1. There’s a hole in the bucket! GN 29 & taxation of surplus Saul Gewer Senior Legal Advisor

2. Taxation of surplus lGN 29 contains the principles by which surplus is to be taxed lSeptember 2003 lWas agreed as a work in progress  Lots of work, no progress! Disclaimer – General Notes have no status in law

3. Taxation of surplus lFORMER MEMBERS What does GN29 say?  Former members to be paid surplus allocation as a cash lump sum (taxed at average rates). Accrual takes place at date SAS is approved – cannot be preserved! Why not? Principles of GN29: Payment is not in consequence of or following upon the retirement, death or withdrawal from the fund. Thus trf doesn’t satisfy the provisions of 2 nd Schedule or RF1/98

4. Taxation of surplus But what about: lCompulsory transfer of benefits of former members to funds in which they are active How? S15B(5)(e) “The Board shall determine how … the allocated portion of actuarial surplus shall be applied for their benefit” And: S15B(2)(b)(ii) A scheme may involve “increases to benefits or transfer values in respect of former members”

5. Taxation of surplus Compulsory transfer of benefits of former members: lClearly to be undertaken by S14 lFSB circular PF118? tSupport for non-taxation ITC1711 Taxation of benefits paid to former members lDirective issues: tFund to calculate average current salary tUnlikely to be accurate – possible ‘warnings’ to former members

6. Taxation of surplus lACTIVE MEMBERS What does GN29 say? tActive member benefits to be enhanced by surplus allocations on a tax-free basis. wBenefits will be taxed in the ordinary course (at average rates when members finally emerge from the fund) EASY?

7. Taxation of surplus BUT what abut the following: lActive member at surplus apportionment date leaves the fund prior to the approval of SAS? lActive member at SAD retires prior to SAS approval? lSurplus allocated to active member, who is then transferred from a pension to a provident fund?

8. Taxation of surplus lPROVIDENT FUND RETIREES What does GN29 say? Benefits to be paid in the form of a lump sum and taxed at average rates But: Unasked for concession – pensioners may transfer the benefit to an annuity on a tax free basis –Seems to contradict GN29 principles; falls into “gift horse in the mouth” category

9. Taxation of surplus lPENSION FUND RETIREES What does GN29 say? Surplus to be used to enhance pension payments- monthly pension will taxed at marginal rates; Except: where insurer is unable to use surplus to enhance an annuity contract-may be paid as a ‘once-off bonus pension’ but taxed at marginal rates Pension funds that pay an additional ‘commutation’ risk losing tax approval

10. Taxation of surplus  Justifiable difference between treatment of pension & provident fund retirees? -Nothing in either the ITA or PFA that prevents pension funds paying bonus pensions. -Bonus pensions do not have the characteristics of an annuity in para (a), better to be taxed under para (e)  Purchase of 2 nd annuities requires amendments to GN19

11. Taxation of surplus REPAYMENTS TO EMPLOYER lTaxed as a recoupment at corporate rate lNo tax consequence at any other stage Funding of deficits by the employer? lLump sum payments deductible under s11(l)(a) lWhat about s 15B(5)(d) arrangement? -accrual date? -tax treatment of any interest payable on such amounts?

12. RF1/98 Preservation of benefits lSARS requires an employment link at date of joining? -Employer to be participating in; -Member to be member of; Preservation Fund prior to the members exit date lSARS has confirmed that this requires both the employer and the member to have signed the application form prior to member’s last day of services; notwithstanding any ‘deeming’ in the rules of the preservation fund

13. Section 197 transfers lPurchase of a division which has no retirement arrangements by a company with existing retirement fund l Eligibility definition includes new employees lMust new employees be forced to join the fund? No- “Pension Fund” definition in the ITA (c)(ii)(cc) “persons who immediately prior to said date were employed by employer…may…on application made within a period of not more than 12 months…be permitted to become members of the fund…”

14. Thank you Questions?