The dead don't complain

06 July 2006 Bette Kun

Poverty continues after death

Alan McCulloch, a retired Certified Financial Planner TM and chair of the Employee Benefits Planning Group of the Financial Planning Institute (FPI), is a trustee for a number of retirement funds. He personally and publicly urges Finance Minister Trevor Manuel to urgently revisit and revise upwards the maximum tax-free amounts payable to the dependants of deceased pension fund members.

McCulloch says it has been years since these limits have been revised and they have miserably failed to keep pace with inflation. Budget speeches over the last decade and more did not allow for any such increase a case of fiscal drag being used intentionally or unintentionally to gradually reduce retirees appetite for cash at retirement thereby focusing on income. Unfortunately, retirement tax free limits are intertwined with the tax free limits on death and consequently this aspect has probably been overlooked as the dead dont complain. McCulloch says this will have far-reaching effects on those who need direct poverty alleviation most, those in households where the deceaseds salary was and subsequent retirement fund payments will be the sole source of income.

The Income Tax Act limits the lump sum amount payable tax free on death to the dependents of a deceased member of a pension or provident fund is twice pensionable salary at the date of death, with a minimum of R 60 000 and a maximum of about R120 000 (based on a complex calculation of the length of fund membership). Accordingly, any amount in excess of R120 000 is taxed at the average rate of tax paid by the deceased in the year of death. The yardstick, when the Income Tax Act came into force in 1962, was that twice earnings provided a sufficient benefit to be paid tax free. The Act actually limits upper earnings to R60 000 (generating R120 000) tax free for understandable reasons. In those days very few people earned as much as R5 000 per month and so a benefit of R120 000 was not often seen. The lower limit actually equates to a salary of R30 000 pa or R2 500 pm. These amounts were promulgated then to avoid penalising the lower paid when the breadwinner dies. It also eliminated the need to collect trivial amounts of tax on smallish benefits. Interestingly, had inflation been applied to these figures the tax-free amount would today be about R1 million.

To my recollection, these limits have been revised only once since the Income Tax Act was promulgated in 1962, but definitely not in the past decade or so, says McCulloch.

With fiscal drag and an unfortunate steady rise in deaths due to HIV/AIDS, this low tax-free threshold is now impacting severely on the most vulnerable group in South Africa - the dependants of lower paid retirement fund members, he says.

McCulloch says there is also an inverse proportion of dependents per deceased pension fund member at lower income levels.

Essentially we are talking about mouths to feed. In the lower income sectors you find that there can often be as many as 10 or 12 dependents per deceased retirement fund member when we consider traditional marriages to multiple spouses with children and extended families. Whereas the higher up in the income levels you go we tend to get fewer dependants relying entirely on the deceased retirement fund member, he says.

McCulloch says in the absence of a comprehensive welfare infrastructure in South Africa, any extra income for dependents was highly valued.

He says technically, some of the tax implications can be eased significantly by taking the death benefits out of the pension / provident fund and into a separate unapproved group life scheme but there are fringe benefit tax implications on the premiums. McCulloch says even with the fringe benefit tax implications, higher paid individuals are prepared to pay the extra tax in exchange for a potential tax-free death benefit payout, but this mechanism hasnt been taken up by many lower paid pension fund members due to its complexity.

As with most tax planning, its largely a luxury afforded only to the rich. It would be far simpler and easier to raise the tax-free amount. From a fiscal point of view, raising the maximum tax-free portion of amounts payable to dependants certainly wouldnt break the bank, but in the hands of impoverished dependants it would be a very significant and a direct poverty alleviation tool, he says.

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