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Taxing times

13 April 2004 Angelo Coppola

Alan McCulloch of Liberty Group Benefits, talks to Angelo Coppola about retirement annuities, and asks whether they are next for the unclaimed benefits tax cash cosh?

Last year in November, SARS suddenly imposed a 30% tax on withdrawal benefits that had lain unclaimed for more that three months in pension and provident funds.

“Exercise of an option to extend or open end a retirement annuity requires a conscious decision on behalf of the prospective annuitant.”

Merely acquiescing to a standard letter would almost certainly not stand up as a defence in an argument with SARS.

“Much better - from a belt and braces perspective – is to confirm in writing to the fund administrator that advantage is being taken of the late retirement rule that appears in every set of retirement annuity fund rules,” suggests McCulloch.

Reaching age 70

The books of many retirement annuity funds are overflowing with cases where the aged prospective annuitant just will not respond to requests for instructions. “It is hard to believe that this inactivity is laziness; it is more likely to be an attempt to defer tax to a subsequent year,” says McCulloch.

The consequences of the three month rule

If the pattern of SARS’ behaviour repeats itself, then in both cases, the strong possibility exists that retirement annuity funds will be instructed to deduct tax at 30% on the assumption that the maximum 1/3rd commutation had been selected.

“The taxpayer will have no opportunity to take a full pension or to reverse the deemed decision.”

Preservation funds

“Here the consequences are much the same as with retirement annuities, although perhaps there is even a weaker case on reaching the specified normal retirement date for just accepting an automatic roll over.

“There is of course no future contribution flow to build even a slim argument.

“Also,” says McCulloch, “don’t forget that preservation funds, unlike retirement annuities, continue to relate to employment.

“If your client retires from his current employer’s pension or provident fund, then the preservation fund has to be taken, irrespective of whether the preservation fund retirement age is earlier or later than the actual age at retirement.

“So why not trawl through your client database right now and identify anyone who might fall into this relatively unknown and unpublicised trap. After all the tax is in fact due and payable and you can prevent a great deal of heartache.”

Any questions? eMail your questions to me and I will forward them to Alan.

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