The Income Tax Act contains, in section 11F, similar tax treatment for the deductions from taxable income for contributions to pension funds, provident funds and retirement annuity funds. Previously, contributions to these funds were treated differently from income tax purposes.
Further retirement fund reforms intended to harmonise the treatment of different retirement funds, deal with the annuitisation requirements for provident funds. The primary objective of the 2013 amendments was to enhance preservation of retirement fund interests during retirement and to have uniform tax treatment across the various retirement funds, resulting in provident funds being treated similarly (as the case is with deductions) to pension funds and retirement annuity funds concerning the requirement to annuitise retirement benefits. These retirement fund reform amendments were supposed to come into effect on 1 March 2015. Parliament, however, postponed the effective date for the annuitisation requirements for provident funds initially until 1 March 2016, then until 1 March 2019 and eventually 1 March 2021.
Each postponement of the effective date requires several consequential amendments to various provisions of the Act. However, certain provisions were inadvertently left out in paragraph 6(1)(a) of the Second Schedule to the Act (dealing with the tax-neutral transfers between retirement funds). Failure to change the effective date in the provisions resulted in the non-taxable treatment of transfers from pension funds to provident or provident preservation funds taking effect from 1 March 2019.
The earlier effective date of 1 March 2019 for the tax neutral transfers from pension to provident or provident preservation funds creates a loophole as the intention was to align the effective date of the tax-neutral transfers from pension to provident or provident preservation funds with the effective date of retirement reform amendments, which is 1 March 2021.
To correct the inadvertent oversight, it is proposed that changes be made in the Act to align the effective date of the tax-neutral transfers from pension to provident or provident preservation funds with the effective date of retirement reform amendments, which is 1 March 2021.
Since these amendments appear to be inserted to correct an oversight, it is not expected that they will be met with much criticism from the industry. The public comment period is, however, open if the amendments do create some other unintended consequences.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)