Earlier this month, the Taxation Laws Amendment Act was passed in parliament. The Act included significant retirement reforms. Although these reforms follow years of negotiations, it has still been met with resistance especially by labour unions. What do these reforms mean for high net worth individuals and families? We believe these changes go some way to simplify the retirement playing field. However, it limits the tax benefits of retirement products to high income earners. The 2016 tax deadline is the last year in which you can make a tax deductible contribution of more than R350 000. What are the details of the reforms? Estate Duty Act amendments Previously retirement funds were excluded from the dutiable estate. Taxpayers made excessively large contributions to these funds. Upon the death of the taxpayer the beneficiaries had the option of a cash lump sum, an annuity, or both. In the case of a cash lump sum the amount would then be taxed in the hands of the deceased, and the previously disallowed contributions would be paid out tax-free. Section 3(2)(bA) is added to the Estate Duty Act:

  • it applies to all individuals who died on or after 1 January 2016
  • affects all contributions to a retirement fund* made by the person on or after 1 March 2015 until date of death
  • Aim of amendment is to prevent taxpayers from making excessive contributions to a retirement fund in order to avoid estate duty. How was this done?
  • The new amendment is that any contribution to a retirement fund after 1 March 2015 shall be included in the gross estate provided that it:
    • did not qualify as a tax deduction
    • was not applied as an exemption under Section 10C of the ITA
    • was not deducted from a taxable lump sum in terms of par 2 of the 2nd schedule of the ITA.

The amendment does not affect most investors who contribute towards their retirement annuities or pension funds up to the limit allowable for deductions from taxable income. Retirement fund amendments This Amendment Act will be implemented on 1 March 2016:

  • Contributions made by an employer to an employee’s retirement fund will be tax deductible, and no limit will apply
    • All such contributions will be included in the employee’s gross income as a fringe benefit and will be taxable
  • Individual taxpayers may deduct all contributions to any retirement fund, including contributions made by their employer on their behalf
    • The tax deduction will be equal to 27.5% of the greater of remuneration or taxable income**
    • An overall cap of R350 000 per annum will apply
    • All contributions that were not tax deductible due to being in excess of the above limits, will be carried over to the following tax year.

Annuitisation of provident funds This was the most contentious issue in this Act but probably the most important for the millions of lower income earners. It is government’s intention to harmonise the tax treatment of pension and provident funds and to ensure that retirees receive life-long pensions instead of lump sums at retirement.

  • At retirement*** a full withdrawal is no longer possible. 1/3rd can be taken as cash and 2/3rd must be used to purchase an annuity (annuitisation)
    • Will only apply to contributions made after 1 March 2016. Fund value as at 28 February 2016 (“vested right”) (including future growth on this amount) remains fully accessible
    • Vested right will remain protected, even if transferred to another retirement fund
  • Annuitisation will not apply if member of provident fund is 55 or older on 1 March 2016
    • Provided that member remains in the same fund until retirement
    • If member transfers benefit to another fund the vested right will be protected against annuitisation, but not future contributions
    • As a result of the above, transfers between pension and pension preservation funds to provident and provident preservation funds will now be possible.

Increase of withdrawable fund value

  • Where a member’s total retirement fund value on date of retirement is R247 500 or less, the whole amount can be withdrawn as cash (this was previously R75 000)
  • Where a member’s vested portion of a provident or provident preservation fund value on date of retirement is R247 500 or less, the whole amount can be withdrawn as cash
    • Will be taxed according to the retirement tax table
  • Access to retirement annuity funds prior to retirement by foreign nationals

From 1 March 2016 foreign national and non-residents will have access to their South African retirement funds. At the moment only persons that formally emigrate can access their retirement annuity fund as a lump sum prior to retirement.

  • Tax changes affecting global insurance policies
    • The legislation included changes to the tax treatment of global insurance policies. Effectively, it means that all income received by the insurer must be included in the gross income of the policy holder fund. The new treatment limits the tax benefits of global insurance policies although there remains benefits relating to estate planning and foreign countries’ death taxes.

*including pension, provident & retirement annuity funds **Excludes annuities and retirement lump sums *** Annuitisation requirement only applies to retirement. Access to the full value of the fund will be accessible in case of resignation or retrenchment.