The Association for Savings and Investment South Africa (ASISA) has called for amendments to the 2024 Revenue Laws Amendment Bill, saying the retrospectivity of certain provisions may result in some retirement funds’ rules becoming non-compliant with the two-pot legislation.
The Revenue Laws Amendment Bill is designed to fix problems with the Revenue Laws Amendment Act of 2024, which established the two-pot system via amendments to the Income Tax Act.
But ASISA told the National Assembly’s Standing Committee on Finance on Tuesday it is concerned that the Amendment Bill may create new problems – particularly for members of provident and provident preservation funds.
ASISA represents the service providers to retirement funds, such as fund administrators and life insurance companies.
The Revenue Laws Amendment Act of 2024 was signed into law in June. Before that, National Treasury, recognising there were problems with the legislation that needed to be fixed, published the draft Revenue Laws Amendment Bill in February.
Treasury published a second, revised version of the draft Bill in August. ASISA said the latest version of the Bill differs in several respects from the original.
It said there are two areas where the retrospective nature of provisions in the latest version is problematic:
- The conditions that determine whether members of provident preservation funds who were aged 55 or older on 1 March 2021 (what is referred to as T-Day) are automatically excluded from the two-pot system.
- The seeding date for members of provident funds and provident preservation funds who were 55 or older on T-Day and who decide to opt into the system.
- Conditions to opt in
The August version of the Bill states that provident preservation fund members must meet two conditions to be automatically excluded from the two-pot system: they were 55 years or older on T-Day and they have remained a member of the same provident preservation fund since then.
But the February version of the Bill and the Revenue Laws Amendment Act of 2024 could be interpreted to mean that the person did not have to remain in the provident preservation fund to which they belonged on 1 March 2021.
ASISA said different retirement funds drafted their rules according to their understanding of Treasury’s intentions, and the FSCA has approved these rules.
- Seeding date
The latest version of the Amendment Bill states that where members of provident funds or provident preservation funds who were 55 or older on T-Day elect to participate in the two-pot system, the calculation of the seeding amount must be based on the value of the member’s vested component on 31 August 2024.
But in the February version of the Bill, the calculation must be based on the value of member’s vested component on the last day of the month during which the election to opt in was made, ASISA said.
The rules of some funds base the calculation on the value of the member’s vested component on 31 August 2024, while others stipulate the last day of the month during which the election was made. The FSCA has approved rules that provide for both.
ASISA’s proposal
ASISA said that, in both of the abovementioned cases, fund administrators have implemented systems based on their approved rules, which have been communicated to members.
It submitted that the Act should not be amended in a way that will make all actions that funds have taken according to their approved rules unlawful.
ASISA proposes that funds should be given the option to select which approach they will follow. In other words, they should be permitted to retain the approach that has been incorporated into their rules and communicated to their members.
Other proposed amendments
In addition to removing the retrospectivity of the abovementioned provisions, ASISA said other changes need to be made to the Amendment Bill. These include:
De minimis calculation
At retirement, a member can take the entire retirement component as a cash lump sum if 100% of the amount in the member’s retirement component plus two-thirds of the amount in the member’s vested component is R165 000 or less.
ASISA said funds have drawn up different definitions in their rules of how this de minimis calculation should be performed, some of which could give rise to confusion.
It has proposed the inclusion of a clearer definition that will avoid misunderstanding and ensure the consistent application of the calculation by all fund administrators and SARS.
Tax residency and preservation funds
The Amendment Bill provides that members of pension preservation funds and provident preservation funds can make a cash lump-sum withdrawal if they have ceased to be a South African tax resident for at least three years.
ASISA said the Bill does not take into consideration that members are permitted to make one partial or full withdrawal before their minimum retirement age (as determined by the fund’s rules). The Bill should be amended to provide that the three-year waiting period should apply only where the member has already taken a once-off withdrawal.
Deduction of maintenance claims
ASISA also wants the Amendment Bill to make it clear that maintenance order claims must be deducted proportionately across all three components, as is the case with other deductions permitted in terms of section 37D of the Pension Funds Act.
National Treasury has communicated that maintenance orders should be so deducted, but it seems this provision has been mistakenly omitted from the Bill.
Retirement calculations per contract or per fund?
The Revenue Laws Amendment Act and the Amendment Bill stipulate that retirement fund calculations must be performed at contract level, not fund level. A member can, for example, have a number of contracts in the same retirement annuity fund.
ASISA said it is unclear which approach should be followed at retirement: must the calculations be performed per contract within the fund or on the entire amount in the fund? SARS, when determining tax at retirement, looks at fund level, not contract level.
ASISA said the Bill should include an amendment to make it completely clear whether contracts must be dealt with separately or collectively on retirement.
Excluded funds
Treasury told the Committee during the public hearings on the 2024 Revenue Laws Amendment Act, when it was before Parliament as a Bill, that funds in liquidation and dormant funds would be excluded from the two-pot system.
But the Act does not provide for the exclusion of these types of funds, which appeared to be a drafting error, ASISA said.
