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INCREASE TO THE ALLOWED OFFSHORE EXPOSURE WITHIN PRE-RETIREMENT PRODUCTS AND POSSIBLE PENDING CHANGES

by | Mar 1, 2022

During his budget address to parliament, Finance Minister Enoch Godongwana said amendments to Regulation 28 would be gazetted in March in order to enable greater investment infrastructure by retirement funds, which will include the increase of the offshore limit for retirement funds to invest up to 45% of their capital offshore. Although the proposal implies that the current Regulation 28 offshore limit of 30% will increase to 35%, with a further 10% in the rest of Africa. As far as we are aware, the current 10% limit on Africa will not change, but there is speculation that this may simply be incorporated into offshore allocation, allowing the 45% offshore exposure to be invested anywhere in the world. Needless to say, this is a welcome change which will provide greater flexibility for all investors to access a wider set of opportunities for growth, as well as diversification.

It is however important to bear in mind that only once the amendments are gazetted will the implications for offshore allocations be confirmed as changes may still be made. Once these are gazetted and confirmed, we will explore the different opportunities this may provide within our portfolios and to our clients and will communicate this to you accordingly.

Two-pot system

Godongwana said the government is busy with a fundamental restructuring of the retirement system, which includes allowing individuals to allow for greater preservation and partial access to funds through a “two-pot” system. He emphasised that he does not have the authority to allow people to access funds at their discretion. “I will create an environment where people can do so, but it will be dependent on the approval of the trustees of each fund, and the trustees will have the final say.”

Godongwana said the consultation process is ongoing after having released a discussion paper last year, and he foresees that draft legislation will be published for comment around June. The proposed restructuring would allow people to access a third of their savings for emergencies. At retirement, you will be able to take one-third of the total amount as a cash lump sum. However, if the individual has made a withdrawal before retirement, the amount would be deducted from the lump sum payment.

The paper also proposes that two-thirds of retirement savings must be retained in a compulsory retirement fund, from which no withdrawal before retirement can be made. “Our current retirement fund tax dispensation is a significant incentive to encourage retirement savings, so we do not believe that this should be amended due to the proposed two-pot system.”

Exit tax on retirement interest

The Budget Review confirms that the government will this year also initiate the process of renegotiating the tax treaties with a view to imposing a tax on retirement interests when taxpayers cease residency. The proposal was withdrawn last year because it was at cross-purposes with South Africa’s treaty obligations.

Harry Joffe, the head of legal services at Discovery Life, said renegotiating the treaties was “a fairer solution to taxpayers than a drastic amendment of the Income Tax Act, such as was proposed last year, whilst still ensuring that South Africa obtains taxing rights on retirement fund money, even when the tax-emigrant becomes tax resident elsewhere”.

Stronger enforcement against wealthy taxpayers

To assist with the detection of non‐compliance or fraud through the existence of unexplained wealth, it has been proposed that all provisional taxpayers with assets above R50 million be required to declare specified assets and liabilities at market values in their 2023 tax returns. The additional information will also help in determining the levels and structure of wealth holdings as recommended by the Davis Tax Committee.