INSTITUTE OF RETIREMENT FUNDS
28 May 2007
Representations: Pension Funds Amendment Bill 2007
We hereby submit representations and comments on behalf of the Institute of
Retirement Funds ("IRF") on the Pension Funds Amendment Bill 2007 for
consideration by Parliament.
To the extent that the IRF submitted comprehensive comments in November 2006
and March 2007 on the previous draft Pension Funds Amendment Bill, and such
comments were incorporated into the amendments, these have not been repeated.
We commented on retroactive provisions, and believe that the benefit of such
may merit attention. However, reference is made to the IRF's previous comments
where necessary.
This submission comprises 3 components, namely:
1. General Comment
2. Detailed submission on Divorce on Section 370 of the proposed Pension
Fund Amendment Bill of 2007; and Paragraph B of the Second Schedule of the
Income Tax Act
1. General
1.1 The definition of "spouse" refers to "permanent life
partner". It is not clear that this is appropriate in relation to any of
the statutes or religious tenets subsequently mentioned in the definition. Thus
the following is proposed wording is submitted:
"spouse" means a person who is a partner or spouse in
·
a marriage in accordance with the Marriages Act, 1961
(Act No. 25 of 1961);
·
a customary marriage in accordance with the
Recognition of Customary Marriages Act, 1998 (Act No. 120 of 1998);
·
a civil union in accordance with the Civil Union Act,
2006 (Act No. 17 of 2006); or
·
a union validly concluded under a system of religious
law.
1.2 Section 11 of the Bill:
We refer to point 1.4 of the IRF submission on the first draft of the Bill,
which raised concerns about inter alia nil schemes. Section 15B(11) can be
construed to require all funds that have already submitted nil schemes to do so
again. Should this not be the intention, it should be clarified in the
legislation. We propose an additional proviso to section 40B of the Act as
follows:
"Provided further that in the case of funds that have prior to the
effective date made submissions stating that the funds had no actuarial surplus
to apportion in terms of section 15B, the Registrar must inform each such fund
of whether or not its submission satisfies the requirements of this amendment
and, if not, grant such fund a reasonable period of time to review its
submission and submit a nil return or a scheme, as may be appropriate."
1.3 Section 26 of the Bill:
An issue with section 37(1) is the high daily maximum, although it may be
argued that it is correct to have the limit in the body of the Act.
The current minimum penalty of R50 is insufficient, however, the proposed
maximum penalty of R5m per day appears unjustifiably high. Imposing the maximum
on a fund could bankrupt that fund.
1.4 Section 27(a) of the Bill:
Section 37C: The rules of most of DC funds provide that the death benefit is a
pension payable to the dependants/nominees, which pension may on application be
commuted. If the Bill is passed in its current form, all these death benefits
will be removed from the ambit of 37C, which is not the intention. The Bill
should only exclude specifically the spouse's and children's pensions provided
for in terms of fund rules.
2. Section 28B(b) of the Bill:
Detailed submission on the division of pension interests on Divorce on
Section 37D of the proposed Pension Fund Amendment Bill of 2007; and Paragraph
B of the Second Schedule to the Income Tax Act
2.1 Introduction
Due to the urgency thereof, the submissions contained herein will only deal
with the divorce provisions contained in the abovementioned proposed Pension
Fund Amendment Bill and the Taxation Laws Amendment Bill, 2007. We shall also
briefly deal with the issue of Maintenance orders on funds.
The submissions contained herein relate to both the above pieces of proposed
legislation because the tax submissions and the pensions bill submissions are
inextricably linked.
The sections which are referred to herein are:
·
the proposed section 370 changes
·
Section 7(8)(a) of the Divorce Act which is referred
to in the proposed section 370 amendment.
·
Section 7(8)(b) of the Divorce Act
·
Paragraph 2B of Second Schedule which deals with the
taxation of the amount allocated to the non-member spouse.
For ease of reference we have attached a copy of the
three pieces of legislation in annexure A hereto.
2.2 Background
2.2.1 Proposed section 37D read with section 7(8)(a) of the Divorce Act
When the draft legislation was first released which incorporates the welcome
clean break principle at date of divorce, there were divided views on whether
the proposed legislation sought to tax the non-member's portion at date of
divorce or at a later date when the member became entitled to benefits in terms
of the rules of the fund, eg at retirement or resignation.
At a meeting between the IRF Legal and Technical Committee and representatives
of SARS; National Treasury and the FSB, Mientjie Botha on behalf of National
Treasury indicated an expectation that the tax would be due when the allocated
portion accrues to the non-member spouse.
·
On an early reading of the proposed legislation, it
was assumed that this was because it had been had interpreted that the
legislation would allow for a deemed accrual of the "pension benefit"
at date of divorce, merely for this limited purpose
·
This would have allowed for the fund to have paid over
the gross allocated portion to the non-member spouse.
·
It would then have allowed for tax to be paid by the
fund out of the remaining pension benefit which was deemed to have accrued on
date of divorce.
·
The member would then have had a right of recovery of
the tax from the member under the proviso to Paragraph B.
·
Unfortunately on actual accrual from the fund, the
benefit would have been taxable again. Hence the need for the tax on tax
formula was discussed.
However on a more careful reading of the proposed legislation
we have reached the following opinion.
·
The fund may deduct from the member's benefit or
actuarial reserve an amount assigned to a non-member spouse from the member's
pension interest.
·
The legislation refers to section 7(8)(a) of the
Divorce Act. It deems the pension benefit referred to in that section to accrue
to the member on the date of the court order. The pension benefit to which
Section 7(8)(a) refers is the part of the pension interest which is allocated
to the non-member.
