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LEVERAGE
Legal and technical update
Edition 1
At a glance:
Legislative update
In this edition Sharon Hamman (Senior Legal Adviser)
provides a reminder of the most recent legislative changes
as well as those changes that need to be recapped.
Happy reading!
Page 1 of 7
March 2020
Recap on changes
from last year
1. Post-retirement benefit preservation
In 2018, an amendment brought about the ability for a
member to transfer their retirement benefit in a pension
or provident fund to a retirement annuity (RA). Therefore, During John’s lifetime he has had a couple of different jobs. When he resigned from those jobs he
the member will reach their retirement date/age in terms generally transferred his resignation benefits to the same pension preservation fund. The result is that he
has 3 different funds’ resignation benefits in the preservation fund
of their employment contract and the employer retirement
fund rules, but instead of retiring from the fund, they
In 2019 he reached his retirement date at which time he transferred his retirement benefit from his fund
transfer the retirement benefit to a RA to preserve that to the same preservation fund.
retirement benefit until a later date. When the member is
ready to retire at some future date, he/she will retire from John now requires cash for a new business venture, but he does not want to retire yet. He will require
the RA and the normal rules applicable to retirement will R1 200 000 before tax and he would like to withdraw it from the preservation fund.
apply. A maximum of one third can be taken as a lump
The preservation fund currently has the following benefits in:
sum, which will be subject to income tax by applying the
retirement tax table. The remaining two thirds will be
transferred to a compulsory annuity to provide the monthly Date Type of benefit Current value Withdrawal possible?
income.
2001 Resignation R150 000 YES
2009 Resignation R1 580 000 YES
From 1 March 2019, the preservation fund was introduced as 2014 Resignation R850 000 YES
another alternative for post-retirement preservation. It was 2019 Retirement R1 500 000 NO
accompanied with the restriction that no withdrawal option
is available on the retirement benefits transferred into the As shown above, he will be able to make a full withdrawal from each of the resignation benefits, but no
preservation fund, prior to formal retirement. This is best withdrawal will be possible from the retirement benefit. It is therefore advised that he withdraws from
explained by an example: the 2009 resignation benefit to fund his new business venture. The withdrawal will be taxed in terms of
the withdrawal tax table.
Page 2 of 7
March 2020
Continued from previous page
As a result of the amendment, the retirement benefit from a pension fund can
be transferred to a pension preservation fund or RA. In the case of a provident Taxation Laws Amendment Act,
fund, the retirement benefit can be transferred to a provident preservation fund,
pension preservation fund and a RA. Where the transfer is made to the provident
2019 (TLAA)
preservation fund, the member will retain full lump sum access at retirement.
This Act, promulgated on 15 January 2020, brought into being the tax proposals
If the pension preservation fund or RA is used, the one third lump sum restriction
made in last year’s budget. In addition it provided the opportunity for SARS to
will apply at retirement.
clarify some points and tie up some loose ends.
If John had a provident fund instead of a pension fund and he transferred
The most pertinent amendments, from a financial planning point of view, are as follows:
that provident fund retirement benefit to a pension preservation fund, and he
retires from the fund, with a retirement benefit being equal to R2 100 000, 1. Provident fund annuitisation
the maximum lump sum he will be able to withdraw upon retirement will be The implementation date for annuitisation of provident funds remains at 1 March 2021.
R700 000 (subject to tax in terms of the retirement tax table) and the Due to the various postponements of this change, some discrepancies became evident
R1 400 000 will be used to acquire a compulsory annuity. in the Act that resulted in confusion in the market - this TLAA corrected it.
The transfer of the retirement benefit to the RA or the preservation fund will be At the moment, a transfer from a pension fund to a provident fund would trigger
tax neutral. income tax. Where such a transfer is done, the pension benefit is treated as a
withdrawal and it will be taxed as a withdrawal prior to the funds entering the
provident fund/provident preservation fund. To bring the rules in line with the
2. Access to preservation fund benefits due to emigration or the annuitisation of provident funds, an amendment is made to allow for tax-free
cessation of a visa transfers from pension funds to provident or provident preservation funds (or
Since 1 March 2019, preservation funds were brought in line with RAs. The result pension preservation funds to provident preservation funds), effective 1 March 2021.
is that when a member emigrates prior to the retirement date, the member
For those that need a reminder on what annuitisation of provident funds is –
will be able to withdraw from their preservation fund, even if the member
already used the pre-retirement withdrawal available in the preservation fund. • It will bring the rules of provident funds in line with that of pension funds
The member is entitled to a full withdrawal from the preservation fund due to regarding access at retirement: a maximum of one third may be taken as a
emigration or the cessation of the visa. lump sum on retirement, while the remaining funds must be used for a monthly
pension;
The normal tax rules are applicable on withdrawal from a retirement fund.
