INDIVIDUALS

Retirement fund withdrawals

This year sees the conclusion of the process begun in 2007 of simplifying the taxation of funds withdrawn from retirement funds, whether by resignation, retrenchment or retirement.
Previously funds withdrawn on resignation from a fund (usually when the member resigned from his or her employment) were fully taxable in the hands of the recipient save for a derisory R1 800, which had remained unchanged in the Act since the days when that amount was meaningful.

Until the amendments, on retirement from a fund the taxable portion of the lump sum paid out would be calculated with reference to two forbiddingly complex formulas in the Second Schedule to the Act and the application of the averaging provision where, with the use of yet another complex formula, the taxable portion would be taxed at the recipient’s average rate of tax.

All that has changed. There are two new stand alone tables, one for resignation and the other for retrenchment or retirement, the only difference being that for resignation the first R22 500 is fully exempt while the exempt amount for retrenchment and retirement is R300 000. After these exempt portions the amount up to R600 000 is taxed at 18%, the next R300 000 at 27% and any amount above that figure at 36%.

The tables are accumulative. To determine the level at which a particular lump sum should be taxed, all lump sums previously received are added together, excluding sums received under the previous dispensation and taxed according the “formulas and R120 000 exemption” previously prevailing.

Any amount received as contemplated above will not be taxed to the extent that it is paid into another retirement fund or a preservation fund, with the caveat that if an amount from a pension fund is transferred to a provident fund it will be taxed.

Retirement annuity contributions

If an employer makes the contributions to the employee’s retirement annuity fund, the amount is taxable as a fringe benefit for the employee. However, despite being so taxed, up to now the employee was unable to deduct the amount in terms of section 11(n), which required that, in order to be deductible, the contribution had to be paid by the employee. This anomaly has been deleted and the employee in such a case may now claim the deduction.

Capital gains tax : Primary residence exclusion

The first R1.5 million of the gain on disposal of a primary residence is excluded from CGT. A further exclusion has been added, which will simplify things for many home owners. If the proceeds of the disposal of a primary residence do not exceed R2 million, then any gain or loss must be disregarded. However, this concession only applies if, throughout the period from 1 October 2001 or the date of acquisition whichever occurred second, the owner or spouse, or the beneficiary in the case of a special trust, used the property as a primary residence, and did not use it for the purposes of carrying on a trade.

At first blush this seems to be a concession, but if the residence is sold for less than R2 million at a loss, which is quite possible in the current climate, the taxpayer loses the tax benefit of this capital loss.

The new provision applies from 1 March 2009.

Liquidation of domestic residences held in an entity

It seems that many taxpayers failed to take advantage of the opportunity to transfer their primary residences out of companies and trusts during the two year window period after 1 October 2001. This left many such entities exposed to the CGT, STC (and later, dividends tax) and transfer duty implications of disposal in the future, in addition to not having access to the R1.5 million primary residence exclusion.

Another window period has been established, from 11 February 2009 to 31 December 2011. Where an interest in a residence is transferred to a natural person or spouse in terms of this provision, the person (and spouse where applicable) and the entity are deemed to be one and the same person for CGT purposes; in other words, there is a rollover of the residence and all its tax characteristics from the entity to the person or spouse (or both jointly). In addition, the transfer, to the extent that it comprises a dividend, is not subject to STC, and transfer duty is not payable. The qualifying requirements are that:

• the person or spouse, in the case of a company, held all the share capital or members’ interest from 11 February 2009 until the date of registration of transfer or, in the case of a trust, disposed of the residence to the trust by way of donation, settlement or other disposition or financed all the expenditure incurred by the trust to acquire and improve the residence;
• that the person alone or together with his or her spouse personally and ordinarily resided in the residence and used it mainly for domestic purposes as their ordinary residence from 11 February 2009 to the date of registration of transfer.

If the property exceeds 2 ha in size, any portion in excess of that limit will not enjoy the benefit of the concession.

The concession does not apply where the residence is housed in a company the shares of which are held by a trust.

Estate duty

The legislators have finally moved to eliminate the need for the artificial use of structures in estate planning resorted to in order to ensure that spouses both enjoy the full benefit of the estate duty exemption, currently R3.5 million.

