Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

A tax change that may affect your client’s monthly cash flow

09 May 2022 Gareth Stokes

Clients who have more than one annuity, or receive an annuity income in addition to a salary, are facing a significant reduction in their monthly cash flow following tax directive enhancements issued by the South African Revenue Services (SARS), effective 1 March 2022. These enhancements require fund administrators, life insurers and living annuity providers to apply a higher prescribed rate to an annuitant’s income than the rate they might have used based on the client’s product portfolio.

Writing in the latest Allan Gray Quarterly Commentary, Carrie Norden observed that the change would affect certain of the firm’s living annuitants from the 2022/23 tax year. “The change requires annuity providers, including Allan Gray, to withhold a fixed tax rate higher than the rate we apply based on the personal income tax table, for some clients’ living annuity income; [the aim is to] reduce the tax shortfall clients may face at the end of the tax year by applying fixed tax rates calculated by SARS, which considers the multiple sources of income they may receive [in addition] to their living annuity income,” she said, adding that affected clients should already have been notified by their product providers. 

Avoiding shocks at tax year-end

Larry Masson, Franchise Principal and Financial Adviser at Consult by Momentum, said that the latest directive was introduced by paragraph 2(2B) into the Fourth Schedule to the Income Tax Act (ITA), and was already in effect. “Pensioners who receive their income from more than one source are often left owing tax at the end of the tax year due to the under collection of taxes via the PAYE deductions made by their respective insurers,” explained Masson. “The reason for this is that the administrator or insurer does not have full sight of the income that is payable by other fund administrators or insurers and only deducts tax from the source of income that they are aware of”. 

The overarching motivation for the change is for SARS to collect income taxes as-and-when they fall due. A secondary and perhaps more consumer-oriented reason is that SARS wants to avoid situations where individuals with multiple annuities or income streams find themselves unable to chip in their outstanding income tax dues at the tax year end. To illustrate, consider an individual with two annuities bought from different insurers, each paying R150 000,00 per year. In this case each insurer would have withheld the standard PAYE due on only half of the taxpayers annual income. On a monthly cash flow view, the taxpayer would have paid R1 764,00 per month (R882,00 deducted by each insurer) instead of the R3 637,00 per month due on his or her total annual income, per SARS’ monthly deduction tables 2022/23. Over 12 months, this comes to a R22 476,00 shortfall. 

“There has been a bit of the proverbial ‘storm in a teacup’ over this change because it is more of a cash flow issue than anything else; it will affect your client’s monthly budget, but they would have had to pay this amount over at the end of the tax year anyway,” commented Masson. Of course, this assumes they had no other deductions or expenses they could offset against their tax dues. The cynics among our readership might observe that this ‘tweak’ ends up being a win for SARS, who often delay tax refunds well into the following tax year… The more positively inclined might observe that the change brings the taxation of these annuitants in line with other salary earners. 

Observations for financial advisers

Financial advisers are often intimately involved with their client’s life and living annuities and tax affairs, so there are a few items you may wish to take note of. According to Masson, financial advisers would typically advise clients with multiple annuities or annuities plus other income streams to elect higher tax rates on their annuities to avoid a cash flow crunch at year end. Fund administrators and insurers have always allowed living annuitants to indicate their preferred tax rate. “Up to now, your life insurer or living annuity provider would have allowed you to select an appropriate income tax rate,” said Masson. 

Norden agreed, saying that annuitants could instruct their annuity provider to apply a higher tax rate and withhold additional PAYE tax from their annuity income if they wished to compensate for different sources of income. “Some taxpayers may also hold a reduced rate directive issued by SARS to deduct or withhold a lower rate of PAYE tax for the tax year,” she wrote. Individual taxpayers can still apply to have annuity PAYE deductions made at a lower tax rate, in discussion with the product provider and subject to approval from SARS. As for high income clients: many will be annoyed by the directive, but it will prevent them from having to scurry for extra cash to settle SARS, potentially avoiding unnecessary penalties and interest. 

SARS has had the technology to reference third party data for some time, and this is the latest in a series of steps that suggest better use by the revenue collection agency of its big data and data analytics capabilities. Readers need no reminder that SARS has sight of most regulated financial transactions. IRP5 data automatically pulls through to annual income tax forms when taxpayers populate those forms, as does the capital gains and interest generated from accounts with many asset managers and banks. It is also clear that SARS can ask local financial institutions to supply taxpayer information, as seen recently with requests to domestic cryptocurrency platforms to provide user details. You can be sure this and other data is being cross-referenced against tax returns in real time, all the time, to flag matters for further investigation. 

Pay now, complain and recover later

“In my experience, SARS is becoming more assertive in collecting tax, leaving it up to the taxpayer to dispute amounts that he or she deems unfair,” concluded Masson. This directive could therefore be indicative of the type of changes that SARS will be driving through the country’s revenue collection system as it gets better at managing and leveraging big data. After all, it takes little effort to run an algorithm to identify taxpayers who have multiple annuity income streams and / or who frequently pay in big lump sums to make up their income tax shortfalls at the tax year-end. 

Writer’s thoughts:
The SARS directive on withholding tax rates for certain annuitants pales into insignificance against recent headlines of the collection authority’s recent courtroom challenges. Has this directive caused headaches for your clients? And are you making any changes to your financial advice approach given this and other tough actions taken by SARS recently? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].


Added by Gareth, 12 May 2022
Thanks for your comments @Gregg. Always appreciate hearing from our readers, who have much wider experience of the treatment dished out by SARS (and product providers). Trouble is, SARS has been repeatedly criticised for its TCF failings, with little sign of improvement...
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Added by Gregg Sneddon, 09 May 2022
In my experience, SARS are delaying refunds with ridiculous audits - a large number of our clients have had to wait well over the 21 days to receive their refunds this past year (many have waited in excess of 40 working days). This is not treating customers fairly - there is no ways that you want SARS to owe you money - rather owe them.
Secondly, the directive rates applied by SARS often bear no resemblance to reality - we have tax payers whose total income is below the tax threshold where the providers have been instructed to withhold tax and others who earn "fortunes" where no directives have been issued.
Thirdly, in our experience, some companies have been very poor in notifying pensioners of the tax deductions and are proving very difficult to contact to instruct them to opt out.
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