·
Therefore only the portion allocated to the non-member
is deemed to accrue at date of divorce. Neither the pension interest nor the
pension benefits or actuarial reserve is deemed to accrue on date of divorce
under section 370.
2.2.2. Paragraph 28 of the Income Tax Act
On a reading of the proposed paragraph 28 of the Second Schedule to the
Income Tax Act the following is noted:
·
Paragraph 28 applies to the case in point where a
court has made an order that any "part" of the pension interest must
be paid to a former spouse of a member
·
It deems "that part" to accrue to the member
on the date on which the PENSION INTEREST, of which that amount forms part,
accrues to the member.
Therefore from the reading of the above three sections
together the following is noted;
·
Only the non-member's allocated portion accrues at
date of divorce
·
The pension interest only accrues when the member
becomes entitled to a pension benefit under the rules of the fund.
·
Taxation of the non-member's allocated portion is
postponed until the date on which the pension benefit accrues. It is not due on
date of divorce.
·
It appears that the intention of National Treasury is
not borne out by the proposed legislation.
2.3 Recommendations
2.3.1. Divorce orders after the date of the new legislation
The following changes are proposed which is believed to be equitable to all concerned.
The following will state the intended effect. We will thereafter provide
suggested changes to the wording of the legislation to give effect to the
changes.
Proposed changes
·
The non-member's allocated portion is deemed to accrue
for tax purposes on date of divorce.
·
The tax is payable at the member's average rate of tax
and is deemed to be the member's liability for tax
·
The tax is payable from the non-member's allocated
portion
·
The fund will deduct the tax payable by the member
from the allocated portion and pay the amount over to SARS.
·
The fund will pay the net amount of the allocated
portion directly to the non member in cash within 60 days where after interest
will be payable
·
The right of recovery will be removed from Paragraph
2B
The effect:
·
SARS is able to tax the non-member's allocated portion
on date of divorce in line with its expectation
·
The tax is payable at the member's average tax rate.
There has been some debate as to whether in future the allocated portion should
be taxed at the non-member's tax rate. On reflection, it is submitted that the
taxation of the benefit at the member's tax rate is correct in principle. The
Divorce Act deems a Pension Interest, as defined, to form part of the member's
patrimonial assets on divorce. However, a member's interest in a fund is a
taxable asset. If the member were able to withdraw from the fund at date of
divorce, only the net proceeds after tax would fall into the member's estate to
be available for division on divorce.
·
The non-member is only entitled to the net amount and
therefore it is equitable for the tax to be withheld by the fund prior to
payment of his! her allocated portion.
·
Submissions will be made in our second report for the
Divorce Act to be changed in the longer term. But support for our view that tax
may be deducted is also contained in section 7(8) (b) which provides the
following:
(b)
any law which applies in relation to the reduction, assignment, transfer,
cession, pledge, hypothecation or attachment of the pension benefits, or any
right in respect thereof, in that fund, shall apply mutatis mutandis with
regard to the right of that other party in respect of that part of the pension
interest concerned.
·
Income Tax is "any law" which will result in
a reduction of the rights of the non-member spouse in relation to that part of
the pension interest concerned.
·
It removes the need for the member to exercise an
almost impossible right of recovery of the tax from the non-member spouse.
·
It gives real effect to the clean break principle.
2.3.2 Application of the clean break principle to
divorce orders which have been made against funds prior to the new legislation.
Proposed changes
·
It is submitted that, in principle, the clean break
principle should be extended to existing divorce orders.
·
The current wording of the proposed Pension Fund
Amendment Bill does not provide for the new provisions to apply
retrospectively.
·
The proposed legislation needs to be amended to allow
this as historically large numbers of non-member spouses have suffered and will
continue to suffer unfairly due to inequitable provisions which have existed in
the law since 1989
·
Regard needs to be had to the administrative and
liquidity burden which may befall approved funds which are faced with an
avalanche of non-member spouses making claims which were unexpected for an
extended period of time.
The effect
Therefore, in light of the above, the following is proposed:
·
The legislation is to apply retrospectively
·
In order for it to potentially have a staggered effect
in practice, there will not be an automatic earlier accrual
·
The date of accrual of the allocated portion to a
non-member spouse with an existing divorce order will be deemed to accrue on
the date of claim.
·
Date of claim will be defined and will be on the date
of receipt by the fund of a written request for payment after the date of the
new legislation.
·
Wording to this effect will be introduced in both the
Pension Fund Amendment Bill and the Taxation Laws Amendment Act to reflect this
·
Suggested wording is drafted hereunder.
2.3.3 The proposal to allow a transfer to a new fund:
It is submitted that the option to transfer should preferably be removed.
· The member has already been taxed on the benefit, so only the net amount would be transferred. However there is no provision in the Second Schedule which provides the non-member spouse with a credit for that tax payment on exit from the transferee fund. Therefore the non-member would be taxed again on the benefit.
·
Proposals for transferability to another approved fund
were linked with the idea of a gross payment of the allocated portion to the
transferee fund and for the tax liability to fall on the non-member on exit
from the new fund. This situation does not currently apply so this provision
should be removed.
·
There is also a view that the Divorce Act authorises
the fund to only make a payment in cash to the non-member spouse.
·
Failing the removal of the transfer benefit, the
Income Tax Act will need to be amended to provide the non-member spouse with a
credit or deduction for the after tax nature of the transfer to the transferee
fund, which may be cumbersome.
2.4.
Suggested amendments to section 37D and paragraph 28 of the Second Schedule
to give effect to the submissions referred to above |