sources of income, including a retirement fund or an insurer paying a pension, the tax rebates are not taken into account by the retirement fund or insurer when employees’ tax in respect of the pension, for a specific year of assessment, is determined.
The effective date of 1 March 2021 is extended until 1 March 2022.
Trust initially nominated as the owner of a living annuity upon the death of the original annuitant
When a trust was initially nominated as the owner of a living annuity upon the death of the original annuitant and the trust is subsequently terminated, such trust is unable to make payments to its nominees, as the definition of living annuity only refers to “on the death of the member or former member”. This anomaly is rectified by amending the definition of living annuity in the Act to allow for a lump-sum payment to such a trust that is in the process of being terminated and the amount will be taxable in the trust immediately prior to the date of termination of the trust according to the retirement fund tax table for retirement and death.
The change comes into effect on 1 March 2021.
Annuitisation of provident funds
In a nutshell, the annuitisation reforms entail that it will be compulsory for a provident fund or provident preservation fund member to convert at least two-thirds of his/her benefit into an annuity at retirement.
Vested rights:
- The annuitisation requirements will not apply to a member’s accrued benefit in a provident fund or provident preservation fund as at 28 February 2021 or future investment return thereon. This protection will apply irrespective of whether the member’s benefit remains in the provident or provident preservation fund or is transferred to another retirement fund.
- A member of a provident fund who is 55 years or older as at 1 March 2021 will not be subject to the new annuitisation requirements. However, should such a member transfer to another retirement fund, the contributions to such other fund after 1 March 2021 will not be protected.
The transfer of benefits to provident and provident preservation funds from other retirement funds, including from pension funds, will be tax-free.
The effective date of reforms relating to annuitisation remains 1 March 2021 and no further postponement will be made. A couple of technical amendments relating to the annuitisation of provident funds have been made, including the extension of vested rights to provident preservation fund members and the clarification that deductions in terms of section 37D of the Pension Funds Act should proportionally reduce vested and non-vested rights.
Amending the 183-day rule to the foreign remuneration exemption
Currently, South African residents who spent more than 183 days during any twelve-month period working outside South Africa would have qualified for tax exemption in respect of their remuneration. In order to take into account the lockdown periods, 66 days (from 27 March 2020 until 31 May 2020) will be subtracted from 183 days. In order to qualify for exemption, the number of days that a person spent working outside South Africa will therefore be reduced to 117 days, for the tax year 1 March 2020 to 28 Feb 2021.
The change is deemed to have come into effect on 29 February 2020.