Monthly Archives: November 2016

Pension fund on finance

I am a 54-year-old male member of the Transnet Pension Fund. I recently responded positively to my employer’s advice for increasing monthly premiums. I have realised that Sars does not consider pension fund contributions for tax relief when submitting yearly returns. I am therefore thinking of reversing my decision, rather increase my Retirement Annuity, which I have with a financial institution, for tax returns purposes.

Please advise if it is a right decision.

A: As of March 1 last year, irrespective of whether you have a pension, provident or retirement annuity (RA), you will qualify for a tax deduction of up to 27.5% of your taxable income (subject to a maximum of R350 000 per year). This limit applies to the total contributions you make to all retirement funds in the tax year.

Prior to March 1 2016, members could get a deduction of up to 7.5% on their own contributions, and no deduction on their employer contribution. Post 1 March 2016, you will now pay fringe benefit tax on the employer contribution, but at the same time get a deduction on both your own and your employer’s contribution by way of a reduction in taxable income, subject to the limits referred to above. This will leave you in the same position as before March 1 2016, as long as your contribution is below the limits mentioned above. By increasing your contribution to the employer pension fund, you get the benefit of the effective tax deduction monthly and you won’t have to wait until you file your tax return (as is the case if you contribute to your own RA).

I would advise you to speak to someone in your HR/payroll department as you should be receiving the full tax deduction for the total contributions if they are below the limits mentioned above. Any contributions in excess of these limits will be carried into the next tax year.

Mutual impersonator

A marketing and sales team purporting to represent Old Mutual Financial Services has re-emerged and is offering fraudulent loans to the public at 5% interest in an effort to get hold of personal details and solicit upfront payment for the release of loans.

This type of phishing scam has become popular over the last few years, with fraudsters using the name of well-known, credible organisations to gain legitimacy. Moneyweb’s name was previously illegally linked to a similar loan scheme offered by “Moneyweb Private Banking South Africa”.

In November last year, the Financial Services Board (FSB) issued a warning against a scam called Skeme Finance Group which requested an “enclosure fee” from individuals before a loan could be granted. To pacify individuals getting wind of the con, the scheme issued a fraudulent letter using the FSB’s logo and a picture of the deputy registrar of financial services providers, Caroline da Silva.

Consumers are lured with promises of very low interest rates – typically no more than 5% per annum. Interest rates on personal loans at most banks generally range from 13% to 28% per annum. This makes the offer “too good to be true”, often the first warning sign that something fishy is afoot.

But shutting down these operators can be a long and cumbersome process and individual vigilance remains the best form of protection.

The Old Mutual impersonator, who calls herself “Melissa Green”, was offering loans to the public late last year, but despite Old Mutual issuing an alert and reporting the case to the police, “Green” was sending emails with a loan offer as recently as Monday.

A woman named Mary-Ann reported “Green” to the fraudalert website in January and although she did not lose any money (Green allegedly asked for R5 750 to cover attorney and insurance costs), she did share her personal details.

“I am afraid that they can do something illegal with it,” she wrote on the website.

Green’s number is still in service. When Moneyweb phoned the number on Wednesday, she repeated the emailed offer, highlighting the “special” interest rate and added that the offer would expire by the 15th. Scammers often put a clock on offers to put pressure on individuals to commit.

Reduce the costs in an estate

The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

How government is collecting more tax revenues

Over the last few years government has collected a significant amount of tax revenue by not fully adjusting the personal income tax tables for inflationary increases in earnings, thereby increasing the effective tax rate of individuals.

A middle-class individual earning a taxable income of R400 000 per annum in the 2016 year of assessment, would have seen her after-tax income increase by only 5.42% and 5.05% in the 2017 and 2018 tax years respectively, even if her taxable income increased by 6% every year.

During his most recent budget speech, finance minister Pravin Gordhan collected more than R12 billion of the R28 billion in additional taxes he needed from the personal income tax system in this way.

In a similar fashion, taxpayers may now become liable for capital gains tax (CGT) purely because three of the exclusions have not been adjusted for the effects of inflation since March 1 2012.

1. The primary residence exclusion

When taxpayers sell their primary residence and realise a capital gain on the transaction, an exclusion of R2 million applies.

Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa), says if the exclusion was adjusted for inflation over the past five years, it would have increased to around R2.6 million over the period.

For someone who bought an upper middle-class house in Cape Town for R650 000 in 2002 and who wants to sell it now, this has significant implications.

Van Vuren says today the house would be worth roughly R3 million. If it were sold, the capital gain realised would amount to R2.35 million (assuming no capital improvements and a base cost of R650 000). Due to the primary residence exclusion, R2 million would be disregarded, and 40% (the inclusion rate for individuals) of the capital gain of R310 000 (after deduction of the R40 000 annual exclusion) would have to be included in the individual’s taxable income.

At an assumed marginal income tax rate of 41%, the individual would have to pay R50 840 in CGT, purely because the primary residence exclusion hasn’t been adapted for inflation, he adds.

2. The year of death exclusion

Apart from the primary residence exclusion, the South African Revenue Service allows for a capital gain exclusion of R300 000 on all other assets in the year of an individual’s death (instead of the normal R40 000 annual exclusion). Personal use assets like artwork, jewellery and vehicles do not attract capital gains tax.

Van Vuren says if someone had invested R250 000 on the JSE in March 2009 in the wake of the financial crisis and it kept track with the performance of the All Share Index, the investment would have grown to roughly R700 000.

Since the individual would be deemed to have disposed of the investment upon death, the capital gain would amount to R450 000, which would reduce to R150 000 after the R300 000 exclusion had been deducted.

Van Vuren says if the exclusion kept track with inflation it would have been around R400 000 today and the gain would be only R50 000 (R700 000 minus R250 000 minus R400 000).

At an inclusion rate of 40%, the R100 000 “additional gain” that had been realised will add R40 000 to the individual’s taxable income, which, at a marginal tax rate of 41% would lead to R16 400 in CGT, purely due to inflation.

3. Special exclusion for small business owners

Van Vuren says because the retirement provision of small business owners are often locked up in the value of their companies, it would be quite harsh to levy capital gains tax in the normal way when they dispose of their interest in the business upon retirement.