Over the past few weeks I have received a number of questions and comments raised by readers in relation to the taxation of retirement savings. I would like to thank Tiny Carroll, the legal adviser to Fairbairn Capital at Old Mutual, and Vlok Symington, the manager of employment income at the South African Revenue Services (SARS), for their assistance on queries about whether costs paid on a living annuity are tax deductible.
Some readers have argued that they should be allowed to deduct all or part of the costs, including financial adviser fees, incurred on living annuities from their taxable income because it is money spent in the generation of income.
Initially some regional branches of SARS did allow the deduction of some costs, but this came to an end when SARS issued a general note in January last year.
SARS's argument is that when you purchase an annuity, your capital becomes the property of the life assurance company and as such it is the life assurance company that is paying the costs, both of managing your money and to the financial adviser giving you advice.
SARS says that the costs associated with annuity products can broadly be placed in two categories, namely initial investment costs and subsequent additional costs over the lifetime of the annuity.
SARS dealt with initial costs in an earlier note. In that note, it is argued that "the initial costs associated with providing a so-called living annuity or equity-linked annuity are debited against the capital invested. The long-term insurer owns the capital used to purchase the annuity. It follows that the costs are incurred by the insurer and not by the annuitant. It cannot, therefore, be argued that the annuitant incurred these costs in the production of the annuity income, and no deduction of these expenses is therefore available under section 11(a) of the (Income Tax) Act".
As far as the ongoing annual costs are concerned, SARS says in its note of last year: "Subsequent costs over the lifetime of the annuity are also debited to the underlying capital. The insurer, as mentioned before, owns the capital. The costs are therefore an expense incurred by the insurer and it cannot be argued that the annuitant incurred these costs in the production of the annuity income. No deduction of these expenses is therefore available under section 11(a) of the Act."
But some readers have argued that life assurance companies should deduct costs, particularly fees paid to financial advisers, after the annuity paid to the annuitant has been calculated. In other words 11(a) would not apply and this would be a cost against earning income.
Carroll says, however, the argument does not stop there. If the costs are deducted after the annuity is paid, section 23(g) of the Income Tax Act applies. This section requires that costs being claimed as an expense against income "must be incurred in the process of trade". Therefore the annuitant could not claim any costs in the management of an annuity as a legitimate expense.
Symington agrees.
However, if you feel both are wrong, you are fully entitled to make a claim and, if it is disallowed, to take the issue on appeal to the special Tax Appeal Court. As yet no one has taken these SARS rulings on appeal.
Claiming disallowed amounts
The second issue relates to claiming disallowed amounts in contributions to a retirement fund. There are limits set on how much of your contributions to a pension fund or a retirement annuity you can deduct from pensionable income. We did not make this clear in a recent article on retirement annuities in our Scrapbook Series.
Firstly, the maximums you can claim as a deduction are:
To a pension fund:
The maximum deductible retirement fund contributions that may be claimed by any employed taxpayer in one year against income tax is the greater of:
- R1 750; or
- 7.5 percent of pensionable remuneration.
To a retirement annuity:
The maximum deductible retirement fund contributions that may be claimed by any taxpayer in one year against income tax is the greater of:
- 15 percent of non-retirement funding taxable income; or
- R3 500 less allowable pension fund contribution; or
- R1 750.
So this is what happens if you go over the limits.
If your tax-deductible contributions to a pension fund or to a retirement annuity fund exceed the annual limits, you can:
- In the case of a retirement annuity, carry the excess forward as a deduction against income in future years, when you have made contributions below your deductible limits; and/or claim them at retirement by adding the residual excess to the tax-exempt portion of a lump sum on retirement.
- In the case of a pension fund, the excess contribution may only be used at retirement to increase the tax-free portion of the lump sum.
In addition:
- You can deduct arrears contributions to a retirement fund to a limit of R1 800 a year.
- You are allowed to make back payments on a retirement annuity, which is already in existence, but on which you have temporarily stopped contributions. You are entitled to claim these "catch-up" payments against tax, provided you are making current contributions. The limit is R1 800 a year.
I hope this helps.
Misguided miners' union
Dinosaurs are entitled to their place in history but when they attempt to destroy the savings of individuals, it is unacceptable. I am referring to Solidarity, the trade union (formerly for white miners) which last weekend took such strong exception to Sanlam retrenching staff, particularly many white employees, that it called on Sanlam policyholders to cancel their policies.
Solidarity is quite entitled to continue to dream about living in some sort of white supremacist homeland, but to advise people to cancel life assurance policies for racist or any other political reasons is totally irresponsible. Anyone heeding this advice will lose money because of the contractual nature of life assurance policies. You could lose more than you have invested, and if you cancel life assurance risk cover and then try to replace it, premiums could be decided higher. If your health has deteriorated, you could even find that no other company will give you risk cover.
The stupidity of the call is underscored by the fact that all financial services companies are committed to employment equity programmes that will see their organisations reflect more closely the demographic profile of the country and their customer bases. I do not know of any whites-only financial institution where people who have cancelled their policies will be happy.
After talks with Sanlam later in the week Solidarity backed off the advice.