Draft Taxation Laws Amendment Bill, 2011

Draft Taxation Laws Amendment Bill, 2011

National Treasury has released the draft Taxation Laws Amendment Bill, 2011 for comment. The Bill should be finalised and passed by September 2011. A summary of the key provisions affecting the retirement funds industry is set out
below:

Third tax rebate for people over 75

Presently, all tax payers can claim the primary rebate; those over 65 can also claim a second rebate. The Bill adds a third rebate of R2 000 for those over 75, effective from 1 March 2011.

Living annuities

• From 1 March 2012, a living annuity will be called a RIDDA (retirement income draw down account)
• The RIDDA can be issued by a “qualifying person”. This person is not defined, but the explanatory memorandum to the Bill indicates that service providers other than insurers and retirement funds will now be able to offer this product, in order to reduce the cost to investors.
• The maximum annual draw down rate stays at 17.5%. The desired drawdown rate is set annually
• The minimum draw-down rate has been reduced from 2.5% to 0%
• RIDDAs can be transferred from one provider to another, but may not be split among different providers
• On death, the RIDDA can be paid out as a lump sum, or continued as a draw-down account, or a combination of the two, if the nominee is a natural person. Juristic persons may only receive a lump sum.

Employer owned insurance policies

There has much industry comment on the laws governing employer-owned long-term insurance policies. The Bill clarifies certain general principles:

• After-tax premiums generate tax-free proceeds
• Pre-tax premiums result in taxable proceeds.

This will bring about the following changes to employer-owned risk policies:

• Disability Income Replacement Policies: The Bill proposes a tax deduction for employees on premiums paid by the employer (individuals may usually only claim a deduction if the policy is in their own name)
• Unapproved Group Life Policies: The Bill clarifies that lump sums payable to employees’ dependants should not be taxed.

Retrenchment (‘Severance’) lump sum benefits

The Bill clarifies that, with effect from 1 March 2011, such lump sums must be aggregated with lump sum benefits from retirement funds and taxed according to the lump sum tax tables.

Lump Sum tax table (retirement / retrenchment / death)

The Bill includes the new lump sum tax tables set out in the Budget.

Transfers of a retrenchment benefit to a preservation fund

The definition of “preservation fund” in the Income Tax Act is to be amended to allow members to transfer their retrenchment benefit to a preservation fund. The benefit will still taxed according to the aforementioned lump sum tax tables. This will be effective from the year of assessment starting on or after 1 January 2012.

Transfers from a preservation fund

The Bill provides that a transfer from a preservation to retirement annuity funds, or between preservation funds will be tax free, for years of assessment starting on or after 1 January 2012.

Second Taxation Laws Amendment Bill, 2011 (to be drafted)

The 2011 Budget Speech contained proposals to remove tax deductibility of employer contributions as well as the removal of provident funds. Government has indicated that discussion documents on these topics will be published in July 2011 and that these documents will form the basis of a further Bill (the Second Taxation Laws Amendment Bill, 2011).

Implementation of Revised Regulation 28

On 10 June 2011, the Registrar issued two notices that deal with the implementation of the revised Regulation 28:

Notice 1: Transition Period until 31 December 2011
The effective implementation date for the revised Regulation 28 is 1 July 2011. This date marks the start of the transition period, which ends 31 December 2011. The transition period allows funds to adjust their monitoring and reporting systems to comply with revised Regulation 28. During the transition period, fund investments may not become less compliant with the limits set out in Regulation 28 as at 10 June 2011, but must progress towards full compliance.

Notice 2 – Revised Regulation 28 reports to FSB
During the transition period, funds do not have to report to the FSB when they exceed any limit prescribed in revised Regulation 28. After 31 December 2011 funds must report quarterly whenever they have exceeded the limits. Reports must be submitted within 30 days following the end of the relevant quarter. From this date, the transition period for implementation starts and will end on 31 December 2011. This transition period allows funds to adjust their monitoring and reporting systems to full compliance with revised Regulation 28. During the transition period, fund investments must not become less compliant with the limits set out in Regulation 28 as at 10 June 2011 and must be progress towards full compliance with Regulation 28 by 31 December 2011.

Fixed term employees to be on an equal footing with permanent employees

• Permanent employees are appointed for an indefinite period
• Fixed term employees are employed for a specified period, to perform specified tasks. At the end of this term, the relationship with the employer automatically ends.

Fixed term employees are often employed on less favourable terms, despite performing the same duties as permanent employees.

The Basic Conditions of Employment Amendment Bill, 2010, proposes the following section 35(5): “Employers must contribute benefits of similar or equal value to employees employed on a fixed term contract as the benefits afforded to permanent employees.” It seems that these benefits include fund benefits, although this provision is currently under debate as it is very wide. However, trustees may have to amend their fund rules as the definition of ‘eligible employee’ usually only refers to full-time, permanent employees.

Supreme Court of Appeal case: Deferred member’s pension interest

In Eskom Pension and Provident Fund v EM Krugel and EM De la Rey N.O., the Supreme Court of Appeal (“the SCA”) had to decide whether a divorce order regarding the division of a member’s pension interest was applicable to a member who resigned from employment before the date of his divorce but chose to become a deferred member of the Fund. The Fund appealed to the SCA after the High Court ordered the Fund to pay the former spouse of a deferred member, their pension interest. However, as the member had resigned from his job long before his divorce, the SCA held that he could not be deemed to become entitled to a resignation benefit, again. Therefore, he no longer had a “pension interest”. The Fund’s appeal was accordingly upheld. The SCA remarked that the parties’ divorce settlement agreement remained binding and the non-member spouse was entitled to claim her share of the member’s deferred pension benefit, when it accrued to the former member after he reaches the age of 55. This route does not, however, involve the Fund.

New FSB Levies

1. R1 229 (was R1 138), plus an additional amount of R10,15 (was R9,40) per member and in respect of any other person who receives regular periodic payments from the fund (excluding any member/person whose benefit in the fund remained unclaimed) and a beneficiary in a beneficiary fund;

OR

1. R2 034 320 (was R1 883 628), whichever total amount is the lesser.

Umbrella funds must pay an additional levy of R575 (was R535) in respect of each participating employer.

Pension Funds Adjudicator Levy

R4.16 (was R3.85) per member and in respect of any other person who receives regular periodic payments from the fund (excluding any member/person whose benefit remained unclaimed in the fund).

Levy on administrators

A new levy in respect of all administrators approved in terms of section 13B of the Pension Funds Act comes into effect on 1 April 2011, as follows.

• R5,523; plus
• R430 per fund under the administration of the administrator; plus
• R0.51 per member and in respect of any other person who receives regular periodic payments from the fund (excluding any member/person whose benefit in the fund remained unclaimed) and a beneficiary in a beneficiary fund.