3 of 2020 (b)
Draft Documents Issued
Draft tax bills 2020
National Treasury released the draft 2020 Taxation Laws Amendment Bill and draft Tax Administration Laws Amendment Bill on 31 July 2020 for public comment by 31 August 2020.
The noteworthy proposals are as follows:
- 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, paragraphs 5(1)(a) and 6(1)(b) provide for deducting 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 persons own contributions” which inadvertently prevents employer retirement fund contributions on behalf of employees made 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, it is proposed that changes be made to the afore-mentioned 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 on behalf of employees made since the introduction of section 11F, it is proposed that the effective date for the proposed amendments be 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.
It is proposed that the definitions of the afore-mentioned funds be amended to remove the reference to payment of lump sum benefits when a member financially emigrates from South Africa. A new test is now 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 non-tax resident for at least three consecutive years or longer.
The proposed amendments will come into operation on 1 March 2021.
- Reviewing the tax treatment of pensions
Changes were introduced in the 2019 tax law amendments to ensure that in a case where a pensioner receives two or more sources of employment income, provided that one of those sources is a retirement fund or an insurer paying a pension, the tax rebates are not taken into account more than once when employees’ tax in respect a specific year of assessment is determined.
It is proposed that the effective date of 1 March 2021 be 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”. It is proposed that this anomaly be rectified and for the amount to be taxable in the trust immediately prior to the date of termination of the trust.
The change will come into effect on the date of promulgation of the tax laws.
- Annuitisation of provident funds
The current effective date of annuitisation related reforms is 1 March 2021. A couple of consequential amendments relating to the annuitisation of provident funds are proposed. No further postponement is proposed, and it therefore seems the annuitisation of provident funds is still planned to take effect 1 March 2021.
Draft Conduct Standard on the requirements related to the payment of pension or provident fund contributions
The FSCA issued a draft Conduct Standard on section 13A on 29 May 2020. The draft Conduct Standard was open for comments until 31 July 2020.
Section 13A deals, amongst others, with the timely payment of contributions to a fund. The draft Conduct Standard in summary provides the following:
- Employer establishing or participating in a pension or provident fund
At commencement of participation and annually thereafter, every employer must be notified by the fund of its duties, obligations and liability under section 13A. The format of the requested information required from the employer as to who will be personally liable for compliance and payment of contributions is set out in the Conduct Standard.
- Contribution statement
The employer must provide a contribution statement to the fund on a monthly basis. The minimum information which must be furnished to the fund in each contribution statement are listed.
In respect of the initial statement, the following new information (additional from current requirements) must be provided:
- The ID number of the person envisaged in section 13A to be personally liable for non-payment of contributions, as requested from the employer
- Cost-to-company salary, Income tax number, contact number, e-mail address, postal address and residential address of each member
The subsequent statements must include all of the above plus the membership number of each member and any changes from the previous statement.
- Further requirements
- The principal officer or monitoring person must within 7 days after the minimum information (the contribution statement) was due, report to the board regarding the compliance with section 13A. This proposed requirement differs from the current requirements as regulation 33 requires reporting on non-compliance, in other words it is proposed that there must be monthly reporting irrespective of whether the employer complied. The report must include details on previously unresolved matters and where the minimum information and actual contributions do not reconcile (unless the discrepancy is less than 2.5% of total contribution payable).
- The board must then ensure that any contravention is brought to the personal attention of each member, in writing. Where members cannot be identified, it must be brought to the attention of all the members of the fund or all members of the specific participating employer within 30 days of the report in (1).
- The board must within 14 days of the report in (1), report the proposed course of action to remedy the contravention to the FSCA in the format set out in the Conduct Standard. Updates on the progress must be provided to the FSCA on a monthly basis.
- If the contravention continues for 90 days, the board must within 14 days after the 90 day-period, report it to the SAPS in the format set out in the Conduct Standard. This continued contravention must be brought to the attention of the affected members, in writing, within 14 days after the expiration of the 90 days period.
- Compound interest on late or unpaid amounts may not exceed the prime rate (currently 7%), plus 2 and may not exceed the principal debt due in respect of the unpaid amounts, inclusive of all costs in recovering the unpaid amounts. The current prescribed late payment interest rate will be repealed.
- Interest shall constitute investment income for the fund and is payable by no later than the end of the second month, following the month in respect of which the amount is received, or the value transferred.
- Where the recovery of arrear contributions is outsourced to an attorney, the board must have regard to and avoid possible conflict of interest. Fees must be reasonable and may not impede the delivery of fair outcomes to members and the fund. The board must enter into an agreement to ensure that the recovered amounts must be paid into the fund’s bank account within 7 working days of receiving such amount. The agreement must also include the fee structure, the steps to be taken if the employer fails to pay, anticipated timelines and the frequency of reporting to the fund.
Comments were submitted on the draft Conduct Standard and the majority of concerns raised were regarding the practicality of additional information required and the proposed reporting timelines.
Draft Conduct Standard for Living Annuities
The FSCA issued a second draft Conduct Standard on 8 June 2020 for the criteria for living annuities which form part of a fund’s annuity strategy and invited comments by 31 July 2020. A fund will have to comply with the Conduct Standard within 6 months after the effective date, which will be the date of publication of the final document.
The Conduct Standard will not apply to members who had already retired with a living annuity before or within 6 months after the effective date of the Conduct Standard.
