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Different taxation of RA contributions is unfair
Why do the procedures to adjust Pay-As-You-Earn (PAYE) tax to account for contributions to a retirement annuity (RA) differ before and after retirement?
Before retirement, all that is required is for the financial services provider to send a certificate to your employer stating that the RA payment has been made, and PAYE is adjusted. This is financially very beneficial when the RA payment is made in March.
After retirement, my service provider (which, technically, is my employer now) will not adjust my monthly PAYE for an RA payment made in March unless a tax directive is obtained from the South African Revenue Service (SARS). It gives “system constraints” as the reason for not being able to do this.
The service provider for my living annuity and my RA contribution is the same. On submission of the required tax directive, my monthly PAYE is adjusted, and the “system constraints” no longer seem to be an issue. Obtaining a tax directive is an expensive process when it is done through a firm of chartered accountants – an expense that the pre-retirement contributor does not have to incur.
Why are the two classes of contributors treated differently for what is essentially the same process? In my opinion, this discriminatory practice is not in line with Treating Customers Fairly, and “system constraints” do not seem to be a valid reason for refusing to treat people equally, fairly and consistently.
* How can the proceeds of life policies owned by a trust be made available for the settlement of estate duty? In my opinion, a bequest would have the effect of increasing the size of the estate. A preferable course of action would be a loan to the executor that would have to be repaid to the trust.
Name withheld on request
Francois le Roux, a financial planner at Old Mutual Private Wealth Management, responds: The Income Tax Act provides an employer (in paragraph 2(4)(b) of the Fourth Schedule) with the option to deduct a contribution to an RA fund that has been paid by the employee and in respect of which proof of payment has been furnished to the employer from remuneration on which employees tax is calculated. This is why you enjoyed the tax deduction as an employee. Now that you are retired, you are no longer an employee, as defined, and your living annuity product provider is not an employer. It follows that your legal status as a retiree differs distinctly from the scenario envisaged by the legislator in paragraph 2(4)(b).
Your living annuity product provider is obliged by law to deduct income tax, at the rate in the income tax table, from your annuity income paid from this source. The only way that you can bind it to deduct tax at a different rate is by obtaining a tax directive from SARS. This is not a complicated process, and you can download the form from www.sars.gov.za
All you need to do is a relatively simple calculation, where you prove that a lower rate than the income tax table applies, because you make tax-deductible contributions to an RA. The directive needs to be renewed annually, preferably before the start of the new tax year on March 1, so that you will not forfeit the more favourable tax treatment. In this way, you can extend the benefit of tax-deductible monthly RA contributions to your post-retirement income.
* Based on the facts provided by the reader, it seems that an inter vivos trust owns a life policy, which provides cover on the life of a natural person, presumably the reader. When the reader passes away, the proceeds will become payable to the policy owner (the trust). It is important to understand that, at the death of the life assured, the value of the life cover becomes a deemed asset in his or her deceased estate (in terms of the Estate Duty Act), and hence it is included in the estate duty calculation. Certain types of policies, such as key man and buy and sell policies, can be excluded from estate duty liability if they are structured correctly, but it is unlikely that these scenarios apply in the reader’s case.
Note that the trust cannot make a bequest to the reader’s estate. A bequest is made by a natural person in his or her will. If the trust requires the policy proceeds to be available to settle the estate duty liability in the reader’s deceased estate, the trust or policy owner can nominate the reader’s estate as a beneficiary (on a standard form provided by the long-term insurer that issued the life policy) of the proceeds of the life cover (for all or a portion of the life cover provided). This will make it unnecessary for a loan arrangement, and therefore no set-off will have to take place.
Leaving money to family, friends in the UK
I am a South African citizen and taxpayer and I live in South Africa. I am married in community of property to a South African and most of our assets are in South Africa. When I die, I would like to pay some money I have in a British bank account, which I received from an inheritance in the United Kingdom, and a British pension to some of my relatives and friends who live in the UK. They are not South African citizens or taxpayers. I have heard that there are some problems in doing this. What can I do to make it easier to implement?
Norma Johnston
Alida Brink, a fiduciary specialist at Old Mutual Wealth, responds: Estate duty is payable on all the assets, wherever situated, of South African residents. The exception is where the deceased acquired the assets before he or she became ordinarily resident in South Africa for the first time, or after he or she became ordinarily resident if he or she acquired the property from a non-resident donor or a non-resident deceased estate.
The money in the UK therefore does not form part of your South African estate for estate duty purposes, and I can therefore see no reason why it would cause problems when bequeathing it to UK residents, provided the other spouse consents to it (if consent is necessary). Section 15(3)(b)(iii) of the Matrimonial Property Act states that a spouse must consent to receiving an inheritance in the joint estate. It may also happen that an inheritance is specifically excluded from any marital regime in someone’s will.
A South African executor cannot deal with foreign assets and would have to appoint a solicitor in the foreign jurisdiction who would have to apply for probate in that jurisdiction. This could be a costly and time-consuming process. There are ways to make this process easier – for example, using life wrapper products where beneficiaries can be nominated. The reader should contact her financial adviser for more information.
Should I buy a property or invest more in the markets?
I am 67 (my wife is 63) and I have been retired for two years. My living annuity provides an after-tax income of about R26 000 a month. I also earn dividend income of about R22 000 a month (average over the past three months).
My living annuity is mainly in offshore and South African balanced funds. I have been building up savings in money market funds – now approaching R3 million. I am thinking of withdrawing this money and buying a flat and renting it out. I would not have to take out a home loan.
On the other hand, I could invest in unit trusts, but I feel I am over-exposed to the share market.
Should I invest the R3 million offshore? Can you suggest where?
A friend suggested offshore listed property, because I could avoid the hassle of being a landlord while still being exposed to property. What do you advise?
Arnold Barrington
Jason Bernic, a Financial Planning Coach at Old Mutual Wealth, responds: Offshore investments come with the risk of exchange rate fluctuations, and you have not indicated that you intend leaving South Africa. I would seek local investment solutions but avoid purchasing a property that may or may not allow you to enjoy capital growth. The returns on physical properties generally do not compare to those of more liquid investments, and you take on the risk of non-tenancy and the responsibility of being a landlord. Yes, listed property could be a solution, but, again, I do not see any obvious benefit of going offshore in your situation.
Consider your total financial picture and understand how long your money will last you – in other words, as it currently stands, when will it run out? Decide how long it needs to last and have a look at what return the R3 million must earn. If necessary, tweak your existing investments. When you know what the money needs to do, invest in a diversified portfolio that pursues your required rate of return and has a history of having done so. Use a financial adviser who can model this scenario and align the investment solution with your needs.
Note: Letter writers will be sent the unabridged response that Personal Finance obtains on their behalf. However, published letters and responses will be edited for length and clarity.
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