The Revenue Amendment Bills and Retirement
Taxation laws are constantly changing. Some amendments are required to keep pace with financial services practices, some to deal with the unintended impact of other legislation, and some to make tax compliance simpler. That’s why treasury is briefing Parliament’s portfolio committee on finance on two draft Revenue Laws Amendments Bills today. The bills address various aspects of retirement fund taxation, changes to estate duty, proposed changes to the taxation of small companies (a turnover tax), taxation of employee share schemes in BEE transactions and a range of other issues. You can view the draft bills on www.treasury.gov.za
In today’s newsletter FAnews Online takes a look at how some of the changes apply to divorce-initiated retirement fund withdrawals.
Addressing the Pension Funds Amendment Bill dilemma
You should all be familiar with the provisions contained in the Pension Funds Amendment Bill, which proposed that the non-member ex-spouse is entitled to a share of the member ex-spouse’s retirement fund on the effective date of the divorce and in accordance with the divorce settlement. This ruling applies to all divorces from 13 September 2007. Treasury now proposes 1 March 2008 as the effective date for a new taxation regime on all such ‘early’ withdrawals. There are three main points to take into account:
1. Amounts transferred to another fund will not be taxed, provided such fund is an occupational pension fund, preservation fund or retirement annuity fund.
2. Any amount taken as a cash lump sum will be subject to tax; but payable in the hands of the non-member ex-spouse.
3. The amount of tax due on the cash lump sum will be calculated in the same way as an ordinary cash lump sum withdrawal (see below).
This is a significant shift from the existing application of taxation laws on pension fund withdrawals due to divorce. As we’ve already mentioned, the non-member ex-spouse has immediate access to a portion of the member ex-spouse’s retirement fund (per the divorce settlement). Tax is calculated, and must be paid, on the value of the award and at the award date. This amount is paid whether the settlement is withdrawn from the retirement fund or not – and is shared by the member and non-member in terms of the settlement award.
The situation for divorces prior to the Pension Funds Amendment Bill is slightly different. For divorces before 13 September 2007 the non-member ex-spouse could only access the awarded share of the retirement fund when the member ex-spouse retired, resigned or withdrew from the fund. The situation put the non-member ex-spouse in a rather unpleasant situation, receiving only the portion of the fund awarded at the time of divorce. In other words, none of the accumulated growth achieved from the date of the award until the member ex-spouse’s withdrawal from the fund accrues to the non-member ex-spouse. All tax in this instance is paid by the retirement fund member. Because some of the provisions in the Pension Funds Amendment Act apply retrospectively, the non-member ex-spouse is now allowed to access the awarded share of the funds with immediate effect. Tax is paid on the withdrawal date and the tax liability is again shared by the member and non-member ex-spouse’s in accordance with the settlement. But this tax is paid regardless of whether the fund is transferred to another retirement instrument or taken as a lump sum.
How lump sum withdrawals are taxed
The basic guidelines for calculating the tax due on a lump sum withdrawal from a retirement fund are as follows:
1. A portion of the lump sum is tax free. To determine the tax free portion of the withdrawal you must take 50% of the threshold that applies in the current tax year (for 2007/2008 this threshold is R46 000). Thus the first R23 000 of the cash lump sum withdrawal attracts no tax.
2. The balance is taxed separate from your other incomes, and in accordance with the sliding taxation scales that apply in the particular tax year...
The draft amendments go some way to clarifying the gray areas created by the Pension Funds Amendment Bill. We like that treasury has implemented measures to encourage the non-member ex-spouse to transfer the money to a new retirement vehicle rather than taking a cash lump sum withdrawal. Preserving the value accrued in a retirement fund makes much more sense that starting from scratch!
Editor’s thoughts:
Every participant in the country’s taxation system benefits from a simplification of the rules. Unfortunately the reality is that laws and amendments which strive to create a simpler tax environment have the opposite effect. Tax professionals have to filter through reams of additional legalese before determining the correct tax treatment of a particular financial transaction. Do you think treasury’s proposal is fair – or will you take advantage of the opportunity to make public comment on the draft prior to 5 September 2008? Add you comments below, or send them to gareth@fanews.co.za
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