tax break plan for pension compensation CAPE TOWN — SARS has proposed tax exemptions for individual recipients of surplus pension fund apportionment as well as to individual beneficiaries of the R2,5bn-R3bn compensation offered by the life industry for the high penalties and excessive charges it imposed on the early termination of retirement and endowment policies.
13 March 2007
The tax breaks were originally meant to apply to the payment of existing retirement, provident and pension funds, due to surplus apportionment, but have now been extended to individual recipients of payouts if they are no longer a member of the fund or the holder of a policy.
The effective date of the tax exemption will be 1 January 2006. The surprise inclusion of these tax-break clauses in the Taxation Laws Amendment Bill were explained to Parliament’s finance committee on Friday by treasury and SARS officials.
The bills give effect to the tax proposals announced by Finance Minister Trevor Manuel in the 2007-08 budget.
Manuel’s most significant tax proposal, with respect to retirement funds, was the repeal of the 12,5% tax on the rental and interest income of retirement funds as from 1 March 2007.
The treasury’s head of tax law design, Keith Engel, said the rationale for the tax relief was to partly compensate individuals and funds for prior losses and to ease SARS’s administrative burden.
With respect to the payment of compensation amounts by life companies, Engel said the tax break would apply to a small number of people who qualified and were no longer holders of retirement or endowment policies.
The Pensions Fund Act was amended in 2001 to ensure surplus employer contributions were paid out to retirement fund members and former members. Engel said these payments began in earnest in early 2006.
The compensation payments by the life industry emerged from an agreement between the treasury and the retirement industry in December 2005 to protect individual policyholders against excessive fees or penalties charged when they discontinued contributions.
The five biggest life companies agreed to plough R2,5bn-R3bn into the funds of retirement annuity and endowment policyholders to address the deluge of complaints over high charges, penalty fees and low investment returns.
The assurers undertook to bolster minimum values of savings policies where the premium payments were stopped early. It was also agreed that in future, penalties would not reduce funds to below 70% of the contribution.
The Tax Laws Amendment Bill provides that no tax-free unbundling, to pension holdings above 5%, would be allowed or tax-free liquidations of pensions.
Engel said amendments to the taxation on lump-sum withdrawals from pension and provident funds were pending.