Budget speech - RA's and more comment by Nedgroup Investments

While there are a number of noteworthy comments on the National Budget speech delivered by the finance minister this afternoon, the key issues for consideration below are with regards to:

• the tax treatment of retirement fund for members who cease to be a tax resident of South Africa;
• Increases to the small commutation of retirement annuities;
• The increase of the personal income tax brackets and;
• Small increases to the medical tax credits;
• Tax-free transfers between retirement funds, and;
• The use of retirement interest to acquire retirement annuities

Below is a high-level explanation of each point.

Applying tax on “withdrawals” of retirement funds when the member ceases to be a tax resident

Currently, a retirement fund member who emigrates from South Africa (and is no longer tax resident) and cashes in their retirement fund, is subject to tax in South Africa using the Retirement Fund Withdrawal Table (i.e. R25 000 tax-free). If the member defers accessing the funds until retirement from employment or upon death, then they are subject to retirement tax at that stage.

Treasury’s concern is that members who become tax resident in another country which has a double tax agreement with South Africa will pay tax in that country. This means that South Africa forfeits its rights to tax the former South African resident.

To overcome this, Treasury intends to tax a retirement fund member when they no longer qualify as a South African tax resident. Their retirement fund interest will be subject to tax using the withdrawal table  the day before they no longer qualify as a tax resident. If they chose to leave their retirement benefit in South Africa, then any tax payable will be deferred until they access their retirement interest. This will ensure that South Africa receives tax due. Treasury will use the relevant retirement tax table at the time of access and provide a tax credit on the calculated deemed tax.

Paid up Retirement Annuities

Small commutation of Retirement Annuities has increased from R7 000 to R15 000. This means that South Africans with an RA value of less than R15 000 will be able to cash in the entire Retirement Annuity. This will be effective 1 March 2021.

Income Tax

• Tax brackets have been increased by 5% to account for inflation
• Tax rebates have also been increased by 5%

Medical Tax credits

Medical tax credits have been increased from R319 to R332 for the first 2 members and from R215 to R224 for all other qualifying members.

Transfers between retirement funds by members who are 55 years or older

Currently members of retirement funds who retire early and decide to transfer to another retirement fund, will be taxed. Treasury proposes allowing tax-free transfers for early retirees provided the transfer is to a similar or more restrictive fund.

Allowing members to use retirement interest to acquire annuities on retirement

When a member retires, they can commute (take in cash) a portion of their benefit and use the rest to purchase a compulsory annuity.  The annuity must be one of the following options:

• The retirement fund can provide the annuity by paying it directly to the member, or
• The fund can purchase it from a South African registered insurer in the name of the fund or
• Purchase the annuity it in the name of the retiring member.

Only one option can be chosen and Treasury is looking to provide flexibility by allowing a combination of options. “Annexure C” mentions that Government “proposes expanding the amount of retirement interest that may be used to acquire annuities” but it is not clear what is meant by that.