LEGAL NOTE: September 2022: Draft Taxation Laws Amendment Bill, 2022

The Draft Taxation Laws Amendment Bill, 2022 (“the Bill”) has been published for public comment. The proposed amendments affecting retirement funds are as follows.

Transfer of all your retirement annuity policies in a retirement annuity fund

Currently, members with multiple retirement annuity policies with a single retirement annuity fund can only transfer all their policies to another retirement annuity fund. The Income Tax Act will be amended effective 1 March 2023 to allow such members to transfer only one or some of their policies, subject to the following restrictions:

· the value of each individual policy contract being transferred must exceed R495 000;

· in the case where the member is not transferring all his/her policies in the retirement annuity fund, the value of the member’s remaining policy, after the transfer, must exceed R495 000.

The above amendment will come into effect on 1 March 2023.

Protection of vested rights when transferring to a public sector fund

National Treasury has realized that the T-day amendments effective March 2021, which make provision for compulsory annuitization where vested rights were protected when transferring benefits into another retirement fund, did not include transfers into public sector funds. This meant that vested rights would not be taken into account if transfer is made into public sector funds.

To address this oversight, the definition of pension and provident funds in the Income Tax Act will be amended retrospectively, effective 1 March 2021, to ensure that these vested rights are protected when transferring to a public sector fund. Public sector provident funds will also be subject to the same annuitisation requirements as private sector provident funds.

Retirement of a provident fund member on grounds other than ill health

Paragraph 4(3) of the Second Schedule to the Income Tax Act currently stipulates that if a member of a provident fund who is younger than 55 retires for reasons other than ill health, any lump sum received shall be taxed as a withdrawal benefit rather than a retirement benefit. This does not apply to members of pension or retirement annuity funds. The Income Tax Act will be amended effective 1 March 2023 to harmonise the treatment of cash lump sums on retirement for provident fund and pension fund retirees. Paragraph 4(3) will be repealed, with effect from 1 March 2023, so that there is no longer any distinction between provident funds and other retirement funds in this regard.

Tax-free transfers from a pension to a provident fund

The policy objective of the annuitisation requirements implemented on 1 March 2021 was to harmonise the provisions relating to pension and provident funds and to allow tax-free transfers between such funds. However, due to an error in the Income Tax Act, contributions made to pension funds before 1 March 2021 were taxable on transfer to a provident fund. The Income Tax Act will be amended retrospectively, effective 1 March 2021, to ensure that contributions made to a pension fund prior to 1 March 2021 can also be transferred from a pension fund to a provident fund on a tax-free basis.

Transfer of benefits from pension preservation fund to provident preservation fund

The definition of “pension preservation fund” is amended to make it possible for a member to transfer from a pension preservation fund to a provident preservation fund.

Section 37C of the Pension Funds Act and transfer to an Unclaimed Benefits Fund

The definitions of “pension preservation fund” and “provident preservation fund” in the Income Tax Act do however not currently make provision for the receipt of benefits, as stipulated in Section 37C(1)(c) and section 37C(5) of the Pension Funds Act, which make provision for the transfer of death benefits to an unclaimed benefit fund inter alia. The definitions will be amended, with the aim of enabling such transfers to an unclaimed benefit fund.