Re-allocation of surplus retirement fund assets

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Re-allocation of surplus retirement fund assets

Binding Class Rulings (BCR) are issued in response to applications by a specific class of taxpayers (usually persons that will have the same tax consequences apply to them from a transaction) and clarifies how the Commissioner for SARS would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.

BCR 068 determines the very technical consequences of transferring surplus retirement fund assets between funds and allocating assets from employer surplus accounts to retirement fund member accounts of members. Employers that are part of retirement funds should take note of the ruling and consult where necessary.

The ruling considers sections 1(1) (specific definitions in the “gross income” definition), 11F and paragraph 2(l) of the Seventh Schedule of the Income Tax Act (dealing with taxable fringe benefits).

The Parties to the ruling

  • The Applicants are resident companies who are participating employers to the Co-applicants.
  • Co-applicant 1 is a defined benefit pension fund.
  • Co-applicant 2 is a defined contribution pension fund.
  • Co-applicant 3 is a defined contribution provident fund.
  • The class members are all qualifying members of the co-applicants, former employees or dependents of deceased employees.

Transactions which the members of the class propose to enter into

Since the class members are entitled to, and the applicants are liable to fund their post-retirement medical aid benefits, the applicants, with agreement by the class, wish to eliminate this liability towards members by:

  • Allocating assets in the employer surplus account of co-applicant 1, to the retirement accounts of the class members of co-applicant 1.
  • Transferring a portion of the assets of the employer surplus account of 1 to those of co-applicants 2 and 3.
  • Allocating assets in the employer surplus account of co-applicants 2 and 3 to class member retirement accounts of these co-applicants.

Essentially, the applicants aimed to move surplus assets between the different funds without incurring tax costs, to the benefit of employees.

The Ruling

Contributions by the applicant to the co-applicant will constitute a fringe benefit and will be deducted by the class members in determining their taxable incomes. This would have been the case in any event and is not a contentious finding.

However, when the application transfer assets from the employer surplus accounts of co-applicant 1, to co-applicant 2 and 3, and lump sum allocations from the co-applicants to the member’s respective retirement accounts, no tax costs will arise, and specifically:

  • Not constitute a taxable fringe benefit for the class members.
  • Constitute an amount received by or accrued to class members subject to tax.
  • Be deductible by class members when determining taxable income.

Class members will still be taxed on payments to them by co-applicants which constitute gross income, income or taxable income, irrespective of whether these are payments as a result of regular contributions, or surplus amounts allocated to class members.

This ruling is a very pragmatic approach to the re-distribution of surplus assets within retirement funds.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)