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Following the letter of the law

22 October 2007 Gareth Stokes


Slightly more than two weeks have passed since we reported on a landmark ruling by the Pension Funds Adjudicator, Momodupi Mohlala. In her determination, Mohlala held "that the new amended provisions [as promulgated in the Pension Funds Amendment Bill] applied to all divorces whether concluded prior to or after 13 September 2007." If the number of queries FAnews Online fielded is any indications, there are thousands of affected divorcees who welcomed this news.

But their excitement might be short lived. Because decisions that require life industry players to part with money are never welcome. The latest indication is that industry giants like Old Mutual have instructed funds and intermediaries to challenge the ruling. It appears Old Mutual (as reported in the weekend press) will follow the letter rather than the spirit of the law and looks set to challenge the application of the Pension Funds Amendment Bill to divorce orders prior to the effective date.

A second stumbling block is that the tax treatment of such withdrawals is not clear. Current tax legislation does not cater for this type of pension fund withdrawal, and early indications are that the Revenue Laws Amendments Bill might categorise such divorce settlements as withdrawals resulting in heavy tax liabilities for the fund member.

Forget the spirit of the law

The Pension Funds Amendment Bill is clearly intended to be applied retrospectively. Its provisions improve the lot of thousands of divorcees who were being denied access to their share of pension funds granted at divorce. The Bill addresses the situation where divorcees (particularly divorced woman) were forced to wait till their husbands retired or passed on before receiving the benefits awarded in the divorce settlement. National Treasury has commented on the matter. They have indicated that the Bill should be applied retrospectively and are on record saying that additional Amendments to the bill will be tabled to 'guarantee' this interpretation.

But if retirement fund administrators adopt Old Mutual's stance (and there is every reason to believe that they will) then divorcees hoping that their wait for a pension fund payout is over, will be disappointed. Old Mutual suggests that retirement fund administrators seek clarity from the Courts where such determinations are concerned an action likely to tie up the funds for months or years to come.

Old Mutual's comments aside, it seems a number of legal issues remain mostly around taxation.

SARS will want a piece of the action

This case demonstrates the knock-on effect of a change in one segment of the country's legislation on another. Current tax law holds that retirement funds are taxed only when the principal member retires, dies or withdraws from the fund. The law does not provide for how tax is applied in the event of a divorced spouse receiving a payout as part of a divorce settlement.

Parliament will have to debate and consider changes to the revenue legislation to address this problem. It is difficult to know upfront what the result might be. The suggestion that the withdrawn funds will be taxed in the member's hands seems a bit harsh. A situation where the member carries 100% of the tax burden was probably not the intended outcome of the divorce settlement...

Perhaps we will see a solution where the tax liability is calculated at the time of the payout and either settled by the recipient at fund payout stage; or carried over to a new retirement fund in the case of a transfer

The Pension Funds Amendment Bill and resulting Pension Funds Adjudicator ruling indicate how quickly problems arise when making changes to the law. Regardless of the outcome of the "retrospective or not" debate tax questions will still have to be answered and divorcees look set for another waiting period.

Editor's thoughts:
The Pension Funds Amendment Bill has gone from hero to zero in a matter of minutes. Despite best intentions, legislators have failed to improve the lot at ground level. One of the difficulties with any legal system is that the astute professional will always find an angle to launch a challenge. Is Old Mutual's decision against the spirit of the law or does it make sense until legislators finalise the relevant tax law? Send your comments to
gareth@fanews.co.za

 

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