Interpretation Note 113 - Apportionment of surplus and minimum benefit requirements: Pension Funds Second Amendment Act

Interpretation Note 113 - Apportionment of surplus and minimum benefit requirements: Pension Funds Second Amendment Act

• 03 March 2020
• Individuals Tax
• SARS

Important:

General Note 29 and Addendum A thereto are hereby withdrawn.

Purpose

This Note provides clarity on the tax treatment of the actuarial surplus allocations or distributions made to members, former members, existing pensioners and employers by funds under the provisions of sections 15B, 15C, 15D or 15E of the Pension Funds Act.

Background

The definition of “actuarial surplus” and sections 15A to 15K were inserted into section 1 of the Pension Funds Act with effect from 7 December 2001. These changes enabled a fund to apportion any actuarial surplus between the employers, members, former members and existing pensioners of that fund.

The first surpluses were determined at the effective date of the first statutory actuarial valuation of the fund following 7 December 2001. The first surplus determined is normally referred to as the past surplus.

Section 15B of the Pension Funds Act governs the distribution of the past surplus determined at the surplus apportionment date. The board of trustees of the fund had to determine how the past surplus should be distributed and allocated among the employer, former members, current members and pensioners of a fund. The surplus apportionment scheme had to be approved by the Registrar of Pension Funds before any distribution or allocation could be implemented. There is a difference in the tax treatment of the past surplus distributed and allocated in terms of surplus apportionment schemes approved before 1 January 2006, and schemes approved on or after 1 January 2006.

Paragraph 2C was inserted with effect from 1 January 20064 and provides that surplus distributions that accrue to a taxpayer on or after 1 January 2006, as a result of a surplus apportionment scheme approved on or after that date by the Registrar of Pension Funds, must not be included in the taxpayer’s “gross income” .

Any subsequent actuarial surplus arising in a fund following the approval of the surplus apportionment scheme by the Registrar of Pension Funds is referred to as ‘future surplus’ and is apportioned under section 15C of the Pension Funds Act.

This Note explains the tax treatment of distributions in terms of past surplus for the two different periods, before 1 January 2006 and on or after 1 January 2006, as well as the tax treatment of the future surplus distributions.

The law

The relevant sections of the Pension Funds Act and the Income Tax Act are quoted in the Annexure, and are discussed in more detail below.

This article first appeared on sars.gov.za

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