Continued…

When does payment to the ex-spouse occur and who pays the tax?

Until recently, the non-member ex-spouse had to wait until the benefit accrued to the member spouse before s/he received his/her part of the benefit under the divorce award. The effects of inflation and the fact that no growth was added to the defined pension interest often resulted in the amount ultimately received by the non-member ex spouse being less than expected. The member spouse paid the tax on the benefit and was permitted to attempt to recover the tax on the divorce award portion from the non-member ex-spouse.

Recent legislative amendments have introduced the so-called clean break principle to retirement funds on divorce. This means that for all divorce orders, even those granted before 13 September 2007, the ex-spouse would be entitled to payment of his/her share of the benefit immediately. The idea is that s/he would be able to invest the money in their personal capacity and enjoy the growth thereon, which seems on the face of it to be more equitable than the old regime.

Further legislative amendments (The Revenue Laws Amendment Act 60 of 2008) have resulted in the tax on the benefit being treated differently depending on the date of the divorce.

a) Divorces effective before 1 March 2009, the benefit will still be taxable in the hands of the member spouse should the non-member spouse select to take the benefit as a cash lump–sum. The member spouse is however able to recover the tax payable from the ex spouse, but is not able to recover the “tax on tax”. (For a practical example please contact us.) The ex-spouse also has the option to transfer the benefit to a retirement annuity fund or to some sort of preservation fund, which has yet to be clearly defined and established, but this transfer occurs after the tax has been paid by the member spouse.

b) Divorces effective after 1 march 2009; the benefit will be taxed in the hands of the non-member ex-spouse if s/he takes the benefit in cash. If it is transferred to another retirement fund, the transfer will be tax-free.

These benefits will be taxed as if the recipient is a separate taxpayer in terms of the new tax dispensation on withdrawal benefits.

This seems to promote a fairer approach than the current one and in that context it may make more sense to transfer the benefit to another approved fund (RA or preservation fund).
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