Proposal to increase retirement funds’ offshore allowance

National Treasury’s proposal to harmonise the offshore limit for all insurance, retirement and savings funds will enable retirement funds to invest up to 45% of their capital offshore. This includes the 10% allowance for investments into other African countries, according to the Budget Review.

The proposal implies that the current Regulation 28 offshore limit of 30% will increase to 35%, with a further 10% in the rest of Africa (the current 10% limit on Africa will not change), said Andrew Davison, the head of advice at Old Mutual Corporate Consultants.

He said the unexpected, but welcome, change will provide greater flexibility for retirement funds and other institutions to access a wider set of opportunities for growth, as well as diversification.

However, not all commentators are convinced that the proposal, which is somewhat ambiguously worded, necessarily means that retirement fund members will be able to invest up to 45% of their fund’s assets outside of South Africa. Only once the amendments are gazetted will the implications for offshore allocations be known.

In his Budget speech, Finance Minister Enoch Godongwana also said amendments to Regulation 28 of the Pension Funds Act will be gazetted next month to enable greater investment in infrastructure by retirement funds.

Two-pot system

Regarding to the two-pot retirement system, Godongwana said “consultations are proceeding following the release of a discussion paper last year and the draft legislation on these amendments will be published for comment in the middle of the year”.

The minister said he does not have the authority to allow people to access funds at their discretion. “I will create an environment where people can do so, but it will be dependent on the approval of the trustees of each fund, and the trustees will have the final say.”

Michelle Acton: the key account manager at Old Mutual Corporate Consultants, welcomed the shift in focus from immediate access to improving retirement fund outcomes.

“More detail is required in terms of understanding the parameters that would allow for early access. This will need to be provided in the draft legislation that will be published for comment towards the middle of the year.”

Acton said more information on how National Treasury plans to tax contributions is also critical to the successful roll-out of the two-pot system.

“Our current retirement fund tax dispensation is a significant incentive to encourage retirement savings, so we do not believe that this should be amended due to the proposed two-pot system.”

Exit tax on retirement interest

The Budget Review confirms that the government will this year initiate the process of renegotiating the tax treaties with a view to imposing a tax on retirement interests when taxpayers cease residency. The proposal was withdrawn last year because it was at cross-purposes with South Africa’s treaty obligations.

Harry Joffe, the head of legal services at Discovery Life, said renegotiating the treaties was “a fairer solution to taxpayers than a drastic amendment of the Income Tax Act, such as was proposed last year, whilst still ensuring that South Africa obtains taxing rights on retirement fund money, even when the tax-emigrant becomes tax resident elsewhere”.

Stronger enforcement against wealthy taxpayers

To assist with the detection of non‐compliance or fraud through the existence of unexplained wealth, it is proposed that all provisional taxpayers with assets above R50 million be required to declare specified assets and liabilities at market values in their 2023 tax returns. The additional information will also help in determining the levels and structure of wealth holdings as recommended by the Davis Tax Committee.

Tertius Troost, manager: tax consulting at Mazars, said the move raised the question whether this was the start of gathering information for a wealth tax.

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