ATC240325: Report of the Select Committee on Finance on the Revenue Laws Amendment Bill [B39B - 2023] (National Assembly- section 77), dated 25 March 2024
NCOP Finance
Report of the Select Committee on Finance on the Revenue Laws Amendment Bill [B39B - 2023] (National Assembly- section 77), dated 25 March 2024
1.Introduction and background
The 2023 Revenue Laws Amendment Bill (RLAB) was formally tabled on 01 November 2023. The objectives of the RLAB are to amend the Income Tax Act (ITA), 1962, and certain definitions and provisions.
In this Bill, the government proposes implementation of the “two-pot” retirement system to address the concerns related to lack of preservation before retirement and lack of access to the retirement funds by households that are in financial distress. The “two-pot” system comprises a savings and retirement component for contributions made after 1 September 2024, while historical retirement benefits will be housed in a vested component. Individuals will have access to amounts in the savings component before retirement, for time of financial distress, and amounts in the retirement component are preserved until retirement.
The Bill also proposes (1) to make provision for the inclusion of defined benefit funds in the “two-pot” retirement regime, (2) to calculate the contributions to the savings and retirement components, and (3) that legacy retirement annuity funds be excluded from the provisions of the “two-pot” retirement system. Under the regime, pension fund members will be allowed to make the intra-fund transfers at any time they wish, and these transfers will be treated as tax-free transfers.
2.Processing of the Bill
Section 77 of the Constitution requires all money Bills to be considered by a procedure for passing revenue Bills established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 (4) requires the Committee to hold public hearings on the revenue Bills and report to the House.
On 21 November 2023, the Committee received a briefing on the RLAB from the National Treasury (NT). On 12 March 2024, the Committee received a briefing from NT on the changes made to the RLAB through the NA process.
The Committee received three submissions from the Association for Savings and Investment South Africa (ASISA), the Institute for Retirement Funds Africa (IRFA) and Congress of South African Trade Unions (COSATU). On 15 March 2024, the Committee held virtual public hearings which included COSATU and ASISA and considered the Bill clause-by-clause. NT responded to the issues raised during the public participation process on 15 and 19 March 2024. On 19 March, ASISA made a submission following their written submission the day before.
3.Changes made since the tabling of the draft 2023 RLAB.
Since the tabling of the draft legislation, proposals have been made to (1) postpone the effective date of implementation, (2) change the seeding capital from R25 000 to R30 000, (3) by default exclude provident fund members who were 55 years and older as at 1 March 2021 from the “two-pot” regime with the opportunity to opt-in should they choose, and (4) amend the proposed definition for legacy retirement annuity funds as contained in the draft legislation to include features unique to a legacy policy, such as universal life or pre-universal life construct.
4.Issues raised during the Public Participation Process and National Treasury’s responses.
Below is a summary of issues raised by the stakeholders:
4.1Errors in the drafting of the Bill: There were drafting errors that do not correctly reflect the responses of NT in October 2023 to the National Assembly (NA) Standing Committee on Finance (SCoF). These include that the definition of “vested component” does not correctly reflect that members of provident funds who were aged 55 and over on 1 March 2021 will remain in the vested component with the option to opt into the “two-pot” system; the incorrect wording of the apportionment of seed capital in the definition in the definition of “savings component”; the proposed wording for cessation of the tax residency clause; that not all funds and categories of members were excluded from the “two-pot” system as proposed; the definition of the term “retirement interest” should be retained and intra-fund transfers should not be part of the definition; the maintenance awards clause; the use of the words “member” and “employee” in different definitions; and different dates for the calculation of the amount of seed capital for each fund member. NT agreed to correct the errors and improve the proposed wording. These comments are to be considered in the 2024 draft RLAB that NT published on 21 February 2024.
4.2Members’ contracts within a retirement fund: In a response to the SCoF in October 2023, NT indicated that amendments would be made “to ensure that the policy intent that the various components can exist on a per contract basis is fully expressed.” The Bill before the National Council of Provinces (NCOP) Committee does not contain these amendments. For example, in the definition of “savings component”, seed capital should be per contract in the fund, not at the fund level. Several drafting changes are required to ensure that the “two-pot” system operates on a per contract basis as intended. NT agreed to correct the errors and improve the proposed wording in the 2024 draft RLAB.
4.3Tax directives on seeding and intra-fund transfers: The Bill requires a tax directive when the seeding of the savings withdrawal benefit takes place. This seeding is a transfer from the vested component within a fund to the savings component within the same fund. Similarly, the Bill requires a tax directive for a transfer between components within the same fund. Transfers from component to component within the same fund do not, and should not, result in any accrual to the fund member as no funds ever become available to the member, and neither do such funds leave the retirement fund. The administrator will simply re-allocate the funds between the components. Therefore, intra-fund transfers should not constitute taxable events that are subject to tax directives. NT accepted the comment. The 2024 draft RLAB proposes that reallocations of amounts between the three components are not treated as transfers and that the requirement to obtain a directive for reallocations between the three components be withdrawn.