• The motivation behind it is to limit members’ access to ensure that some
benefits remain to provide for a monthly pension and reduce the burden on the
state in respect of government pension grants; and
• Once implemented, all new contributions to the fund, after this date (1 March 2021),
will be subject to the new rules and the limitation. The fund value as on 28 February
2021 will be referred to as the vested benefit and will remain fully accessible at
retirement.
Page 3 of 7
March 2020
Continued from previous page
2. Section 10C and compulsory annuities stemming from provident
funds
Recap
Section 10C provides for an income tax exemption in respect of income paid by
compulsory annuities insofar as the annuitant has disallowed contributions.
Disallowed contributions refer to the contributions made to retirement funds
that did not qualify as a tax deduction due to it being in excess of the allowed
deduction limitations. Those disallowed contributions are then rolled over to the
following tax year, and once again deductible during that next year along with Amendment
any other contributions actually made during that following tax year. Once again, When section 10C was initially introduced, this exemption was only applicable to
if any portion of the contributions (current or disallowed) is not deductible in compulsory annuity income, where the compulsory annuity came from a pension/
that following tax year, it will roll over to the next year. pension preservation fund or retirement annuity fund. Compulsory annuities
stemming from provident funds/provident preservation funds did not qualify for
To illustrate, we repeat an example from 2019 Legislative Update Leverage: this exemption. The rationale is explained in the SARS Explanatory Memorandum
on the TLAA, 2019, that was published on 20 January 2020:
Mary has accumulated R230 000 disallowed contributions when she retired
from her employer. She elects to withdraw a lump sum of R100 000, transfer the The rationale behind excluding provident funds from this exemption was based on
remaining retirement benefit to a living annuity, and withdraw an income of the fact that both provident and provident preservation fund members were not
R15 000 per month from that living annuity. required by the rules of the provident and provident preservation fund to utilise at least
two-thirds of their fund benefit upon retirement to acquire or purchase a compulsory
annuity (provident or provident preservation fund members were allowed to receive
When the tax directive for the lump sum is issued, no tax is payable due to
their full retirement benefit as a lump sum upon retirement).
R230 000 disallowed contributions being available. Therefore, R100 000 of this
amount is used against the lump sum under paragraph 6 of the Second Schedule.
The outcome led to inconsistencies - a member of a provident fund, with
The living annuity will be subject to PAYE during the year and the administrator disallowed contributions, transferred their retirement interest (in full or in part) to
is obliged to withhold that PAYE. At the end of the tax year, Mary will enjoy the a compulsory annuity, that member could only utilise the disallowed contributions
section 10C exemption against the living annuity income, to the extent of when calculating the taxable lump sum and not against the annuity income
R130 000 (R230 000 – R100 000). The outcome is that only R50 000 (R180 000 received from the compulsory annuity. If one assumes that the member only had
– R130 000) of the living annuity will be subject to tax, and Mary will be refunded this one retirement fund, it would ultimately result in the benefits associated with
any PAYE deducted during the tax year over and above this amount. the disallowed contributions being lost (insofar as it was not used in respect of the
lump sum).
Page 4 of 7
March 2020
Continued from previous page
From 1 March 2020, the exemption in section 10C will apply in respect of all Amendments
annuity income payable by compulsory annuities that stemmed from retirement
funds. The aggregate tax deduction in respect of the expenditure incurred by any
taxpayer when purchasing VCC shares may not exceed:
It is important to remember that the disallowed contribution is only available
• R5 million if that taxpayer is a company, and
to the taxpayer that actually made the contribution and is not transferable to a
dependant/beneficiary. Therefore, if the dependant/beneficiary selects a lump • R2.5 million for any taxpayer other than a company, and applies in respect of
sum from the deceased member’s retirement fund, that lump sum is taxed in the expenditure incurred by the taxpayer on or after 21 July 2019.
hands of the deceased, as if it was received the day immediately prior to death,
The proposed changes in section 12J will exclude the ability of a roll-over of any
and therefore, any disallowed contributions will be allowed as a deduction when unused expenses incurred by the VCC shareholder after the application of the
determining the taxable lump sum. However, where the dependant/beneficiary proposed limitation above during that year of assessment or any subsequent year
elects to transfer the death benefit to a compulsory annuity, the disallowed of assessment.
contributions of the deceased will not be applicable. The amendments are deemed to have come into operation on 21 July 2019.
3. Section 12 J amendment 4. Foreign employment exemption – section 10(1)(o)
In 2008 tax incentives for investments in venture capital companies (VCC) At the moment, if a SA tax resident works abroad and earns foreign employment
were introduced. The aim was to raise funding to support the development of income, that income will be exempt from income tax in SA if the following
small business which would otherwise not have access to funding due to their requirements are met:
size or inherent risk. It allowed for the investor to enjoy a tax deduction for the • They are outside SA for at least 183 days during any 12-month period;
investments made in the defined businesses.
• Of which 60 days must be consecutive.
