Section 19(5) allows retirement funds to grant housing loans to members under certain circumstances (refer to last month’s newsletter) against the security of the member pledging his benefit, a first mortgage or both. If a fund wants to grant housing loans, NAMFISA insists that the rules must provide for granting loans. Funds usually append sections 19(5) and 37D to their rules.

While sections 37A and 37B strictly protect members’ benefits even when the member wants to dispose of them, sections 37A and 37D make certain exceptions.

Section 37A

This section allows a fund to deduct a maintenance order by the Maintenance Court and income tax.

Section 37D

This section deals specifically with deductions a pension fund can make from pension benefits:

  1. Deductions for Loans (37D(a)):
    • The fund may deduct any amount due to the fund for:
      • A loan granted to a member in terms of section 19(5)(a)
      • Any amount for which the fund is liable under a guarantee furnished regarding a loan by some other person to a member.
    • The deduction cannot exceed the amount permitted by the Income Tax Act.
  1. Deductions for Employer-Related Debts (37D(b)):
    • The fund may deduct amounts due by a member to their employer, such as:
      • A loan granted by the employer to the member for any purpose referred to in section 19(5)(a)
      • any amount for which the employer is liable under a guarantee furnished in respect of a loan by some other person to the member,

on his retirement date or on which he ceases to be a fund member.[Note that I underscored this proviso, which section 37D(a) does not have and must result in different conditions when applied in these two scenarios.]

    • The deduction cannot exceed the amount permitted by the Income Tax Act.

 

Analysis:

Based on the wording of sections 37D(a) and 37D(b):

  • For loans granted by the pension fund (37D(a)):
    • The fund may deduct the loan amount from the member's benefit.
    • The deduction cannot exceed the amount permitted by the Income Tax Act.
    • There is no specific mention of the deduction timing in this section, which implies it can be made before or after the member exits the fund as long as it does not exceed the limit set by the Income Tax Act.
  • For loans granted by the employer or guaranteed by the employer (37D(b)):
    • The fund may deduct the loan amount from the member's benefit.
    • However, the deduction under 37D(b) appears contingent on the member's retirement or when they cease to be a fund member.
    • This deduction also cannot exceed the amount permitted by the Income Tax Act.

Conclusion:

  1. Loans Granted by the Pension Fund (37D(a)):
    • Deductions can be made before or after the member exits the fund as long as they do not exceed the limits set by the Income Tax Act.
  1. Loans Granted by the Employer or Guaranteed by the Employer (37D(b)):
    • Deductions are tied to the member's retirement or when they cease to be a fund member.
    • The deduction cannot exceed the limit set by the Income Tax Act.

So, for a housing loan:

  • If the loan is granted by the pension fund (37D(a)), deductions can be made before or after the member exits the fund.
  • If the loan is granted by the employer or guaranteed by the employer (37D(b)), deductions are linked to the member's retirement or when they cease to be a member of the fund.

The timing of deductions for loans granted by the employer or guaranteed by the employer (37D(b)) is specified to occur at retirement or when the member ceases to be part of the fund. However, deductions for loans granted by the pension fund (37D(a)) can be made before or after the member exits the fund as long as they do not exceed the limits set by the Income Tax Act.

A word of caution:

Despite the above conclusion, funds must note that NAMFISA interprets section 37D(a) differently. It insists that a loan or payment for a guarantee furnished by the fund may only be deducted once the member exits the fund. Funds may apply their interpretation and leave it to NAMFISA to challenge it in court. Although some legal experts believe the fund rules do not explicitly have to allow the granting of loans or furnishing of guarantees and deducting  amounts owing in this regard, it is advisable to include section 37D verbatim in the rules.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS (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 RFS.

 

 

 

 

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