If you divorce your spouse and the Divorce Court awards him or her part of your retirement fund benefits, you will have to pay tax on the amount that is paid out to your former spouse.
The South African Revenue Service (Sars) has, in a recent draft note to the retirement fund industry, reiterated that the fund member is liable for the tax.
Rod Stevenson, a senior legal adviser at Old Mutual, says your pension money (or "pension interest") forms part of the assets which may be divided between yourself and your spouse in a divorce agreement.
This applies unless you are married out of community of property by antenuptial contract and the accrual system is excluded from your marriage. The court may also order the court registrar to notify your fund to make an endorsement to that effect in its records and to provide proof of such endorsement to the registrar.
In a pension or provident fund, the "pension interest" in which your ex-spouse can share is the amount of the benefit that you would be entitled to receive had your membership of the fund come to an end on the date of divorce.
In a retirement annuity (RA) fund, the pension interest is the sum of your accumulated contributions plus interest that has accumulated to the date of the divorce.
The Income Tax Act makes the fund member liable for the tax on the portion of the pension interest awarded to an ex-spouse.
However, the Income Tax Act gives you, the fund member, the right to recover the tax from your ex-spouse on the portion of the benefit allocated to him or her.
Stevenson says while you do have the legal right to recover the tax, the task of recovering the money may be difficult if the divorce agreement does not take account of the tax due in the division of the pension interest, or in other ways.
Stevenson says some legal practitioners believe that pension benefits in preservation funds (depending on the fund rules) do not qualify as pension interest. Therefore, a divorcing spouse would not be entitled to share in money paid into a preservation fund if the divorce occurs after the money has been paid into a preservation fund.
But, draft the note from Sars to the industry implies that the same tax rules apply where the retirement fund concerned is a preservation fund.
This statement is likely to stir up debate in the industry, Stevenson says.
The other issue that Sars has clarified for retirement fund members regards the commutation of the pension benefit. As a pension fund or RA fund member, you can take up to one-third of your total benefit in cash when you reach retirement age. You must buy an annuity with the remaining two-thirds of your benefit. Some funds and people in the financial services industry have been uncertain whether the one-third cash lump sum to which you are entitled includes or excludes the portion allocated to an ex-spouse in a divorce settlement.
In its note to the industry, Sars states that the one-third which you are entitled to receive in cash at retirement excludes the amount allocated to your ex-spouse.
The draft note has been circulated to industry bodies for comment and its contents may change before it is formally issued.