Since inception the rules were relaxed extensively – it removed various prohibitions
and saw the tax deduction limits being removed over time. Initially a taxpayer From 1 March 2020, the exemption will be limited to a maximum amount of
could only deduct investments up to R750 000 per annum with a lifetime limit R1.25 million. The result is, that if the following requirements are all met, the
of R2 250 000. These limits were totally removed and so abuse of the system taxpayer will enjoy a R1.25 million exemption in respect of foreign employment
income earned abroad. The requirements are that the taxpayer must:
increased with the objectives of the entire VCC tax regime being undermined.
This created the need to reintroduce a limitation of the amount to be deducted by • Be a tax resident in SA, (comply with the ordinarily resident or physical
investor taxpayers when investing in VCC shares. presence requirements);
• Earn certain types of income in respect of services rendered;
• Be employed and work outside SA;
• Outside SA for at least 183 days during any 12 month period of which 60 days
must be consecutive;
• Not be subject to any other exclusions.
Page 5 of 7
February 2020
Continued from previous page
It is important to note that this is not a new expat tax – this amendment simply
2019/20 2020/21
introduces a cap on an existing exemption.
If a SA taxpayer earns foreign employment income below R1.25 million, the total Salary and benefits Emirates R1 400 000 R1 400 000
income will still be exempt from income tax in SA. However, if earnings exceed
R1.25 million, the excess amount may be subject to tax in SA.
Less:
R1 400 000 R1 250 000
The provisions of double taxation agreements (DTA) will apply in respect of Exempt income
(total income is exempt) (limited to R1.25m)
Section 10(1)(o)
income earned in excess of R1.25 million during the tax year. The DTA will
prevent the same amount being taxed twice.
Taxable income R0 R150 000
The following example will illustrate the workings of the exemption:
Tax R0 R27 000
Mila is an airhostess for Emirates and has worked in Dubai for four years,
Less rebate R0 R14 220
however she intends to return to SA when she eventually starts a family.
Therefore she is a SA tax resident. She spends most of the year in Dubai, with Tax payable R0 R12 780
two visits during the year but she fulfils the requirements of being out of SA for
at least 183 days per annum of which 60 is consecutive. Her earnings for the An ASAP will be published shortly to provide more detail on this amendment
year ending 29 February 2021 is R1 400 000 (which includes all her benefits and the practicalities surrounding it.
associated with her position).
Note – Dubai is a tax neutral jurisdiction and there is no DTA between SA and
Dubai.
Tax calculation comparing 2019/20 and 2020/21 tax year in South Africa:
(assumed the tax rates remained unchanged)
Page 6 of 7
March 2020
Dots on the horizon
Cosatu’s proposal to fund state enterprises with funds from the
Government Employees Pension Fund (GEPF)
It has now been a constant rumour in the press that government wants to and give input. The international market will also have something to say.
access retirement fund money to fund their failing state enterprises and now
Then, government will have to hear all interested parties’ input, take it all
Cosatu has joined the bandwagon, with their eye on the GEPF. Finance Minister
into account, after which the legislature will have to draft something that will
Tito Mboweni expressed his support for this and stated that it should not be
once again be open for debate, comment, constant amendment, and eventual
restricted to only public retirement funds but also private funds and that the
approval by government – it can only be enacted if the majority of MPs vote in
proposal warrants further investigation and debate.
favour of the amendment.
We cannot provide certainty that this will not happen or that this will happen,
We have heard this before, always during election times, and not once has
however, what we can confirm is that there will surely be a process that will be
anything transpired. I cannot predict the future, but I do know that there is a long
followed to make changes to the GEPF Law or the Pension Funds Act to change
process to be followed before something like this is enacted. Let us wait and see
their investment guidelines to include government enterprises.
and not worry about things that we have no control over at this point. When the
As per our communication last year, we can only outline the procedure to be time comes, we will make sure our voices are heard. Of course we will keep you
followed if a change like this is planned. Firstly, the public, retirement funds, informed if anything changes or as the matter develops.
employers, employees, their unions, and bargaining councils will have their say
About Leverage
Momentum Leverage is prepared by the Momentum Legal Advisers. For financial advisers, please contact your legal adviser should you have any questions.
For clients, please contact your financial adviser should you have any questions.
Disclaimer:
The views and/or opinions expressed in this article have been prepared as a primary source of information and are not a recommendation for the conclusion of a transaction. This article has been
prepared for general information and not having regard to any particular person’s financial planning, tax planning, investment needs and objectives. No representation is given, warranty made or
responsibility taken as to the accuracy, timeliness or completeness of any information contained in this article and Momentum Metropolitan Life Limited will not be liable in contract or in delict
or otherwise for any loss or damage arising as a result of the reader relying on any such information (except insofar as any statutory liability cannot be excluded).
Please note:
Any unauthorised copying or reprinting or publishing in any other publications, webpages or emails are strictly prohibited. Should you wish to use this article for any such purpose, please email
sharon.hamman@momentum.co.za to obtain permission.
Page 7 of 7
March 2020You can also read
