If you are a pensioner with more than one source of annuity income, the South African Revenue Service (SARS) has changed the way your PAYE tax is calculated so that you pay more in tax each month but are spared a large tax bill for the tax year after you file your return.
At the beginning of this tax year, March 1, SARS implemented the changes according to an amendment to the Fourth Schedule of the Income Tax Act. SARS now prescribes the rate of PAYE that annuity providers must withhold from annuity income, instead of the providers themselves determining the rate.
Larry Masson, franchise principal and financial adviser at Consult by Momentum, says the reasons for the change are twofold: to protect the taxpayer from a hefty tax liability and to ensure a steady flow of revenue for SARS throughout the year. He says SARS identified roughly a million taxpayers who would be affected.
“Pensioners who receive their income from more than one source are often left owing tax at the end of the tax year due to the under-collection of taxes via the PAYE deductions made by their respective insurers. The reason for this is that the administrator or insurer does not have sight of the other income that is payable by other administrators or insurers, and therefore they only deduct tax from the source of income that they are aware of.
“At the end of the tax year all the income received effectively places the taxpayer in a higher tax bracket, resulting in a shortfall in tax paid. This then creates an unforeseen financial burden on the taxpayer – which often runs into thousands of rands," Masson says.
The new process is intended to prevent this shortfall, and annuity providers (retirement fund administrators and life insurance companies) will now be issued with a tax directive prescribing the PAYE tax rate that must be applied to an affected taxpayer’s income.
Masson says the process applies only to annuitants who have more than one source of remuneration (defined for this purpose as income from a registered employer or annuity provider from which PAYE is deducted by the employer or annuity provider). It does not apply to income from discretionary, non-annuity investments, such as unit trusts, or to rental income from a property. People with these added sources of income are likely to be provisional taxpayers, to whom the directive does not apply. (Only if these additional, non-PAYE sources total less than R30 000 per year are you exempt from paying provisional tax.)
The process applies to life and living annuities, and to both compulsory annuities bought with two-thirds of your retirement savings and voluntary annuities bought with the other third or with discretionary savings. (On voluntary annuities you pay tax only on income related to growth, not capital.)
How does it work?
Masson provides an example of how the process works. A pensioner has two annuities from different providers, each providing an income of R150 000 a year. Under the old system each provider would separately calculate PAYE on the annuity it is providing. Each annuity would fall into the 18% marginal tax bracket and PAYE would be calculated accordingly. However, the total income of R300 000 from both annuities falls into the higher 26% marginal bracket, resulting in a shortfall for the taxpayer at the end of the tax year. Under the new system SARS does the calculation on the total annuity income of R300 000, and then directs each annuity provider the rate of PAYE to deduct. As an employer would when calculating a PAYE deduction from an employee’s salary, rebates and medical tax credits are also taken into account.
In an article “The tax burden on annuitants: spread, not lightened”, Joon Chong, partner at law firm Webber Wentzel, outlines how SARS calculates this rate, known as the Fixed PAYE Rate:
A = Remuneration from all sources.
B = Normal tax on A prior to rebates and tax credits
C = Primary, secondary and tertiary rebates
D = Medical tax credits
E = B-C-D
Fixed PAYE Rate = E/A*100
Masson emphasises that while this is now the default arrangement for determining PAYE, you can opt out. Chong explains further: “Taxpayers can request that their [annuity providers] use the PAYE rates in terms of the normal PAYE deduction tables under the Fourth Schedule or deduct PAYE at a higher rate. The risk of using the former (which is lower than the Fixed PAYE Rate) is that a taxpayer may have significant income tax liability on assessment.”
Chong adds: “If there are taxpayers who have, through their own or their tax practitioners' calculations, ascertained that the Fixed PAYE Rate used against their annuity payments is too high and could result in a significant refund on assessment in addition to the cashflow constraints, they should request their [annuity providers] to withhold PAYE at a more accurate rate.”