Section 19 (5) - housing loans

Amendment Act no 6 of 2014 amending section 19(5) has been published in Government Gazette 5584 effective 8 October 2014. Section 19(5) defines the parameters for a fund granting a loan to a fund member. The Act introduces the following changes, all other conditions remaining unchanged:

• Loans may also now be granted for the purchase of land, the erection of a property on land, or for alterations, maintenance or repair of a property on land, in respect of which a valid customary land right or right of leasehold has been granted in terms of the Communal Land Reform Act, subject otherwise to the same conditions as apply to land held under 'conventional' property rights.
• Loans shall be repayable over the shortest period of either 30 years, the remainder of the member's employable years until retirement, or the duration of the right of leasehold/ customary land right as referred to in the preceding bullet.
• Loans are capped at 90% of the amount of the benefit which the member would receive if he were to terminate his membership voluntarily at the time of taking up the loan.
• Reference to the Black (Urban Areas) Consolidation Act, as a qualifying ownership right, is removed.

It is to be noted that the Pension Funds Act only creates the enabling legal framework. A fund whose rules do not provide for granting loans may not grant loans despite the enabling provisions of the Act.

It is to be noted further that the rules of a fund may cap the maximum loan that may be granted to an amount lower than 90% of the termination benefit (i.e. not the retirement benefit or a commutation thereof).

It is to be noted that in the case of a loan granted to a member, secured only by the member having pledged his benefit, market value is no longer relevant.

Section 37D - deduction from benefits for housing loans for housing loan guarantee

Amendment Act no 6 of 2014 also amend section 37D of the Pension Funds Act. Section 37D defines the parameters for a fund deducting certain amounts from the benefit of a fund member. The Act introduces a change to sub section (a)(ii), (all other conditions remaining unchanged), which now reads as follows:

"A registered fund may -

(a)    Deduct any amount due to the fund in respect of - ...

 ii. any amount to which a fund is liable under a guarantee furnished in respect of a loan by some other person to a member for any purpose referred to in section 19 (5) (a), but the fund shall not be liable to such other person in an amount greater than the amount of the benefit which the member would receive if he were to terminate his membership of the fund voluntarily as at the time the guarantee is called up0n and notwithstanding that the amount originally granted might be greater."

Interestingly a part of the wording in the previous section referring to such permissible deducting being "...from the benefit to which the member or beneficiary is entitled in terms of the rules of the fund..." was removed. This may yet create arguments between a fund and a member on the basis that this section does not permit the deduction from the member's benefit, although it appears that the intention of this section remains just that.

It is to be noted in particular that in our opinion, for the purposes of a third party (employer of bank) claiming from a fund in respect of a member's housing loan, the benefit due to a member is not the gross benefit as per rules but is the net benefit after PAYE (in the opinion of Inland Revenue also after arrears taxes). A fund cannot be held liable by a third party (employer or bank), to pay over more than the member's net benefit. We believe that banks and any employer that has been granting housing loans to fund members on the basis of a fund guarantee are likely to terminate their housing schemes and will seek to call up any outstanding loans, without delay.

Section 37D - deduction from benefits for housing loans for loan granted by fund to member

Where a fund grants a loan directly to a member, it can deduct up to 100% of the member's benefit, in the event of the member having been granted 90% of his benefit and the Receiver of Revenue claiming 10% PAYE. However, should the Receiver claim PAYE at the maximum rate of 37%, any outstanding loan balance in excess of 63% of the members total benefit will have to be recovered from the member. To avoid the situation where the fund has to recover any outstanding loan balance from the member personally, loans should be limited to 63% of a member's total benefit. Note that Inland Revenue will only be able to claim any arrears tax to the extent that any amount is still due to the member after the loan has been redeemed and any PAYE deducted.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.