Articles | Personal Income Tax

Latest proposed Income Tax changes affecting individuals

The draft Taxation Laws Amendment Bill, 2018 has been published on 16 July 2018.

A number of changes that were not discussed in the budget speech and that will impact individual taxpayers, have been proposed. We will focus on 3 specific changes:

  1. Changes to the Medical Tax Credits regime;
  2. Tax treatment of transfers to pension and provident preservation funds after normal retirement age, but before the person’s retirement date;
  3. Emigration and Preservation Funds.

Changes to the Medical Tax Credits regime

The Income Tax Act (the Act) provides for a taxpayer who pays contributions to a medical scheme on behalf of a dependant (as defined), to claim Section 6A Medical Tax Credits. This is the prescribed amount that a taxpayer can claim based on the number of dependants on the medical scheme for each month they were a member. However, an anomaly currently exists whereby each taxpayer that proportionately contributes to a medical scheme on behalf of a dependant can claim full medical tax credits.

For instance, a brother and sister who each contributes half of the contribution to their mother’s medical scheme, can each claim the full Section 6A Medical Tax Credit. This is an unintended allowance and the proposal is aimed at rectifying the current situation.

It is proposed that with effect from 1 March 2018, the Section 6A Medical Tax Credits be proportionately allocated to each taxpayer in the ratio such taxpayer carried a share of the medical scheme contributions of a dependant.

It is also proposed that the definition of “dependant” be amended to align it with the definition in Section 6B. Currently, the definition refers to the definition in the Medical Schemes Act where a dependant is defined as a person on the same medical scheme as the principal member. The definition needs to allow for a dependant to be on a different medical scheme as well.

Transfers to Pension and Provident Preservation Funds after normal retirement age, but before retirement date

Since 2017, taxpayers are allowed to transfer benefits from their pension or provident fund (the fund) to a retirement annuity fund if they wish to postpone their retirement. This would be the case where a taxpayer reached the normal retirement age of the fund but has not decided to formally retire yet. This allowance is provided for in the definition of a “retirement annuity fund” in section 1 of the Act.

It is proposed that with effect from 1 March 2019 the Act be amended to allow for transfers to Pension Preservation Funds and Provident Preservation Funds on or after reaching the normal retirement age of the particular fund, but before retirement date. “Retirement Date” is also defined in Section 1 of the Act.

However, the one withdrawal currently allowed from Preservation Funds before retirement, will not be applicable where benefits were transferred after normal retirement age.

Emigration, Expatriates and Preservation Funds

Currently, the Act allows for a member of a retirement annuity fund that becomes a non-resident for tax purposes to withdraw from the retirement annuity fund if they formally emigrated and such emigration is recognised by the Reserve Bank for exchange control purposes.

It is also allowed in the case where a person worked in South Africa on a work visa, the work visa expired and the member returns to their own country.

The same treatment is not currently afforded to Preservation Funds.

It is proposed with effect from 1 March 2019, that the definitions of “pension preservation fund” and “provident preservation fund” in section 1 of the Act be amended to make provision for the members of pension preservation funds and provident preservation funds to be entitled to withdraw their full lump sum benefit when they emigrate from South Africa and such emigration is recognised by the South African Reserve Bank for the purposes of exchange control or upon repatriation on expiry of the work visas.

Final Comment

Comments on the draft bill must be submitted before 16 August 2018. For more information go to http://www.sars.gov.za/Legal/Preparation-of-Legislation/Pages/Draft-Documents-for-Public-Comment.aspx

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