National Treasury has moved to close a loophole that enables taxpayers to save on estate duty by contributing substantial amounts to retirement annuity (RA) funds after they have retired.
The Draft Taxation Laws Amendment Bill proposes that contributions to a retirement fund that could not be claimed against taxable income should be included in an estate when estate duty is calculated.
If the loophole is closed, it will end the widespread practice of people taking out RA funds and making large, once-off contributions to them shortly before they expect to die, to reduce the value of their estates.
Until 2008, members of RA funds had to retire from their funds before the age of 70 and use the proceeds to buy an annuity.
In its explanatory memorandum to the Draft Taxation Laws Amendment Bill, National Treasury says the age limit on RA fund membership was removed to enable individuals to work beyond their normal retirement age and still contribute to a retirement fund.
Also in 2008, the Estate Duty Act was amended to exempt lump-sum benefits paid by a retirement fund from estate duty (benefits paid as regular pensions were already exempt). Treasury says the amendment was intended to alleviate financial difficulties that a family may face upon the death of the breadwinner.
National Treasury says the effect of the 2008 amendments is that, on the death of the RA fund member, the contributions pass to the estate free of the tax on retirement lump sums and then pass to the beneficiaries free of estate duty.
The bill proposes that RA contributions that exceed the annual tax deduction must be included in an estate. Non-deductible contributions that formed part of lump-sum payouts to a member, or that were used to offset the tax liability of annuity payments to a member, will not be included in the estate.
The annual tax deduction for RA contributions is the greater of:
* 15 percent of taxable income other than from retirement-funding employment; or
* R3 500 less current deductions to a pension fund, or
* R1 750.
If the proposal is implemented, it will take effect on January 1, 2016, and apply to the estates of people who die on or after that date, National Treasury says.
TAX AMENDMENT BILLS PUBLISHED
National Treasury on July 22 published, for public comment, the Draft Taxation Laws Amendment Bill and the Draft Tax Administration Laws Amendment Bill, which provide the legislative amendments required to implement most of the tax proposals announced in the 2015 Budget in February.
The legislation is available on National Treasury’s website, www.treasury.gov.za
Written comments should be emailed to Adele Collins and Nomalizo Bulisile by August 24, at [email protected] and [email protected]