4.4Adherence to the agreed implementation date of 01 September 2024: This date means that the Committee should seek to process this Bill through the NCOP as soon as reasonably possible. The implementation deadline will have to be strictly adhered to, and all the necessary legislative and administrative processes need to be addressed in time. NT will need to work with the South African Revenue Service (SARS) and the pension fund administrators to ensure this.
4.5Proposals on further engagements after the passage of the RLAB: These include not only the matters of retrenchments, dismissals, and resignations, but also affordable home and educational loans that workers could take from their pension funds. These matters need to begin to be discussed by May 2024 and be concluded by August 2024, so that they can be tabled in Parliament by November 2024 and come into effect on 1 March 2025. NT noted the comments and would revisit these issues once all the changes to the “two-pot” system have been implemented.
5.Committee’s observations
5.1The Committee welcomes the new implementation date of 01 September 2024. Ideally, this should have been earlier. The Committee notes NT’s response that, while the draft legislation had a very ambitious implementation date, the changes that were required to be put into the system were substantial. These changes needed a lot of time not only for the industry, but also to enable SARS to put in place measures to be able to implement the withdrawals. The Committee accepts this.
5.2The Committee notes, with considerable disappointment, that only three stakeholders made submissions on the 2023 RLAB. It notes too that big business that expressed concerns about the “two-pot system” did not make submissions to the Committee and engaged more with the Executive than with Parliament. It is in the interests of big business to engage with parliamentary committees as it is Parliament that ultimately decides on legislation, not the Executive. Not only will business advance their own interests by more actively engaging with Parliament, they also have economic, financial and other technical skills and experience that will help committees to better process more technically complex bills, irrespective of whether committees agree or disagree with businesses’ particular policy proposals on bills.
5.3The provision for withdrawal from the savings component was introduced to assist financially stressed people, particularly following the substantial economic disruptions caused by the response to COVID 19. These withdrawals, however, will be taxed at marginal rates and undermine this objective. Taxation of withdrawals at the marginal rate is effectively an application of punitive taxation intended to discourage withdrawal, similar to the historical way that individuals were taxed when they moved from one scheme to another as a result of an employment change. In those cases, the aim was to disincentivise withdrawals from the funds. The Committee felt that a lower tax rate on withdrawals should be considered in the proposed "two-pot system'. However, the Committee notes NT's response that taxation of savings withdrawals from the "two pot" system at a marginal tax rate could benefit individuals in a year where they have lower income, and that applying the normal withdrawal tax table rates would be more punitive to members who have had previous withdrawals. While the Committee understands NT’s arguments, we remain concerned about the serious tax implications for people in genuine need.
5.4Taking into account the need to process this Bill and the complexities of effecting amendments to it, ASISA and IRFA agreed to defer consideration of their proposed amendments, and rather engage with NT on the 2024 draft RLAB before 01 September 2024. The Committee agrees with the proposed amendments from ASISA and IRFA. These include: that the “two-pot” system operates at a contract level and not a fund level, such that the seed capital in the savings component is allowed per contract; that tax directives for the seed capital and for intra-fund transfers are not required; and that further amendments to the legislation are needed to remove some errors and reduce
6.Committee’s recommendations
6.1NT should seriously consider the proposed amendments from ASISA and IRFA before it tables the 2024 draft RLAB in Parliament. The Committee supports their proposed amendments.
6.2NT and SARS should consider the proposals made by COSATU, after the approval of the 2023 RLAB. These include not only the matters of retrenchments, dismissals, and resignations, but also affordable home and educational loans that workers could take from their pension funds.
6.3As the withdrawals are to be taxed at the marginal rate, and will be a huge percentage of what is withdrawn, it is extremely likely that most of those who withdraw from their funds will be very disappointed and maybe even very frustrated. It is utterly important that NT, SARS, COSATU, and the pension fund industry inform and educate members about the tax implications of accessing their savings in the “two pot” system before retirement. The Committee urges that this be done.
6.4SARS and NT should monitor the tax implications on individuals and the state with a view to easing the tax burden on withdrawals made in terms of the “two-pot system” in future iterations of the Bill.
The Select Committee on Finance, having considered and examined the Revenue Laws Amendment Bill [B39B - 2023] (National Assembly – section 77), referred to it, and classified by the JTM as a Money Bill, accepts the Bill.
Report to be considered.