Your tax-deductible contributions to a retirement fund are subject to a maximum of 27.5% of the greater of your taxable income or remuneration. Supplied
Your tax-deductible contributions to a retirement fund are subject to a maximum of 27.5% of the greater of your taxable income or remuneration, with an annual ceiling of R350 000. Carrie Furman, a tax specialist at Allan Gray, says that although most of us may find it difficult to get anywhere near these limits, there may be occasions when you can contribute more than 27.5% and/or more than R350 000 in a tax year. Is there any benefit in doing this?

“The answer is ‘yes’. Retirement fund contributions can help to reduce your tax bill in more ways than one,” Furman says.

You can:

1. Reduce your tax bill this year and in future years while you earn. “Contributing in excess of the maximum annual amount can benefit you in future years. This is because excess contributions carry over to the following tax year and may reduce your taxable income during the next tax year, even if you don’t make any new contributions in that year.

“If you still make additional contributions in the next tax year, those contributions and the carry-over amount from the previous tax year are added together and are subject to the 27.5% annual limit again, with any excess carrying over to the following tax year. Carry-over can happen indefinitely throughout your lifetime,” Furman says.

2. Reduce your tax bill when you withdraw or retire from a retirement fund. The tax on the lump sum you can take from your retirement fund when you retire may be reduced by any excess contributions the SA Revenue Service (Sars) has on record for you, Furman says.

“Your fund may ask you for a copy of your latest ITA34 (Notice of Assessment) from Sars to attach to your tax directive application. The ITA34 contains the excess amount of contributions that Sars has on record for you at the time you filed your most recent tax return.

“It is important to note that the tax bill on your retirement cash lump sum takes all previous taxable cash lump sums you have received into account, including severance benefits and cash lump sums withdrawn from a living annuity, which is allowed if the value of your account falls below the prescribed limits,” she says.

3. Get tax back from Sars on living annuity income when you file your tax return. If you have tax-deductible contributions that you did not use when you retired from the fund or as a current year tax deduction, these benefits will still remain available to you when you receive your living annuity income and can reduce the taxable portion of your annuity income, Furman says.

4. Reduce the tax bill on your death. If your beneficiaries choose to take a cash lump sum from your retirement fund or living annuity when you die, that lump sum is taxed in your hands (Sars considers this as received by you on the day you die) and it is taxed according to the retirement lump-sum tax tables, Furman says.

“The calculation takes any previous taxable lump sums you have received into account and the taxable portion of the cash your beneficiaries take can also be reduced by any excess contributions remaining on your death.”

Furman says it is important to note, however, that excess contributions cannot carry over to reduce the tax your beneficiaries pay on their own income if they use your death benefit to open an annuity in their own name.

“This is because annuity income is taxed in their hands, whereas cash lump sums from a retirement fund or living annuity are taxed in your hands and then paid over after tax to the beneficiaries,” she says.

Supplied by Allan Gray

PERSONAL FINANCE