Email your questions to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.
How are voluntary annuities taxed?
I know that if I purchase a compulsory guaranteed annuity, the monthly pension that I receive will be taxable. What is the tax situation if I purchase a voluntary guaranteed annuity with my savings?
Chery Koekemoer
Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: A voluntary annuity is classified as such because the product is purchased with a lump sum from any source other than a retirement fund. The capital used to fund the voluntary annuity is regarded as money that has already been taxed.
In terms of the Income Tax Act, annuities received from a retirement annuity fund, a life assurance company, a trust or an estate are taxable. However, there is an exemption in the case of voluntary annuities. The capital content of the annuity is exempt from income tax under section 10(A), resulting in the investor not being taxed twice on the capital portion of the income stream.
However, it is important to remember that the annuitant will be taxed on the interest portion of the income at his or her marginal tax rate. The company from which the product is purchased normally issues a certificate indicating the capital content of the income stream.
Does my wife have to submit an income tax return?
My wife has not earned taxable income for many years and was advised some time ago that she would no longer have to submit an income tax return. However, an article in Personal Finance on July 4 states that taxpayers must submit a tax return if dividends were paid to them and they were a South African resident during the year of assessment.
My wife has investments in unit trusts and shares. The taxable dividends for the tax year were R2 653, from which dividends withholding tax was deducted. Is she required to submit a tax return?
Allen Snell
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: Your wife earns very little income and the dividends have been taxed already, so she is way below the tax threshold and will not pay any tax. As long as she does not claim any deductions, there should not, from a practical point of view, be a reason for her to submit a tax return.
However, I have not found a clear indication in law or on the website of the South African Revenue Service (SARS) that she should or should not submit a tax return. I would advise that you seek the advice of a registered tax practitioner or contact SARS directly to ensure that she does the right thing.
Abil assets and winding up deceased estates
I could not close a unit trust fund account, because some of the African Bank (Abil) assets are in a retention fund. Could this prevent the winding up of a deceased estate? Can one forgo one’s rights to Abil investments?
Andy Johnston
Braam Fouche, a financial adviser at PSG Wealth in Umhlanga Rocks in Durban, responds: An executor can either liquidate an asset in order to pay the cash amount to the recipient, or the asset can be transferred in its current form to the recipient. In this case, the executor would transfer the account that holds the Abil retention capital to the recipient, to ensure that the estate is wound up expeditiously. The recipient can then wait out the period of retention instead of renouncing the benefit in the estate.
Although an heir or legatee can renounce his or her benefit in an estate, which would allow for it to be passed down the line in the estate, a right to an Abil investment cannot be renounced, because it is incorporated in a collective scheme (unit trust) of which the deceased was a unit holder, and no owner of units can simply forgo his or her ownership.
Even if it were possible, it would not make financial sense to relinquish the possible value in the asset, and the recipient should take transfer of the asset and wait out the retention period.
How to declare Reit dividends
Is interest from a real estate investment trust (Reit) added to normal interest, or have the amounts already been taxed? Most of the IT3(b) forms issued by unit trust companies use 4238 as the South African Revenue Service code for Reits, but one company uses 4214. Which is correct?
Name withheld on request
Lesley Isherwood, associate director: corporate tax at KPMG, responds: The Reit dispensation in the Income Tax Act came into effect on April 1, 2013 and applies to what was traditionally referred to as listed property loan stock companies. Investors in these companies acquired a linked unit comprising a share linked to a long-term debenture, with income distributions taking the form of a dividend and interest.
In terms of the dispensation for Reits, the entire income distribution is deemed to be a dividend; there is no longer an interest component. The deemed dividend is not exempt from normal tax and does not attract dividends withholding tax.
Therefore, the amounts have not already been taxed, and investors must include the amounts in determining their taxable income.
For tax return purposes, the correct code would appear to be 4238, which relates to “taxable local dividends – for example, Reits”. Code 4214 is a generic code for “other receipts and accruals”.
How can I pay less donations tax?
My father and I have cashed in some shares. My father plans to give me his payout of R600 000. Apart from capital gains tax, I believe that he will also be liable for donations tax. Are there any legal ways to minimise the donations tax? I was told that he could minimise donations tax if he lent me the money and paid it off by donating R100 000 a year to me.
Name withheld on request
Ronald King, the head of technical support at PSG, responds: If you structure a transaction purely for tax purposes, with no other reason for the transaction, the South African Revenue Service (SARS) can claim that the substance of the transaction differs from the form and can tax you on the substance. In this case, if the intent is a R600 000 donation and you structure it as a loan only for donations tax purposes, SARS can ignore the form of a loan and tax you on the substance: the R600 000 donation.
However, if your father is concerned that he will not be able to afford to donate the full amount and wants the right to recall a portion in the future, structuring it as a loan will not attract donations tax. Your father can then decide every year if he wants to write down a portion of the loan account as a donation.
Where should I buy a pension?
I am 53 years old and am thinking about taking early retirement at 55. My total fund credit is R3.3 million and is invested at moderate to high risk in shares administered by a reputable pension fund administrator.
* If I retire at 55, should I buy a pension through this administration company, or seek advice from one of the smaller, personalised financial consultant firms?
* Can you recommend an investment plan that will generate an income of R14 000 a month? I will also have to settle a mortgage bond of R800 000 from the R3.3 million fund credit if I retire at 55.
Name withheld on request
Anton Prinsloo, a financial adviser at PSG Wealth in Silver Lakes, Pretoria, responds: The large pension fund administration companies have their own financial advisers, who will advise you on your options if you were to buy a pension via them. However, it would be better to obtain advice about retirement planning from an independent adviser. You should look for an adviser who has the Certified Financial Planner qualification.
Fifty-five is a young age at which to retire. It means that you will have to live off your capital for a long time – 30 years if you were to live to the age of 85.
Capital of R2.5 million (R3.3 million less R800 000) could provide you with an income of R12 500 a month, based on an income drawdown rate of six percent.
However, if you retire at age 55, the withdrawal rate should be closer to five percent (R10 420 a month). This rate will make it possible for your capital to grow so that your income can keep up with inflation later on in life.
A post-retirement investment portfolio should be based on the cash-flow needs of each individual; therefore, I cannot recommended an investment plan without assessing your circumstances in detail. However, the most important component of an investment portfolio after retirement is diversification. This means the portfolio should combine different asset classes to protect it against market volatility and provide growth opportunities to earn inflation-beating returns over time.
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.