The way in which savings benefit withdrawals are taxed is designed to benefit low-income earners, says National Treasury.
The tax revenue the government will receive from savings component withdrawals under the two-pot retirement system came up for discussion during a meeting of the National Assembly’s Standing Committee on Finance on Tuesday.
Pre-retirement withdrawals from the savings component are taxed at a fund member’s marginal tax rate.
One of the Bills on which National Treasury briefed the committee was the 2024 Revenue Laws Amendment Bill, which, among other things, removes the tax directive requirements for the transfer of the “seed capital” from the vested component to the savings component and for transfers between components within the same fund.
Economic Freedom Fighters MP Sinawo Thambo said the public has not been sufficiently educated about the tax implications of the two-pot system, so instead of “being the progressive tax reform that we all imagined it to be and supported”, it has become a “massive” source of revenue collection for the South African Revenue Service (SARS).
Earlier this month, the Congress of South African Trade Unions called on Treasury to introduce tax concessions for low-income members who withdraw money from their savings component.
Read: Cosatu wants urgent discussions with Treasury over changes to two-pot system
National Treasury’s acting head of tax and financial sector policy, Chris Axelson (pictured), said the government did not implement the two-pot system to raise revenue.
In the Budget in February, Treasury said it would receive about R5 billion in additional tax revenue from the two-pot system, compared to the estimated R12bn the fiscus receives in tax as a result of withdrawals from retirement funds.
Axelson emphasised that fund members pay no tax on retirement fund contributions – indeed, contributions are tax-deductible. Furthermore, the growth on those contributions within a retirement fund are tax-free – there’s no capital gains tax, dividends tax, or tax on interest income.
Under the previous rules (which still apply to the vested component), fund members who withdrew money before retirement because of resignation or retrenchment would pay tax on the withdrawal. The tax would be based on the withdrawal benefit tax table, or the retirement fund lump-sum benefits or severance benefits table, Axelson said.
He said Treasury did not favour this approach to taxing withdrawals from the savings component. This is because, with the withdrawal benefit and the retirement lump-sum benefit tables, the tax liability depends on how much a taxpayer withdraws cumulatively over time, not on his or her taxable income.
In the case of the withdrawal benefit table, people who withdraw more than R27 500 are charged tax even if they have no income, and the tax rates increase from 18% to 27% to 36%.
Under the two-pot system, on the other hand, the savings component withdrawal is added to the fund member’s income, which means that individuals who have no income, or a very low income, will not pay any tax, Axelson said.
The tax threshold for people under 65 years is R95 750. He said fund members will pay no tax if their savings benefit withdrawal and their income in the tax year do not exceed R95 750.
“However, if you have a high income and you withdraw from the two-pot system, you will be taxed a higher amount, to make it progressive, and the whole point of the system is to be progressive and to try and help those on lower incomes. If you have a lot of income, you shouldn’t be withdrawing the money, because you have a lot of income,” Axelson said.
“Tax needs to be paid at some point. We couldn’t have a system where people can withdraw money out of their funds and no tax was ever paid. In our view, that isn’t progressive.”
Postponing the tax pain
Meanwhile, Momentum Investo actuarial specialist Paul Menge has warned that fund members face paying more tax if a savings benefit withdrawal pushes them into a higher tax bracket and the additional tax was not paid when the withdrawal was made.
A member’s tax rate, the so-called marginal rate, is based on an income bracket or range. If their current income is close to the top level of the bracket, the income from a savings component withdrawal can push them over that level into a higher tax bracket.
Taxpayers can also be pushed into a higher bracket if they receive a salary increase during the tax year, or some other windfall. The combination of a two-pot withdrawal and a salary increase can push them into a higher bracket.
When SARS conducts an assessment, it will look at a taxpayer’s total yearly income, determine their tax bracket, and claim tax based on the full picture.
“If you didn’t pay the higher tax when the withdrawal was made, you will have to repay this when you submit your annual tax assessment. If you cannot afford it at the time and have to make another two-pot withdrawal to pay SARS, it perpetuates that you keep paying the emperor more than what you had anticipated,” Menge said.
He said Investo is seeing a trend where clients fill in “nil” when asked for their annual taxable income when they make a two-pot withdrawal. “The same principle may bite them when SARS does their yearly assessment. If you earn a taxable income, SARS will demand its pound of flesh come assessment time. You are only postponing the pain or making it worse.”
Non-payment of contributions
Thambo also wanted to know what SARS or the FSCA could do about employers that do not pay over contributions to retirement funds.
He said there is a correlation between non-compliance with respect to contribution payments and the effectiveness of the two-pot legislation. If contributions are not paid, members will not have money available to withdraw, which, in turn, will negatively impact the revenue SARS anticipates it will collect.
Franz Tomasek, the head of legislative policy tax, customs and excise at SARS, agreed that the failure to pay contributions to funds has an impact on SARS. The affected fund members are receiving a tax deduction for the contributions, and when the member seeks to make a withdraw, there is nothing available.
He said there are steps SARS can take to pursue non-compliant employers – they might have appropriated the money for their own account, which means they would incur a tax liability. “The fact that you’ve got income that is illegal doesn’t stop the fact that it is taxable, so SARS might want to do something along those lines.”
Tomasek said although there are lines of communication between SARS and the FSCA, SARS was not in a position pursue employers that contravened the Pension Funds Act. “But what we can do is tease out the tax implications of what that non-compliance has led to and then implement those tax consequences.”
In March, the FSCA published the names of about 4 100 entities that were allegedly in arrears with their retirement fund contributions at the end of July 2023. Most of the employers on the list owed contributions to the Private Security Sector Provident Fund. Other funds whose names come up repeatedly were the Transport Sector Retirement Fund, the Municipal Councillors Pension Fund, and the Metal Industries Provident Fund.
The alleged “worst offenders” (four entities) have been in arrears for 21 years.
Read: Arrear contributions: 10 employers should not have been on the list
Naheem Essop, the Deputy Pension Funds Adjudicator, said earlier this month that the Adjudicator’s office has received 1 996 complaints about arrear contributions since 1 January 2024. Another 1 768 complaints were classified as withdrawal benefit types of complaints, which typically include issues relating to arrear contributions.
On Tuesday, News24 reported that the Minister of Co-operative Governance and Traditional Affairs (CoGTA) wants municipalities to be investigated amid allegations that they failed to pay contributions to fund administrators.
The FSCA’s list of delinquent employers included more than 20 municipalities.
The report quoted Velenkosini Hlabisa as saying that the failure to pay over contributions constituted financial mismanagement and was a criminal offence.
Hlabisa said he would ask CoGTA MECs to institute investigations in terms of section 106 of the Municipal Systems Act. If they did not intervene, he would, News24 reported.
