Retirement fund members can buy a mix of annuities

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The Taxation Laws Amendment Act (TLAA) of 2021, which, among things, gives retirement fund members greater flexibility in terms of the type of annuities they can purchase, was promulgated on 19 January.

The TLAA contains other important changes for individual taxpayers, including the following areas:

  • Transfers between preservation funds
  • Clarifying the classification of risk benefits
  • Clarifying when an asset is acquired from a deceased estate
  • Extending the taxable fringe benefit exemption on long-service awards

More flexibility when buying annuities

Currently, an annuity can be paid to a member in one of three ways:

  • Directly by the retirement fund to the member; or
  • Purchased from a South African-registered insurer in the name of the fund; or
  • Purchased by the retirement fund from a South African-registered insurer in the name of the life of the retiring member.

As a result of the amendment to the Income Tax Act, members will be able to buy a variety of annuities – for example, a combination of living and guaranteed annuities. However, the portion of the retirement interest used to purchase each type of annuity must exceed R165 000.

The amendment applies in respect of annuities purchased on or after 1 March this year.

Tax-free transfers between preservation funds

Also on the retirement front, fund members who have reached normal retirement age will be allowed to make tax‐free transfers from a preservation fund into similar funds.

Currently, paragraph 6A of the Second Schedule to the Income Tax Act permits the following tax deductions when calculating the retirement lump sum benefit to be included in gross income:

  • Transfers from a pension fund into a pension preservation fund or a retirement annuity fund; or
  • Transfers from a provident fund into a pension preservation fund, a provident preservation fund or an RA fund.

A member of a pension preservation fund or provident preservation fund who has reached normal retirement age but has not opted to retire and who transfers a benefit between preservation funds is subject to tax. This is despite the fact that National Treasury’s policy intention is not to tax transfers from a less to a more restrictive fund, or between similar funds.

The amendment to the Income Tax Act addresses this anomaly by allowing tax‐free transfers from a preservation fund into similar funds by members who have reached normal retirement age.

The amendment will come into operation on 1 March and will apply in respect of the years of assessment commencing on or after that date.

Risk benefits classified as a defined contribution component

Another amendment addresses instances where a retirement fund provides both a defined contribution component and a risk benefit.

From March 2016, employer contributions to a retirement fund on behalf of employees are considered taxable fringe benefits in the employees’ hands. If the contribution contains a defined contribution component, the value of the fringe benefit is the cash equivalent of that part of the contribution that pertains to an employee. In addition, the employer is not required to provide the employee with a contribution certificate.

However, where a retirement fund provides both a retirement and a risk benefit, the current interpretation of the Income Tax Act results in the total contribution being classified as a defined benefit component, subject to valuation in terms of the formula in the Seventh Schedule to the Income Tax Act, as well as the issuance of a contribution certificate. This is because risk benefits are not considered a defined contribution component.

The Income Tax Act has been amended so that risk benefits are classified as a defined contribution component. This ensures that retirement funds that provide both a defined contribution component and a risk benefit can account for the fringe benefit based on the actual contribution. As a result, the value of the risk premiums will be determined based on the actual contribution made by the employer.

Acquisition of an asset from a deceased estate

The TLAA has introduced an amendment that clarifies when heirs are regarded as having acquired an asset from a deceased’s estate.

The heirs of an estate have a right to claim delivery of the assets from the deceased estate after the finalisation of the liquidation and distribution account. The L&D account must lie open for inspection in the Master of the High Court’s office for 21 business days. If no objection is lodged against the account, it can be finalised. If any objections are lodged against the account, it must remain open for inspection for another 21 business days (this 21-day period will be required until such time as no objections are raised).

In order to clarify the time of the heirs’ right to claim delivery of the deceased estate’s assets, sections 1(1) and 25(3) of the Income Tax Act have been amended so that the disposal of the assets by the estate occurs on the earlier of the date of an interim disposal or the date when the L&D account becomes final.

The amendment will apply in respect of L&D accounts finalised on or after 1 March.

Tax exemption on long-service awards

The tax exemption on long-service awards has been extended, so that it will not only apply to non-cash assets but also to other “reasonable awards” granted for long service.

In order to qualify as a no-value fringe benefit, all the current requirements in the Act should be met – for example, the number of years required to be considered a long-service period and the value of the award should not exceed R5 000.

The amendment will come into operation on 1 March.

Treasury said the amendment to the Income Tax Act was necessary because employers grant their employees a wider range of long-service awards, such as gift vouchers, cash, services or giving the employee the right to an asset owned by the employer for private purposes.