Welcome tax development for beneficiary funds

It is eight months since beneficiary funds came into existence as the primary vehicle for the acceptance of death benefits on behalf of minor dependants. Despite some delays and an extension from the Financial Services Board for registration, there are now 13 beneficiary funds registered with the FSB.

Giselle Gould, Marketing Director: Fairheads Benefit Services says beneficiary funds are structured similarly to retirement funds. They offer greater protection for minors as they are regulated by the Pension Funds Act and all stakeholders have recourse to the Pension Funds Adjudicator; there are strict corporate governance requirements; and investments are prudentially managed in line with regulation 28.

Gould says: “When beneficiary funds were promulgated late last year, the tax regime dictated tax-free transfer of death benefit lump sums into a beneficiary fund, taxation on an annual basis on distributions paid out, and taxation upon termination. The administrative implications were complex and vast for the South African Revenue Service and administrators. Accordingly, Fairheads and other industry players embarked on discussions with the authorities.”

Gould says the issues are now largely resolved, with the outcome contained in the Draft Taxation Laws Amendment Bill - Second Draft I June 2009 that was released by National Treasury in June 2009. It should be signed into law soon. In effect, the tax regime will now revert to what it was previously (and still is) for umbrella trusts, that is taxation of the lump sum before transfer into the fund, and exempt taxation for annual income and upon termination.

The implementation date for this tax treatment will be made retrospective for all retirement fund member deaths since 1 March 2009. This may be problematic for retirement funds that have concluded these claims already, but a submission has been drafted to SARS to obtain clarity on this matter.

The tax amendments for beneficiary funds are a welcome development and National Treasury can be commended for its cooperation in bringing about a tax regime that will be of ultimate benefit to the dependants of deceased retirement fund members.