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Budget proposes changes to the tax regime of retirement funds

The government proposes to address anomalies in the Income Tax Act to ensure that members of pension and provident funds are treated alike, according to proposals announced in the Budget Review.

The anomalies are largely a result of the mandatory annuitisation of provident fund benefits from 1 March last year.

The amendments will address the following issues:

Taxfree transfers from a pension fund to a provident fund

Result of the amendment

Transfers from a pension fund to a provident fund related to contributions made before 1 March 2021 will not be taxed.

Reason for the amendment

Before the mandatory annuitisation of provident funds came into effect in 2021, transfers to a provident or provident preservation fund would be taxable if the transfer was made from a fund that had mandatory annuitisation requirements.

From 1 March 2021, transfers to a provident or provident preservation fund would be tax‐neutral irrespective of the type of retirement fund from which the retirement interests were transferred.

The provisions of paragraph 6(1) of the Second Schedule to the Income Tax Act create an anomaly: transfers from a pension fund to a provident fund related to contributions made before 1 March 2021 are not tax-free.

The proposed amendment will mean that transfers to a provident fund or a provident preservation fund will be tax-free, irrespective of the type of retirement fund from which the retirement interest is transferred and the when the contributions were made.

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

Result of the amendment

The lump sums received by members of provident funds who retire before age 55 for reasons other than ill health will be taxed as a retirement benefit, not a withdrawal benefit.

Reason for the amendment

Paragraph 4(3) of the Second Schedule to the Income Tax Act treats pension and provident funds differently. According to this paragraph, if a member of a provident fund who is younger than 55 retires from that fund 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. To address this anomaly, the government proposes to delete paragraph 4(3).

Transfer of the total interest in a retirement annuity fund

Result of the amendment

A member of a retirement annuity fund will be able to transfer more than one contract.

Reason for the amendment

The Income Tax Act allows members of retirement funds to transfer their retirement interest from one fund to another. This provision is subject to certain conditions – for example, if the individual is transferring to a similar type of retirement fund or from a less restrictive to a more restrictive retirement fund and – in the case of RA funds – if the total interest is transferred.

These conditions result in RA fund members with more than one contract in a particular fund being restricted from transferring one or more contracts from one RA fund to another. However, members of a preservation fund are not restricted on the proportion of their retirement interest that can be transferred into another fund.

To address this anomaly, government proposes changing the legislation to allow fund members to transfer one or more contracts in an RA fund, subject to certain conditions to ensure that the current minimum thresholds are not contravened.

Vested rights when transferring to a public-sector fund

Result of the amendment

Members’ historically vested rights will remain protected if a transfer is made to a public‐sector fund.

Reason for the amendment

The annuitisation of provident fund and provident preservation fund benefits came into effect subject to the protection of vested rights. The protection of vested rights applies as follows:

  • Members of a provident or provident preservation fund at 1 March 2021 will not be required to annuitise any historic vested rights.
  • New vested rights in relation to members who are 55 years or older at 1 March 2021 will remain protected provided the member remains in that same fund.
  • Historical vested rights may be transferred into another retirement fund without forfeiting their vested rights protection (irrespective of the number of transfers effected).

The current provisions forfeit the protection of historical vested rights if a transfer is made into a public‐sector fund. This is because the pension fund and provident fund definitions do not make any reference to the protection of vested rights for individuals who were members of a provident fund or a provident preservation fund at 1 March 2021.

The government proposes amending the pension and provident fund definitions to ensure that historical vested rights remain protected even if they are transferred to a public‐sector fund.

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