Taxation of divorce order-related Pension benefits

It is Government’s policy to promote the “clean-break” principle in respect of the taxation of all amounts assigned in terms of divorce orders. This means that in principle, each party to a divorce order should be subject to tax on the portion of the pension interest that each party ultimately receives.

Government Employees Pension Fund (GEPF)

The GEPF introduce the “clean-break” principle for the division of pension benefits. On 14 December 2011 the The GEP Law Amendment Act 2011 amended the law to provide for the implementation of the “clean-break” principle.  This means that former spouses of members contributing to the Government Employee Pension Fund (GEPF) can now claim their share of the fund as stipulated in their divorce order and don’t have to wait until retirement, resignation or death.

Divorce orders issued before 13 September 2007

Transitional rules were implemented to exempt from tax amounts payable to a non-member ex-spouse by private sector funds under divorce orders issued before 13 September 2007. However, the exemption only applied if the non-member ex-spouse claimed the benefit on or after 1 March 2009. The purpose of the exemption was to shield non-member ex-spouses from unanticipated tax consequences that would result if the non-member ex-spouse was suddenly subject to tax on his/her portion of the lump sum benefit. The effect of the transitional rules will be extended so that any amount that becomes payable on or after 1 March 2012 in terms of a divorce order that was issued before 13 September 2007 will be free from tax.  The principle will apply regardless of the timing of the payment to the non-member ex-spouse, and regardless of whether the retirement fund from which the amount became payable has implemented the “clean-break” principle.

Tax regime applicable as from 1 March 2012

The tax regime described below will apply to all amounts assigned in terms of a divorce order (granted under section 7(8)(a) of the Divorce Act, No. 70 of 1979):

• If an amount becomes payable by a retirement fund on or after 1 March 2012 to a non-member ex-spouse, that person (and not the member ex-spouse) will be subject to tax in respect of that amount.

• No tax will be payable on any amount that becomes payable on or after 1 March 2012 in terms of a divorce order that was issued before 13 September 2007.

• Should a non-member spouse owe the South African Revenue Service (SARS) any tax, this will be deducted from the benefit by SARS, regardless of whether the parties divorced before or after 13 September 2007.

These changes will apply to all public and private sector funds, regardless of whether or not the fund at issue has introduced the “clean-break” principle.

Administrative considerations

The South African Revenue Service is in a position to provide tax directives on the basis described below:

• The retirement fund or the administrator of the retirement fund must apply for a tax directive in the name of the non-member ex-spouse in the case of an amount assigned in terms of a divorce order that becomes payable by the retirement fund to the non-member ex-spouse on or after 1 March 2012.

• Any amount that becomes payable by a retirement fund to a non-member ex-spouse on or after 1 March 2012, in terms of a divorce order that was issued before 13 September 2007, will be free from tax.

• The intention is to apply Formula C to pension interest payable by the public sector fund to either the non-member or the member ex-spouse on a continuing basis.

Summary

In short this means the following:

• Divorces before 13 September 2007 are tax free.  In other words, you will not be taxed on your share of the fund.

• Divorces after 13 September 2007 will be taxed according to Formula C:
  • The first R22 500 is tax free.
  • From R22 501 – R600 000 = 18% tax
  • From R600 001 – R900 000 = R27% tax
  • From R900 001+ = 36% tax

Source:  National Treasury

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