New bill gives more time for two-pot system rollout
On February 21 2024, the National Treasury released the Second Amendment Bill to make technical corrections to the Revenue Laws Amendment Bill (RLAB).
The Second Amendment Bill follows the proposal by finance minister Enoch Godongwana, that parliament extend the date of implementation for the twopot system contained in the RLAB from March 1 2024 to September 1 2024 for various reasons supported by industry stakeholders.
The bill eliminates the necessity for a tax directive when transferring the seeding amount from the vested to the savings components contemplated in the two-pot system.
The proposed amendments to the definitions of the three components exclude maintenance awards. This adjustment ensures consistency with existing tax provisions regarding the tax treatment of maintenance awards under section 7(11) of the Income Tax Act 58 of 1962.
Furthermore, the bill addresses intra-fund transfers and associated tax directives by proposing that the reallocations of amounts between the three components are not treated as transfers for which tax directives are required. Consequently, the requirement to obtain a directive for reallocations between the three components has been withdrawn in the Second Amendment Bill.
While these proposed changes are a step in the right direction to give effect to the two-pot system, the lead time provided still falls short of what industry stakeholders advocate for to overcome the practical challenges associated with the new system, including how it will be implemented for defined benefit funds (DB funds).
A major difference between defined contribution funds (DC funds) and DB funds is that in DC funds, it is possible to calculate the value of the contributions that the member has already made, but in DB funds, the final pension fund benefit will be based on the final salary of the member plus the number of years’ service.
The RLAB has provided for the one-third and twothirds allocations to the savings and retirement components of DB funds to be determined regarding a member's pensionable service on or after September 12 2024, or a reasonable method of allocation as approved by the Financial Sector Conduct Authority (FSCA).
The implementation of the two-pot system for DB funds must be carefully undertaken to ensure fairness to all members of each DB fund.
IMPLEMENTATION MUST BE CAREFULLY UNDERTAKEN TO ENSURE FAIRNESS
Any necessary engagements with the FSCA by DB fund administrators will also require additional lead time from the promulgation date to the implementation date which the Second Amendment Bill does not provide.
The Second Amendment Bill aims to clarify the language in the RLAB and simplify the directives system for both administrators and the South African Revenue Service, allowing for an efficient implementation of the twopot system. The deadline for public comment on the Second Amendment Bill is March 31 2024.