Regulation 39 of the Pension Funds Act requires boards of management to establish an annuity strategy for all pension funds and pension preservation funds, as well as provident funds where the rules provide that members may elect an annuity upon retirement. A retiring member’s benefit will not automatically default into a particular annuity, but the member will have to select the board of management’s preferred choice of annuity as set out in the fund’s annuity strategy or choose any other annuity product made available by the fund.
According to the draft Conduct Standard, the annuity strategy of a fund must represent the fund’s most appropriate proposal for the average member from a specific category of members of that fund in order to assist those members who do not feel comfortable making their own decision at retirement.
The default regulations require that the drawdown levels from living annuities, where it is included as part of the annuity strategy, be compliant with a prescribed standard. The draft Conduct Standard sets out the following drawdown rates that a fund should aspire to (therefore not compulsory) in table A. The proposed maximum allowable drawdown rates are indicated in table B.
The sustainability of income must be regularly measured and monitored by the fund, and if the living annuity is to be paid by an external provider, must be monitored by the external provider by applying the same criteria as the fund would have.
A fund must measure the sustainability of the income from the living annuity by considering the continued payment of a particular income over the lifetime of a pensioner, where the income payments increase in line with a targeted percentage of inflation. The targeted percentage of inflation may not be less than 66%.
A fund must communicate to members –
- at inception – the reasonably expected income, drawdown rate, risks and sustainability; and
- thereafter on at least an annual basis – performance of the annuity and continued sustainability.
If the living annuity is to be paid by an external provider, the fund must agree with the provider to provide similar communication, and the fund must monitor that it takes place.
Concerns raised through the commentary process were mainly that if the FSCA wants to encourage sustainability, an industry wide standardised table should be recommended with maximum drawdown percentages applicable to all living annuities, regardless of the service provider or whether the living annuity is part of the fund’s annuity strategy.
The drawdown levels fail to take personal circumstances into account and don’t consider a pensioner’s needs and the concern is that due to the stringent drawdown limits required to be applied, most members are likely to not opt into the fund’s annuity strategy making the fund’s annuity strategy unfeasible.
Notice of Draft Conduct Standard – Conditions for investment in derivative instruments
The FSCA issued a Draft Conduct Standard – Conditions for Investment in Derivative Instruments on 8 June 2020 and invited comments by 31 July 2020.
The Conduct Standard recognises that there is a role for the use of derivatives as part of the investments of a retirement fund but given the non-traditional and potentially complex nature of derivative investments, the regulator believes that there is a need to outline the conditions to invest in derivative instruments.
Boards are expected to understand the risks (market, underlying and liquidity) underlying these investments and need to incorporate the management and reporting on derivatives in their governance and reporting processes (i.e. risk management and investment policies). The Conduct Standard contains further conditions in respect of leverage, netting of positions, collateral arrangements and over-the-counter exposures in respect of derivatives.
Comments on the draft Conduct Standard highlighted a number of concerns in respect of the draft Conduct Standard as some of the conditions will limit the efficient use of derivative investments.
The impact of the Conduct Standard will be limited to funds that invest in regulation 28 pooled arrangements (i.e. life policies and unit trusts). Funds utilising segregated portfolios and derivative arrangements directly will need to assess the impact of the draft Conduct Standard on their arrangements with their investment advisers.
Draft Conduct Standard – Communication of Benefit Projections
During February 2018 the FSCA distributed a first draft notice on benefit projections.
The FSCA has now published a revised draft Conduct Standard on Communication of Benefit Projections, containing some of the same requirements but also introducing several new requirements, including a requirement that a withdrawing member must also receive a projection to illustrate the impact of preserving retirement savings.
The Conduct Standard will apply to every fund that is registered under the Pension Funds Act, excluding unclaimed benefit funds and beneficiary funds and comments on the draft Conduct Standard had to be submitted to the FSCA by 31 July 2020.
It is stated in the draft Conduct Standard that projections should strive to manage member expectations and promote retirement savings by influencing member behaviour by educating members on the effect of their retirement decisions.
A fund must provide a benefit projection statement to a member:
- when joining the fund to enable the member to make an informed decision on retirement savings;
- on an annual basis thereafter;
- upon withdrawal to illustrate to a member the impact of preserving retirement savings until retirement; and
- in respect of living annuities, on an annual basis after retirement to allow a member to consider the sustainability of his/her income and drawdown rates.
The communication can be done as part of the member’s annual benefit statement.
The draft Conduct Standard prescribes the methodology and assumptions to be applied in the calculation of benefit projections.
The following information must be included in the benefit projection statement:
- an appropriate disclosure to the member that the aim of the projections is to offer guidance, and that it is not binding or a guarantee;
- a disclaimer to the effect that the final value of the benefit received will probably differ from the projections provided; and
- a statement that the projected retirement benefit from the fund should be added to projected retirement benefits expected from other sources for the member to consider the overall adequacy of retirement provision.
Any benefit projection in respect of living annuities must reflect the time until the living annuitant’s future income will reduce in real terms, the time until the living annuitant’s savings will start to decline below the current level and the time when the capital will no longer be able to support the current drawdown amount adjusted with inflation.
Draft Conduct Standard on smoothed bonus policies
The draft Conduct Standard on the conditions for smoothed bonus policies to form part of default investment portfolios has been submitted to Parliament on 24 June 2020 and will probably be published as final within the next few weeks.