Moonstone - 21 January 2008

From the Crow's Nest

This week we discuss some serious imperfections in the new amended legislation on retirement funding and speculate on the effect of poor service on the remuneration of the intermediary.

Thanks to those who responded with problems they experienced with the new format of this publication. It would appear to be related to the settings on their PC's. We are working on changes on this side, but if you change the settings on your PC to a minimum of 1024 x 768 you should have no problem reading the newsletter as per usual. Unfortunately, Eskom caused serious delays in our delivery last week.
With the power cuts on everyone's lips it is inevitable in South Africa that the jokes will start doing the rounds. A reader advises as follows:

In Pretoria "black outs" are politically incorrect. It is rather referred to as "electile disfunction" that darkens our days.

This morning a reader of a daily newspaper writes that it is not all doom and gloom. In his household they were forced to start talking to each other again and found it to be an enlightening experience. I had the same once when our TV was broken for three days. It cost me an arm and a leg, but I did manage to get the TV repaired in record time.

My contribution to cut our electricity consumption is to braai much more often, but the drawback is of course that it leads to consumption of another kind which also leads to increased conversation, but often of a much more heated variety. My one colleague complains that he was given a buffet by his wife - "warm tong en koue boud."

Spare a thought though for the man who suffered the worst power cut of all, our President Mbeki. I see that he spoke to Eskom last night, but I am afraid that this will have little impact on his future aspirations. He should possibly have spoken to the nation a lot more, and a lot earlier.

My sporting highlight was the LBW dismissal off an inside edge of King Kong aka Andrew Symonds. He admitted a while ago that he did nick the ball and caught but did not walk as there were other incidences where he was given out incorrectly. There is little doubt that, given the choice, he would have opted to score his 150 plus in this past weekend's game to help the Aussies improve on their own record of 16 consecutive victories. His prophetic words came true at the most inopportune time for him.

In all fairness, one must commend the Aussies for a wonderful performance. In my younger days we used to ask what the similarity was between Naas Botha and braai brickets; we did not like either, but had to admit that they were both very good. Hats off to India as well for their part in a magnificent series.

Enjoy your week.

Paul Kruger

ANNUITY ANOMALIES ADDRESSED BY LOA

The LOA distributed a circular to its members on Friday which outlines its discussions with SARS regarding ambiguous issues contained in the amendments in the Taxation Laws Amendment Act, 8 of 2007 which have changed the structure and operation of the Second and Fourth Schedules of the Income Tax Act, 58 of 1962.

We must commend the LOA on a job well done. The full document can be read here.

Commutation of lump sums on retirement- Pension Funds and RA’s

The maximums were increased from R25 200 to R 75 000. If directives have already been given with the maximum of R25200 since either 1/3/2007, 8/8/2007 or the proposed 1/10/2007 will the SARS allow cancellation of those directives and issue new directives?If so, will it be in line with GN16 or will GN16 be amended or be scrapped?

As per the RLAB the effective date will be 1 October 2007. In practice SARS is already giving effect to the 1 Oct date.

The LOA notes that the RLAB changes the effective date of this change to 1 October 2007. The LOA maintains, however, that the change was originally effective from date of promulgation of the Taxation Laws Amendment Act, 8 of 2007. Prospective changes of existing legislation do not allow for tax certainty. In order to preserve the rights of members the LOA recommends that the original effective date of 8 August 2007 be applicable to these commutations. This is based on the assumption that the fund rules make provision for such commutations.

Calculation of tax-free portion of lump sums –Pension, Provident Funds and RA’s

The Explanatory Memorandum on the Taxation Laws Amendment Bill, states at page 4, that ‘The new system will apply to the aggregate of all retirement lump sums over the retiree’s lifetime that are received on or after 1 October 2007’. The LOA therefore wishes SARS to confirm that the tax free amount of R300 000 will apply from the first Rand of lump sums accruing after 1 October 2007, and will consequently not be reduced by any tax-free amounts taken in respect of lump sums accruing prior to 1 October 2007 i.e. will the R300 000 tax-free limit be reduced by R120 000 tax free lump sum taken before 1 October 2007?

The law is clear in this regard. Symbol “D” of “formula B” continues to account for deductions in the past. The total deduction provided under “formula B” will therefore be reduced with prior deductions, regardless of whether the lump sum benefit accrued before or after 1 Oct 2007.

The LOA is of the opinion that the revised formula B is not clear. This can be explained in three simple examples:

Example 1:

Assuming a taxpayer retires and takes a lump sum of R900 000, the tax –free amount of R300 000 as well as 18% and 27% tax rates of the tables are utilised. What tax rate will a lump sum of R300 000 accruing in the following year of assessment have?

In terms of the revised Formula B (Z=C+D-D), D only refers to the ‘deductions which may have been allowed to the taxpayer… in respect of previous years of assessment’. This should exclude the R300 000 tax-free amount from being used as second-time, but would not exclude the lower rates on the scale (i.e. 18% and 27% ) from being used again, since they comprise tax rates and not ‘deductions’. This means that the R300 000 should be taxed at 18% .

Example 2

D refers to the ‘deductions which may have been allowed to the taxpayer… in respect of previous years of assessment’. Assume a taxpayer retired before 1 October 2007. He receives R120 000 tax-free. After 1 October 2007, but before the end of the 2008 tax year, he retires from another fund. In terms of a strict reading of the formula B, the taxpayer could still use the full R300 000 tax-free amount for his second retirement, as the R120 000 was not used in the previous year.

Example 3

Assume a taxpayer retired before 1 October 2007 and receives a lump sum of R720 000. He receives R120 000 tax-free, and was taxed at average tax rates on R600 000. After 1 October 2007, but before the end of the 2008 tax year, he retires from another fund. As the remaining lump sum of R600 000 was taxed at average rates, would any taxable portion of the second retirement be disqualified in terms of the 18% and 27% tax rates.

Clarity is therefore required in terms of these three points above.

In terms of the current reading of the RLAB, the scale in 7 of part 1 of appendix 1 applies to lump sum benefits each year. There is therefore no aggregation across tax years.

Other important issues raised include:

- the tax-free portion from a public sector fund which must be preserved if it is transferred to a private sector fund

- the tax status of surplus payments made to retirement fund members after they have retired, died, withdrawn or after winding up of the fund will not be taxable.