ON THE SCALES 18 OF The Draft Taxation Laws Amendment Bill 2018

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1 ON THE SCALES 18 OF 2018 The Draft Taxation Laws Amendment Bill 2018 National Treasury has issued the draft Taxation Laws Amendment Bill 2018 ( draft TLAB ) for comment. It includes some of the proposed amendments announced in the 2018 National Budget. Issues of relevance to retirement funds are covered in this publication. Summary The law currently says that annuitisation of provident funds will go ahead on 1 March The draft TLAB does not deal with the annuitisation of provident funds. By mid-october 2018 Government will advise if this will be postponed again. From 1 March 2019 members of preservation funds will be allowed to withdraw their full lump sum benefit when they emigrate from South Africa. Transfer of contributions and actuarial surplus from one employer retirement fund into another employer retirement fund is a taxable fringe benefit in the hands of employees. From 1 March 2017 surplus transfers or transfers within or between retirements funds of the same employer will not create a taxable fringe benefit for the employee. From 1 March 2019 transfers to a pension preservation or provident preservation fund on or after reaching normal retirement age, but before retirement date will be allowed. On the Scales is produced by Alexander Forbes Legal Services department to provide clients with information on employee benefits. The issues need to be carefully considered taking into account the specific circumstances of each of our clients. July 2018

2 Correcting an error and allowing a deduction from tax when a member transfers from a provident preservation fund to a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund. Clarifying that the tax free status of a pre 1 March 1998 amount in a public sector fund will only be maintained for one transfer out of a private sector fund. Annuitisation of retirement benefits from provident funds effective date 1 March 2019 but may change The legislation that is currently in effect and which was passed in previous years states that from 1 March 2019, provident fund members may be required to purchase an annuity from contributions made to their provident fund after 1 March The implementation of this requirement has been postponed a number of times for consultation at NEDLAC. No date changes have been included in the draft TLAB. The process of consultation at NEDLAC is taking longer than anticipated. Government may introduce further legislative amendments related to the start-date of 1 March 2019 once the NEDLAC process is completed. This is expected to be no later than end-october. Emigration benefit from a preservation fund effective date 1 March 2019 Members of a retirement annuity fund ( RAF ) can receive payment of a withdrawal benefit when a member ceases to be a tax resident, due to that member emigrating from South Africa; and such emigration is recognised by the South African Reserve Bank for the purposes of exchange control. Expatriates can also withdraw a lump sum from their RAF when they leave South Africa at the expiry of the work visa that was granted in terms of the Immigration Act. Currently, members belonging to pension or a provident preservation funds are restricted from withdrawing their benefit when they emigrate from South Africa. This does not matter when the member has not exercised the once off right to a withdrawal from the preservation fund before retirement. At any time, including on emigration, a member can take a withdrawal benefit. However, if a member has already taken one withdrawal, the member has no further access to the funds on emigration or leaving South Africa. One solution has resulted in artificial transfers from preservation funds to a RAF to make use of the access that was given to RAF members. 2

3 To promote a uniform approach, the draft TLAB proposes amending the definitions of pension preservation fund and provident preservation fund to allow members to withdraw their full lump sum benefit when they emigrate from South Africa and that emigration is recognised by the South African Reserve Bank for exchange control or upon repatriation on expiry of the work visas. Tax treatment of actuarial surplus between retirement funds - effective date 1 March 2017 Employer contributions to a retirement fund for the benefit of an employee is a taxable fringe benefit. This also applies to a benefit provided by an associated institution if such benefit would have constituted a taxable benefit had it been granted directly by the employer. An associated institution includes an employer established retirement fund. This means that a transfer of actuarial surplus from one employer retirement fund to another employer retirement fund is a taxable fringe benefit in the hands of employees. To address this unintended anomaly, surplus transfers or transfers within or between retirements funds of the same employer will not create a taxable fringe benefit for the employee. Tax treatment of transfers to pension and provident preservation funds after reaching normal retirement age but before retirement date - effective date 1 March 2019 Since 1 March 2015, retirement date is triggered only when an election to retire is made by the member of the fund. A member can defer his or her retirement date after reaching normal retirement age but before retirement date by: remaining a deferred retiree of the employer pension or provident fund; or transferring from a pension or provident fund to a retirement annuity fund. Currently, transfers to a pension preservation fund and a provident preservation fund are excluded after normal retirement age. Only withdrawal benefits are allowed to be transferred. The draft TLAB proposes to allow for transfers to a pension preservation or provident preservation fund on or after reaching normal retirement age, but before retirement date. The one withdrawal applicable to preservation funds before retirement date will not apply to amounts transferred after reaching normal retirement age in terms of the fund rules, but before an election to retire. 3

4 Transfers from provident preservation funds to pension funds - effective date 1 March 2018 The general rule is that a transfer of a benefit from one approved fund to another is an accrual event for tax purposes. However a deduction is provided in the law which results in the amount transferred being untaxed. The only exceptions to this principle are where a pension fund or pension preservation fund benefit is transferred to a provident fund or provident preservation fund. These transfers are not tax deductible. However, a mistake exists in the law. No deduction is provided for a transfer from a provident preservation fund into a new employer pension fund. It is proposed to allow a deduction from tax when a member transfers from a provident preservation fund into any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund. This also applies to divorce awards made to a non-member spouse which may be transferred to a fund chosen by the non-member spouse. Transfers from public sector funds to private sector funds- effective date 1 March 2018 Before 1 March 2018 a transfer of the pre 1 March 1998 amount from a public sector fund to a private sector fund was tax free. However, further transfers from the private sector fund to another private sector fund caused the member to lose the tax free status of the pre 1 March 1998 amount. From 1 March 2018, the Income Tax Act was amended to allow the tax free status of the pre 1 March 1998 amount to be retained on the next transfer to another private sector fund, but not to any further transfers. The way in which the legislation was drafted is ambiguous in that it potentially contemplates more than one transfer being permitted. The draft TLAB proposes to clarify that it applies only to one transfer out of the private sector fund. 4

5 Deduction for contributions to retirement funds must be proportionately incurred between SA and foreign sources - effective date 1 March 2018 Any allowable deductions permitted in section 11F (the 27,5% retirement fund deduction) and section 18A (charitable donations) must be deemed to have been incurred proportionately in respect of taxable income derived from sources within and outside South Africa. The deduction under section 11F and section 18A must be allocated in relation to the taxable income from sources within and outside the Republic before taking into account any deduction in terms of those sections. Comment: This is still a draft Bill and the public is invited to submit comments. We await the Bill to see whether any of the provisions have changed. If you need more information, please contact your consultant. 5