In the past the wealthier spouse would typically bequeath R3.5 million to the trust and the rest to the surviving spouse. The result would be that the deceased estate would pay no estate duty, because the bequest to the trust would be covered by the exemption and any bequest to a spouse is also exempt. The survivor would then have access to the exemption as well, resulting in a total exemption of R7 million. Had the wealthier spouse bequeathed his or her entire estate to the surviving spouse, only the estate of the survivor would use the R3.5 million exemption.
The amendment provides that the first dying spouse will have access to the exemption and the second dying will have access to any unused balance plus his or her own exemption. If there is more than one surviving spouse, the unused balance will be split equally between the surviving spouses.

Where a person has been a surviving spouse more than once, the executor has a choice of which predeceased spouse’s unused balance to use, provided the executor submits the estate duty return of the spouse chosen.

A situation not catered for is where the spouses die simultaneously. The section provides specifically that there must be a first dying spouse and a surviving spouse. Therefore, as the section reads at present, the unused balance may not be transferred from one spouse to the other. No doubt this omission will be rectified.

The new provisions will apply from 1 January 2010.

I should point out that the proposal to eliminate the so-called “one year usufruct” estate planning tool has been withdrawn for the time being.

BUSINESSES

Medical contributions for retired employees

Employers often undertake to provide medical cover for employees and their dependants after retirement. This obligation be expensive and have a serious negative impact on published financial results in light of the IFRS requirement to quantify and provide for it. Accordingly, employers often seek to escape from these obligations by either paying lump sums directly to the retired employees or dependants, or by taking out policies with life insurers to cover the future expenses.

The problem is that general tax principles provide no certainty that these payments are deductible: they might not pass the capital/revenue test and, even if they do, they might fail the “purposes of trade” test.

A new section 12M recognises this commercial reality and resolves the uncertainty by providing that such lump sum payments may be deducted whether they are paid directly to the employees or dependants or to an insurer. The lump sum must be intended to cover medical expenses contemplated in section 18 of the Act and it must absolve the employer of any further liability for mortality risk. In other words, the employer may, for example, undertake to make further payments necessitated by medical inflation running ahead of general inflation; but the employer may not retain any risk if the employee or dependant lives longer than the actuarial mortality tables predict.

This provision applies from 1 September 2009.

ALL TAXPAYERS

Provisional tax

Thanks to vigorous submissions by several organisations, the draconian and totally unrealistic provisions introduced last year relating to the second provisional payment have been ameliorated. SARS had decided in its wisdom that taxpayers were enjoying an unfair advantage in being able to base their second provisional payment on the so-called basic amount, which is the taxable income on the most recent assessment. If you based your estimate of taxable income for the current year on the basic amount, you could not be penalised for underestimating. If you based it on a lesser figure, you had to be accurate within 10% or a penalty of 20% of the tax on the underestimate would result.

For the 2009 year of assessment the right to use the basic amount was removed and, as a sop to taxpayers, their estimates were allowed to be out by up to 20%. This provision showed a profound ignorance of, or refusal to acknowledge, the reality faced by the great majority of small and medium sized businesses, namely that they simply do not have the information in the last month of a financial year to estimate their profits, let alone their taxable income, with that degree of accuracy. After intensive lobbying and protests and many meetings with SARS, sanity prevailed, at least insofar as smaller businesses are concerned.

The new dispensation is as follows:

• taxpayers whose taxable income does not exceed R1 million may calculate their second provisional payment based on the basic amount. If they estimate their income at less than the basic amount and are out by more than 10%, they are liable to a penalty of 20% of the tax on the amount of the underestimate. If the basic amount is based on a year of assessment that is more than one year old, it must be increased by 8%. The Commissioner may remit all or part of the penalty if he or she is satisfied that the estimate was “seriously calculated with due regard to the factors having a bearing thereon and was not deliberately or negligently understated”. It seems that the default position will be that the penalty will be imposed and the taxpayer will have to show why it should be reversed or reduced;
• taxpayers whose taxable income does exceed R1 million will not be able to rely on the basic amount and their estimates will have to be within 80% of the actual taxable income. If not, the Commissioner “may, if he or she is not satisfied that the amount of such estimate was seriously calculated with due regard to the factors having a bearing thereon or was not deliberately or negligently understated”, impose a penalty of up to 20% of the tax on the amount of the underestimate.

Provisional taxpayers

Registered public benefit organisations and recreational clubs no longer qualify as provisional taxpayers.

The same applies to bodies corporate under sectional title and share block schemes.

The threshold for persons older than 65 to be exempt from registration has increased from R80 000 to R120 000.

Employees’ tax

The portion of a travel allowance to be included in remuneration for the purpose of calculating employees’ tax has been increased from 60% to 80%.