You should not be taxed on money from your pension fund which you pay to your former spouse.
Harry Joffe , a legal adviser to Fedsure, says a ground-breaking decision earlier this year by the Cape Income Tax Special court has resolved an unclear issue in the law.
The court found that a pension fund member should not have been taxed on money paid from the pension fund to his ex-wife in terms of a divorce settlement.
Following an amendment to the Divorce Act, a former wife or husband can lay claim to "the pension interest" of a member of a pension fund. For the purposes of the act, the amount due is calculated as if the member had resigned on the date of the divorce, but it is only payable on retirement or resignation of the member. (By the time the member does resign or retire there is probably much more money in the fund, but the rule still applies).
Until now it was not clear who would be taxed on this money the fund member or the former spouse.
In the court case, taxpayer H was married to W in community of property. When the couple divorced, W obtained a 50 percent interest in her ex-husband's pension and when H left the company, the fund paid W her share. But the Receiver of Revenue taxed H on this amount, on the basis that it had first accrued to him and was gross income in his hands.
H objected to this, arguing that the Divorce Act gave his ex-wife a direct right to part of his pension fund and, in an important finding, the judge ruled that he was correct.
But though the court found that the money had accrued to W and not to H, the court was not asked to rule on whether or not W should pay tax on it.
So though the court answered one tricky question, Joffe says it opened up another: if a member of a pension fund is not liable for tax on money paid to a former spouse, is the former spouse liable for tax on this money?
Possibly not, Joffe says. Because this is a payment in terms of a divorce order, it could be argued that the money is capital in the hands of the spouse receiving it and therefore not taxable. Also, he says, although the Income Tax Act does specify in detail what a taxpayer's tax liabilities are when retiring or resigning from a pension or provident fund, this applies only to members of the fund, not to their former spouses.
So it may be possible not to pay tax on any money you get from your former spouse's pension fund at least until the taxman closes this loophole.