Email your questions to [email protected] or fax them to 021 4884119. This feature is sponsored by PSG Wealth.
IS CGT PAID ON ASSETS LEFT TO A SPOUSE?
Is it correct that the surviving spouse does not pay capital gains tax (CGT) on assets (for example, shares, unit trusts and property) bequeathed to him or her by the first-dying spouse, but CGT on the estate of the first-dying spouse is rolled over and, together with any CGT due on the assets of the surviving spouse, is paid by the estate of the second-dying spouse?
I would also like to know whether shares and unit trusts in the name of the first-dying spouse can be transferred into the name of the surviving spouse if he or she does not want to sell them.
Name withheld
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: Assets inherited by a surviving spouse from the estate of the deceased spouse are transferred free of CGT.
The assets are transferred at their original base cost, and CGT will be realised once they are disposed of by the surviving spouse.
Assets can be transferred from the estate of the deceased spouse to the surviving spouse without being sold, as long as there is sufficient liquidity in the deceased estate to take care of expenses, taxes and estate duty.
HOW CAN I GET AROUND REGULATION 28?
Investors are told that, if they have a long-term investment horizon, they can afford to take more risk and have a higher exposure to growth assets, such as equities. But retirement-savings products are subject to regulation 28 of the Pension Funds Act, which limits their exposure to equities and listed property to 75 percent and 25 percent respectively, and they cannot invest more than 25 percent offshore. Is there any way that investors who are saving over the long term for retirement can get around regulation 28?
J van Wyk
Graham Lovely, a financial adviser at PSG Wealth in Rondebosch, Cape Town, responds: The only way to get around regulation 28 is to invest outside of retirement-savings vehicles, which are typically a pension fund or retirement annuity (RA) fund.
The advantages of these vehicles include that the contributions are tax-deductible within limits and there is no tax on the interest, dividends and capital gains earned within the fund. However, retirement-savings products have disadvantages, in addition to the asset-allocation restrictions imposed by regulation 28. These disadvantages include:
• In most cases, you cannot withdraw all your capital when you retire from a pension or RA fund; you have to buy an annuity with at least two-thirds of your savings. (If your savings are less than R247 500, you can withdraw the entire benefit.)
• If you have a life assurance RA, you will be charged a penalty if you stop paying or reduce your contributions before the policy matures.
• If you withdraw your savings from an RA before retirement, you will be charged a penalty.
• If you withdraw your savings from a pension fund or an RA before you retire, you pay tax at a much higher rate than you would if you withdrew a cash lump sum at retirement.
You would be wise to consider protecting against the long-term depreciation of the rand by allocating some of your savings to discretionary savings vehicles that are not limited to investing 25 percent of their assets offshore. There are two ways to access offshore investments:
• Rand-denominated funds, where you invest with a South African-based fund manager that invests in offshore assets; and
• With your offshore investment allowance (up to R10 million) and your offshore discretionary allowance (up to R1 million a year). In this case, you give your money to an offshore fund manager, which converts your rands into a foreign currency and invests in assets denominated in that currency. The minimum lump sums for foreign-currency-denominated investments are relatively high.
If you have a relatively small amount to invest, your best option is a tax-free investment plan, where you do not pay tax on interest, dividends or capital gains. You are limited to investing R30 000 a year, or up to R500 000 over your lifetime. These products are flexible (you can withdraw your investment at any time) and offer a wide choice of underlying investments, such as unit trusts.
Apart from a tax-free plan, you can invest in unit trusts, either directly through a fund manager or via an investment platform, which enables you to access a variety of management companies’ funds and track and manage your portfolio. You incur a fee for investing via a platform.
You can also invest directly in shares listed on a foreign stock exchange. However, you need a large amount of capital to achieve diversification and ensure that the fees do not eat into your capital.
There are several other options to consider, but, before you make a decision, you should discuss your personal situation with a qualified financial adviser.
The main disadvantage of discretionary investments is that, unless they are housed within a tax-free savings plan, the returns are taxed.
You pay income tax, at your marginal rate, on the interest. The first R23 800 (if you are aged under 65) or R34 500 (if you are 65 or older) is exempt. Dividends withholding tax is paid at 15 percent. Capital gains tax is payable on capital gains within the investment.
ARE THERE RESTRICTIONS ON MOVING FROM A LIVING TO A GUARANTEED ANNUITY?
I have a living annuity and I want to change to a guaranteed annuity. Are there any restrictions on when I can do this? Can I transfer some of the money, or must I move it all? Will I pay any fees or tax when I transfer my funds? How long will the transfer take?
Jannie Oberholzer
Wico Strydom, a financial adviser at PSG Wealth in Silverlakes, Pretoria, responds: You can transfer from a living to a guaranteed annuity at any time. You must transfer the full amount. There are no tax implications or administration fees. However, there might be a once-off fee to your financial adviser. It should take about a month to effect the transfer. The time it takes to effect the transfer will depend on whether or not you buy the guaranteed annuity from the same company that provided your living annuity.
CAN I WITHDRAW ANOTHER TAX-FREE LUMP SUM?
I was retrenched in 1999 and placed my entire provident fund benefit in a preservation fund. I found another job almost immediately and the money was left intact until 2007, when, because of a change in the tax law, I withdrew the full amount of R1 357 576.23, on which I paid tax of R297 671.84. At that stage, one could take up to R300 000 as a tax-free lump sum.
I contributed to my new employer’s pension fund. When I retired in December 2011, my pension was paid into a preservation fund. I have been self-employed since January 2012, so it has not been necessary for me to withdraw any funds.
The tax laws changed after 2007, making it possible to withdraw up to R500 000 as a tax-free lump sum. Because I have already withdrawn R300 000 tax-free from the provident preservation fund, can I withdraw R200 000 (substantially less than one-third of my fund value) from my pension preservation fund tax-free?
I do not need to withdraw the money for living expenses, but, because I am somewhat concerned about market volatility, I think it might be a good idea if I could withdraw R200 000 tax-free.
Jean Marks
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: You are allowed to withdraw up to one-third of the benefit from a pension preservation fund at retirement, provided you are 55 years or older.
When retiring from a retirement fund, which includes a retirement annuity, pension fund or provident fund, the first R500 000 taken as a lump sum is tax-free. It is important to note that a lump sum received as a severance benefit might influence this tax-free portion.
In 2007, you made a withdrawal from another fund, of which the first R300 000 was tax-free; therefore, if you take a one-third lump sum now, the first R200 000 should be tax-free.
The South African Revenue Service will take into account all the lump sums you have taken previously. The dates on which those lump sums were taken is important, because lump sums taken before certain dates are excluded from the tax calculation.
If you received the following lump sums before the dates mentioned below, these can be ignored when the tax is calculated on any lump sums taken in the future:
• A retirement fund lump-sum benefit taken before October 1, 2007;
• A withdrawal lump-sum benefit taken before March 1, 2009; and
• A severance benefit taken before March 1, 2011.
You must use the balance (two-thirds) of your retirement savings to buy an annuity.
You wrote that you do not have to withdraw the money in order to provide an income; therefore, the implications of taking the lump sum need to be considered carefully.