In South Africa, divorce settlements are taxed in terms of the Income Tax Act. The tax implications of a divorce settlement depend on the nature of the assets being transferred.
Transfer of assets: When assets are transferred from one spouse to another as part of a divorce settlement, the transfer is subject to capital gains tax (CGT).
Lump sum payments: Lump sum payments made as part of a divorce settlement are taxed as income in the hands of the recipient.
Pension fund benefits: Pension fund benefits are taxed in terms of the Income Tax Act, and the tax implications depend on the type of benefit and the age of the recipient.
Tax on Maintenance Payments
For members of the Government Employees Pension Fund (GEPF), different rules apply. When a divorce settlement awards a portion of a GEPF pension to a former spouse, the GEPF deducts tax before making the payout.
The member spouse’s retirement benefit is reduced accordingly. This means that, in a GEPF divorce settlement, the tax burden is shared between both spouses, and the member spouse’s final pension is affected.
Divorce Settlement and Maintenance Payments
For the recipient: Spousal maintenance is not taxable income.
For the paying spouse: Spousal maintenance is not tax-deductible.
This means that the spouse receiving maintenance does not have to pay tax on it, but the spouse paying maintenance cannot claim it as a tax deduction.
For child maintenance payments, the same rules apply—no tax is payable, and no deduction can be claimed.
The tax rates applicable to divorce settlements in South Africa are as follows:
Capital gains tax: CGT is taxed at a rate of 40% of the gain, subject to an annual exemption of R40,000.
Income tax: Lump sum payments are taxed as income, and the tax rate depends on the recipient’s tax bracket.
Pension fund benefits are taxed at a rate of up to 27%, depending on the type of benefit and the recipient’s age.
Upon divorce, you may be entitled to a share of your former spouse’s retirement savings, depending on the provisions of the divorce order. For many years, it was the case that the non-member spouse could not obtain a share in the member’s retirement fund before the member’s retirement. This changed in 2007, and a non-member spouse may now receive a share of the member’s retirement fund upon divorce (if the divorce order provides for it), even where the divorce takes place before the retirement date.
If you are married in community of property, or with an antenuptial contract with accruals, then the pension savings form part of the joint assets, which can be shared at divorce. If you are married out of community of property (with an antenuptial contract and no accrual), there is no joint estate, so no claim to pension fund savings.
If the divorce order was granted before September 13 2007, the payment to the non-member spouse will be tax-free, irrespective of the date of payment to the non-member spouse. If the divorce order was granted after September 13 2007, the non-member will be responsible for the tax and such tax is calculated as a withdrawal.
Separating assets at the time of divorce has capital gains tax (CGT) implications for those who are party to the divorce. Additionally, there are tax-free rollover provisions that apply to spouses who are divorced or separated, where the legal requirements are met.
Divorce often results in the transfer of assets between spouses. In ordinary circumstances, the transfer of assets would count as a disposal thereof, which could count as a CGT (capital gains tax) trigger event. However, certain transfers between spouses are exempt from CGT. In the case of dissolution of marriage, “roll over” relief can be granted where assets are transferred between spouses. Here, the relief is that there is no CGT triggered on the transfer of the asset as the spouse receiving the asset is treated as having gained the asset at the same time, at the same cost, in the same currency and for the same use as the transferring spouse.
The spouse receiving the asset simply steps into the same shoes as the original owner (the other spouse). CGT is ‘rolled over’ or delayed until the asset is disposed of to a third party outside of the marriage/divorce scenario.
It is important to point out that this relief only applies where the recipient spouse is a tax resident of South Africa or, if the spouse is now a tax non-resident, the assets are immovable property, or assets that relate to a business operating in South Africa.
Rollover relief delays the trigger of CGT on assets transferred between spouses until that asset is disposed of to someone else.
In certain divorce cases, there can be unexpected CGT exposure in the hands of the spouse receiving the asset:
- If the primary residence is transferred between spouses, the receiving spouse can use the full R2 million CGT exclusion.
- Where a second property or holiday home is transferred to a spouse in a divorce settlement, which is then used as a primary residence, the receiving spouse will need to pay CGT on the subsequent disposal of that residence and will not be entitled to the full R2 million primary residence exclusion on disposal.
- Where immovable property is used as both a residence and a location for carrying on a trade or business, and this property is transferred to a spouse as a result of divorce, the recipient spouse will be exposed to CGT, and the primary residence exclusion will be pro-rated depending on the split between residential and non-residential use.
SARS has an anti-avoidance measure that prevents a tax-free rollover from being used by a non-resident spouse except in the case of:
- Immovable property situated in South Africa or any interest or right of any nature in such property; or
- Any asset effectively connected with a permanent establishment in South Africa.
Since these assets fall within the tax jurisdiction of South Africa, even for non-residents, there is no need to preclude them from roll-over relief.
A withdrawal from a pension fund, even in terms of a divorce order, is considered a retirement fund lump sum withdrawal benefit for purposes of the Income Tax Act. The amount paid to the non-member spouse is included in their gross income, and they will be taxed on the withdrawal (and not the member spouse).
This tax is not calculated according to a “normal” sliding scale tax rates applied to individuals, as lump sum payments from retirement funds are taxed in their own right, depending on whether money is paid as a retirement fund lump sum benefit (where a member has died or retired) or a retirement fund lump sum withdrawal benefit (where the fund benefits are accessed before retirement).
Early withdrawal payments are taxed at a higher rate than they would be if paid out after retirement.