AUGUST 2009 |
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NEW OPPORTUNITY TO TRANSFER YOUR RESIDENTIAL PROPERTY TAX-FREE
The first R1.5 million of a gain made on the sale of a primary residence is exempt from Capital Gains Tax (“CGT”) provided the residence is held in one’s own name. If the residence is held in the name of a company, close corporation or trust, this exemption does not apply.
When CGT was introduced in 2001, taxpayers were given a limited period of time in which to transfer their residential properties out of a company, close corporation or trust into their own name without paying transfer duty. Many taxpayers used this opportunity but there are others who did not do so.
Legislation is due to be tabled in parliament shortly which will give taxpayers another opportunity to transfer their residential properties from a company, close corporation or trust into their own name without paying transfer duty. The window period will be from 1 January 2010 to 31 December 2011 and we believe those clients affected should take advantage of this opportunity. If you take up the offer, any CGT payable will be deferred until you dispose of the property and the base cost at which the company, close corporation or trust acquired the property will be regarded as your base cost for CGT purposes
TAX PENALTIES SCARE
On 31 December 2008 The Minister of Finance approved the introduction of certain administrative penalties that may now be imposed by the Commissioner of Inland Revenue in respect of non-compliance with certain provisions of the Income Tax Act.
According to the latest documentation in our possession the new regulations came into effect on 1 January 2009.
Among other things, if any taxpayer
- Fails to register as a taxpayer…
- Fails to submit a return when required to do so…
- Fails to make certain information available when required to do so…
- Fails to reply to or answer a question when required to do so…
- Where an employer fails to submit a monthly declaration of employees tax…
- Where an employer fails to deliver an employee’s tax certificate to one or more of his employees…
- Where a provisional taxpayer fails to submit an estimate of his taxable income…
… he will be required to pay a penalty based on the following table (extract only):
TAXABLE INCOME PENALTY
Assessed Loss R 250
R 0 – R 250,000 R 250
R 250,001 – R 500,000 R 500
R 500,001 – R 1,000,000 R 1,000
R 1,000,001– R 5,000,000 R 2,000 etc
While this may not at first glance appear to be unreasonable, the penalty “will increase automatically by the same amount for each month that the person fails to remedy the non-compliance”. Clearly this new legislation could have very serious implications for taxpayers who do not take seriously the deadlines imposed by the Income Tax Act.
It is the policy of the tax department of the Aliwal Road
Group, as far as is possible, to complete and submit our clients’ tax returns on time in order to avoid penalties being imposed. We in return must rely on our clients to give us their tax information timeously. Clients who deliver their information at the last minute tend to create an unacceptable build up of work resulting in our not being able to meet the deadlines that have been set by SARS. The new penalty regime would then be imposed
with adverse financial implications.
RETIREMENT – Prepare for a delay!
The Economist recently ran a lead article headed “The end of retirement – Demography means virtually all of us will have to work longer. That need not be a bad thing”. The essence of the message was that due to a combination of recent poor investment returns and the fact that everyone is living longer, people will need to work beyond the traditional 65 retirement age to fund their retirement.
It was back in 1889 that Bismarck (age 74) set the retirement age at 70 but this must be measured against the average life expectancy of Prussians at the time being 45! It was only in 1916 that the age was lowered to 65 and funding these retirement plans was therefore not regarded as problematic.
Now the average life expectancy of an American at 64 is 80 and this figure is constantly increasing. Added to the pressure of an ageing population is the fact that in developed countries birth-rates are dropping dramatically. OECD countries (Organisation for Economic Co-operation and Development – i.e. developed countries) in the 1950’s had 7 people aged between 20 and 64 for every 1 of 65 and over. Currently the ratio is 4:1 and in 2050 this ratio is expected to be 2:1, a significant shift by any measurement.
With this lack of funding from the young, particularly in countries with more state benefits, and a labour shortfall, older people will on the one hand be forced to work longer to afford a now shorter retirement and on the other be more welcome and needed in the workforce making this task a little more palatable. Recently introduced legislation in America prevents the imposition of a mandatory retirement age – in essence you can only be forced to retire when you are no longer able to perform the work required.
Purely from a practical point of view the major advantage of delaying retirement is that it enables one to build up retirement capital both by not starting to draw from your capital and adding to it whilst you continue working – a ‘double whammy” so to speak! Everyone needs to work out their own retirement income needs but as a guideline it is generally felt one can make do with 70% of your income just prior to retiring. To generate this income the guideline is that you can draw about 6% of your capital to provide you with income that increases by inflation each year and keeps your capital intact – each R1 million of capital built up would therefore generate income before tax of R5000/month.
As most South Africans save too little, our general advice would be to take the Economist’s advice to heart and be prepared to work longer – whether that be full time or part time needs to suit your particular circumstances!!!
TAX ON RETIREMENT FUNDS WHEN YOU RETIRE
Retirement products include Retirement Annuities, Pension funds, Provident funds and Preservation funds.
A Preservation fund can be a Pension Preservation fund or a Provident Preservation fund. Different rules apply to the cash amounts you can take on retirement depending on whether you are retiring from a pension or a provident fund. You can take one-third of your savings in a pension fund or retirement annuity in cash, but you can take the entire amount in a provident fund. There are certain tax implications to consider though as follows:
R0 to R300 000 Tax Free (This is a once-off allowance over your lifetime from the sum total of your retirement savings)
R300 001 to R600 000 Taxed at 18% of the amount above R300 000
R600 001 to R900 000 Taxed at 27% of the amount above R600 000
R900 001 onwards Taxed at 36%
The remaining two thirds from a Retirement Annuity or Pension fund has to be reinvested into an annuity or pension. If you choose a living annuity, you are entitled to draw an annual amount from your capital of between 2.5% and 17.5%. We do however caution you against drawing too great a percentage as you could end up drawing down the capital and it might not sustain you throughout your retirement.
An important point to remember is that you don’t have to take the full one third – you are entitled to withdraw less e.g. just the R300 000 tax-free amount. In fact we recommend this and advise that you reinvest as much as you can into your annuity or pension.
WITHDRAWAL PRIOR TO RETIREMENT
If you withdraw funds from a Pension, Provident or Preservation fund prior to retirement (you are entitled to one withdrawal – either full or partial), the taxation of your withdrawal is treated as follows:
R0 to R22 500 – Tax Free
R22 501 to R600 000 – Taxed at 18% of the amount above R22 500
R600 001 to R900 000 – Taxed at 27% of the amount above R600 000
R900 001 onwards - Taxed at 36% of the amount above R900 000
This means that on this withdrawal you are not entitled to the R300 000 tax-free amount that you are allowed on retirement. But be aware that if you do make a withdrawal prior to retirement, the full amount is deducted off your R300 000 tax-free entitlement at retirement. For example if you withdrew an amount of R200 000 prior to retirement, only R100 000 would be available to you of the R300 000 tax-free amount on retirement.
P.P.S. TAX CERTIFICATES NOW AVAILABLE
P.P.S. are now issuing tax certificates for the 2009 tax year. Unfortunately they will only give the certificates to the members personally – financial advisors and tax advisors are not permitted to obtain these on their client’s behalf. You can phone P.P.S on telephone number
0860 123 777 to request one. |
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