Pre 13 September 2007:
- Member spouse is liable for the tax.
- No tax is however levied on the proceeds due to a concession from SARS, which concession is now formalised in the Second Schedule to the Income Tax Act.
- The non-member can elect to transfer the benefit to another approved fund or withdraw the benefit.
Post 13 September 2007:
- The accrual of the pension interest post 13 September 2007 was unclear and varied on whether the divorce took place before or after 1 November 2008 and 1 March 2009.
- The Income Tax Act has now been amended to reflect that for any benefits granted to non-member spouses in terms of divorces after 13 September 2007, the benefit will accrue to the non-member.
- The non-member spouse is therefore liable for any tax payable.
- If the non-member spouse elects to transfer the benefit to another approved fund, and their tax affairs are in order, the transfer will be free of tax to that approved fund.
- If the non-member elects to withdraw the benefit then they will be liable for tax on the benefit in terms of the withdrawal table. The benefit withdrawn will aggregate and accumulate and so negatively impact on future retirements/withdrawals.
Are there any formalities that must be adhered to?
Yes, the divorce order must make specific mention of the fund benefits and the fact that the non-member spouse is to share in them. Further, the divorce order should indentify the relevant fund or policies, as well as specify the percentage of the pension interest that the non-member spouse is to receive at date of divorce. If the divorce order does not deal with the fund benefit in accordance with what is required in the legislation, the parties will have to revert to the High Court to have the provision amended so that it becomes enforceable.
- All private sector funds.
- Public sector funds, such as the GEPF (Government Employee Pension Fund), have argued that the provisions do not apply to them. In a recent case, in judgement handed down on 1 July 2011, the Cape High Court held that the Government Employees Pension Law is unconstitutional insofar as it fails to give former spouses of GEPF members the same rights as those enjoyed by former spouses of members of private sector funds (which are governed by the Pension Funds Act). The High Court gave Parliament 12 months to correct the legislation governing the GEPF (essentially the fund rules) and ordered that if it does not do so, provisions equivalent or similar to those applicable to private sector funds will be "read into" the Government Employee Pension law, which means that former spouses of members of the GEPF will have the same rights as those on private sector funds. (Wiese v GEPF)
Article continues on page three: What financial planning opportunites present themselves in the context of divorce?