In this fourth newsletter for 2022 we consider the following:
Multiple Annuities and PAYE;
Change of Tax Residence – Procedural Tax Timing Issues and Section 9H;
Withdrawing Retirement Benefits as a Non-Resident – The Three-Year Rule;
Home Bond Interest Deduction Prohibition – SARS IN28 (Issue 3);
SARS Interpretation Notes (INs), Guides, BGRs, BPRs Noter-Up.
SARS has issued a Notification titled “Tax Deductions (PAYE) on your Pension or Annuity”. The objective, effective 1 March 2022 to be achieved is that the retirement fund administrator deducts a more accurate amount of PAYE when a pensioner annuitant has more than one source of income, usually because of multiple annuities.
The rationale is that given marginal tax rates are progressive, a higher income from more than one annuity results in the taxpayer being placed into a higher tax bracket, resulting in a tax shortfall when the taxpayer’s actual tax is reconciled with the PAYE at the end of the tax year.
SARS effectively states in its notification:
1. SARS will provide the retirement fund administrator with the PAYE deduction percentage, taking into consideration SARS database information on the taxpayer;
2. For pensions or annuities payable commencing March 2022 the retirement fund administrators will automatically use this revised rate provided by SARS to deduct PAYE from the pension or annuity but subject to an opt-out if exercised by the taxpayer as per point 6. below;
3. The rate provided by SARS will be valid for the whole tax year, unless circumstances that influence the year-end tax liability change. In such a case, the retirement fund administrator may revert to applying the normal PAYE deduction rate, with effect from the month in which it becomes aware of the change in circumstances;
4. The PAYE deducted from the pension may be higher because the taxpayer’s income is aggregated with other income (including annuities) into a higher tax bracket or, certain deductions of which SARS currently is unaware may apply;
5. Further to this, a taxpayer may request the retirement fund administrator to deduct PAYE at a rate higher than the rate provided by SARS;
6. The taxpayer may also request the retirement fund administrator to continue using the normal PAYE deduction rate as per the SARS published PAYE tables, and not the one provided by SARS. Simply put, an opt-out option is available to the taxpayer.
CHANGE OF TAX RESIDENCE – PROCEDURAL TAX TIMING ISSUES AND SECTION 9H
Valuation date of assets for CGT Exit Tax
Section 9H(2)(a) provides that when an RSA resident person (other than a company) ceases, during any year of assessment to be a resident, that person is treated as having disposed of his/her assets at market value on the date immediately preceding the day on which that person ceases to be a resident. Thus, the operative date for valuation purposes is the day before becoming tax non-resident.
Revised Tax Year of Assessment and Provisional Tax
Section 9H(2)(b) provides that the year of assessment is deemed to have ended on the date immediately preceding the day on which that person ceases to be a resident.
“Year of Assessment” is defined in Section 1 of the Income Tax Act to mean “any year or other period” (my underlining) in respect of which any tax is chargeable. Further to this, paragraph 17 of the Fourth Schedule provides that every provisional taxpayer shall make payment to the Commissioner in respect of his liability for normal tax (income tax and CGT, including the “exit tax”) in respect of every year of assessment. Further to this paragraph 21(1)(b) of the Fourth Schedule provides that provisional tax shall be paid not later than the last day of the year of assessment.
It follows that the Section 9H CGT exit tax must be paid on the date immediately preceding the day on which that person ceases to be a resident.
Simply put, the normal dates for both a natural person’s year of assessment, being 1 March to end February and also, provisional tax returns and payments, being end August and end February, are replaced to the day before becoming a tax non-resident.
Practically speaking, an IT12 tax return must be generated via e-filing and also the provisional tax return (IRP6) in order to make the provisional tax payment timeously.
It is important to deal with this timeously because a late payment of provisional tax attracts a 10% penalty of the tax due in terms of paragraph 27 of the Fourth Schedule as read with the Tax Administration Act.
WITHDRAWING RETIREMENT BENEFITS AS A NON-RESIDENT – THE THREE-YEAR RULE
A question that frequently arises is whether a non-resident has to wait three years before being able to withdraw from a retirement annuity fund.
The rule is contained in the definition of ‘retirement annuity fund’ in s 1(1) of the Income Tax Act. It provides as follows:
‘(BB) is a person who is not a resident for an uninterrupted period of three years or longer on or after 1 March 2021;’
It is unclear whether the three-year period must be accumulated only on or after 1 March 2021 or whether a period of non-residence before 1 March 2021 can be taken into account.
SARS confirmed that as long as the person had ceased to be a resident for at least three years at the time of withdrawal, regardless of whether such period was before or after 1 March 2021, the requirement will be met. Thus, a person who wished to withdraw their funds on 31 May 2022 would qualify if they had been a non-resident for at least three years on that date. The fact that a portion of the non-residence period extends before 1 March 2021 is not a disqualifying factor.
This limitation on access to retirement fund benefits applies, in practice, only to a Retirement Annuity Fund member who was under age 55 at date of becoming non-resident, as the member could have retired prior to becoming non-resident and accessed a one-third lump sum with the balance taken as a living annuity at a draw-down rate of 17,5% per annum, thus extracting this balance over a five-to-six-year period. Members of an employer Pension and/or Provident fund can access their full Fund benefits upon termination of employment and thus given this is presumably prior to becoming non-resident for tax purposes, the limitation of access to such Fund benefits, does not arise.
Upon access by the non-resident to the Retirement Annuity, the full lump sum benefit will be taxed as a withdrawal benefit (not a retirement) in the RSA, according to the tax withdrawal tables which provide as follows:
HOME BOND INTEREST DEDUCTION PROHIBITION – SARS IN28 (Issue 3)
Home office deductions: SARS no longer permitting employees to claim bond interest
SARS released IN 28 (Issue 3) on 4 March 2022. In the previous issue SARS had permitted the deduction of the portion of bond interest relating to a home office but had a change of heart in the current issue after discovering that its previous practice was unlawful.
Section23(m) prohibits salaried employees from claiming deductions against remuneration except for some specified expenditure, one of which relates to –
‘(iv) any deduction which is allowable under section 11(a) or (d) in respect of any rent of, cost of repairs of or expenses in connection with any dwelling house or domestic premises, to the extent that the deduction is not prohibited under paragraph (b);’ While bond interest is an expense in connection with a dwelling house or domestic premises, and is not prohibited by s 23(b), it is not deductible under s 11(a) but rather under s 24J(2). Section 24J(12) excludes interest on instruments repayable on demand, and this type of interest would fall under s 11(a). However, this is unlikely to apply to a mortgage bond.
Even if it can be argued that a deduction under s 24J falls under s 11(x), the problem is that bond interest does not arise from a demand loan and thus does not qualify to be deducted under s 11(a). While it is accepted that s 23(m) does not permit the deduction of bond interest, it is to be hoped that National Treasury will amend s 23(m) in the draft Taxation Laws amendment bill, 2022 to allow for the deduction of interest incurred under s 24J(2).
BINDING GENERAL RULINGS
BINDING PRIVATE RULINGS
Tony Davey – Editor
Duncan McAllister – Co-Editor