TAXATION LAWS AMENDMENT
Taxation Laws Amendment Act 7 of 2010
The Taxation Laws Amendment Act, No. 7 of 2010, which was signed into law and published in the Government Gazette, No. 33726, on 02 November 2010, introduced a number of important amendments to the tax laws affecting the retirement fund industry. Below are four of the relevant changes.
When do Lump Sum Benefits Accrue?
Paragraph 4 of the Second Schedule to the Income Tax Act ("the ITA") was amended to include all lump sum benefits and to stipulate that any benefit that accrues on or after 01 March 2011 will accrue on the earliest of the date on which:
● an election is made in respect of which the benefit becomes recoverable;
● any amount is deducted from the benefit in terms of section 37D (housing loans or guarantees, compensation payments to the employer, outstanding medical scheme subscriptions and insurance premiums)
● the benefit is transferred to another fund;
● the member retires; or
● the member dies.
This amendment makes it clear that the accrual date is the actual date on which the member signs the election form and not the date on which a fund pays a benefit according to the member's election.
Transfer to Preservation Funds
The definitions of preservation funds have been amended with effect from 01 March 2008 to allow these funds to receive transfers as a result of the partial winding up of a fund. So, if the employer terminates their participation in a fund, the member has the option to transfer their benefit to a preservation fund. The member may also choose to:
● have the benefit paid to them in cash, which will result in it being taxed immediately;
● transfer their benefit to an approved stand-alone fund established by the employer, if the employer did establish such a fund; or
● transfer their benefit to a retirement annuity fund, where the benefits are then "locked in" until age 55.
Taxation on Retrenchment
Paragraphs 2(1)(a) and 6(1) of the Second Schedule to the Income Tax Act have been amended to allow for a lump sum retrenchment benefit to be transferred, tax-free, to another approved fund. The result of the change is that a member can take R300 000 of their retrenchment benefit in cash and transfer the balance, tax-free, to another approved fund. This cap was changed to R315 000 at the start of the new tax year.
Taxation on Divorce
Paragraph 2(1)(b)(iA) of the Second Schedule to the Income Tax Act outlining taxation of divorce benefits has also been amended. Any divorce order granted after 13 September 2007 but accruing after 1 March 2009 will form part of a person's gross income and will be taxed in accordance with the withdrawal / resignation table. Any divorce order that was granted before 13 September 2007 but accrues after 1 March 2009 will not form part of a person's gross income. So, if a non-member spouse now claims payment from a fund in respect of a divorce order granted before 13 September 2007, neither of the ex-spouses will pay tax on that amount.
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