Legislation aimed at addressing tax problems that could arise when the clean break principle is applied to pension interests at divorce has been redrafted and tabled in Parliament.
The Revenue Laws Amendment Bill of 2007 provides for an amendment to the Income Tax Act to recognise that if you make an early withdrawal from your retirement fund to pay your former spouse a share of your fund benefits in line with a divorce order, this withdrawal will be taxable in your hands on the date that it is paid over.
Previously, there were concerns that retirement fund members who got divorced and had some of their benefits paid over to a former spouse could face being taxed only when they resigned or retired from their retirement fund, possibly years later.
The Revenue Laws Amendment Bill also provides for an amendment to the Pension Funds Act to allow retirement funds to release more than just the amount awarded to a former spouse in terms of a divorce order. Funds will be able to pay from your benefits the tax you owe to the South African Revenue Service in respect of any portion of your benefits paid to a non-member former spouse in terms of a divorce order.
This will avoid a situation where a divorced retirement fund member who is expected to pay tax on the amount paid to his or her former spouse does not have the cash to pay the tax.
The memorandum to the draft legislation says a retirement fund member who withdraws benefits to pay a non-member former spouse in terms of a divorce order will still have a right to recover the tax paid on these benefits from his or her former spouse.
However, Jenny Gordon, a senior legal adviser at Old Mutual, says this provision has always been controversial and in practice is not used.
The redrafted legislation also ensures that if you, as a non-member former spouse, are awarded an amount from, for example, your ex-husband's retirement fund, you will be able to transfer this money to a retirement fund, such as a retirement annuity, and not face being taxed twice on this money.
When you, as a non-member former spouse, retire, you will be able to get the money that is transferred from your husband's retirement fund back out of your fund tax-free - either by way of a tax-free lump sum (within the limits on how much you can withdraw as a lump sum) or by way of a tax deduction on the annuity or monthly pension that you are paid from your retirement savings, Gordon says.
Parliament is expected to approve the Revenue Laws Amendment Bill before the end of year, but it may only be promulgated next year. However, once promulgated, the provisions will be effective from September 13 this year, when the clean break principle was introduced by way of an amendment to the Pension Funds Act in September this year.
The effect of this amendment is that non-member former spouses can now immediately access the portion of their former spouses' retirement fund benefits that they are awarded in terms of a divorce agreement.
Before this amendment, non-member former spouses, usually former wives, had to wait - sometimes many years - until their ex-husbands retired or resigned from their retirement funds, and in the interim they were not entitled to any growth on their portion of the retirement fund benefits.
After the amendment, Mamodupi Mohlala, the Pension Funds Adjudicator, ruled in a case before her that the amendment also applied to a former spouse divorced before the law was changed.
However, some pension funds and their administrators do not share the adjudicator's views on the retrospectivity of the amended law. The National Treasury has stated that it did intend the law to be retrospective and will, if necessary, put through another amendment to make this clear.
In the meantime, Gordon says, if an appropriate test case arises, an affected fund may decide to take the matter to court to get clarity on the issue. Gordon says funds cannot approach a court for a legal view but need a case in which a non-member former spouse, most probably a former wife who divorced a retirement fund member before September this year asks a fund to pay out her portion of the fund benefits. If the fund's legal advice is not to pay out, then a dispute will arise that can be taken to court.
The retirement fund industry is of the view that the amendment should be retrospective, but is also of the opinion that the way in which the amendment was drafted is such that currently it is not retrospective.