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Deferring deductions on retirement annuity fund contributions

28 November 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: If a taxpayer’s yearly income is below the tax threshold before the deduction of retirement annuity contributions then they get no tax relief during each year.

Is there any reason why we cannot exclude the RA premiums each year and build up unclaimed deductions so that when the client retires they can then claim all the premiums not claimed as a deduction to be added on to the  R 500 000 exemption of retirement lump sum?

The client lives overseas and is contributing +- R 4800 per year & is in her mid-30s so these premiums not claimed could amount to well over R 150 000 by the time she reaches 55. It would appear that she has no intention of residing in SA.

A: In terms of proviso (bb) to section 11(n) "the deductions in terms of subparagraph (i)(aa) shall not exceed an amount equal to the amount remaining after deducting from or setting off against the income derived by the taxpayer during the year of assessment the deductions and assessed losses admissible against such income under this Act (excluding subparagraph (i) (aa), sections 17A and 19 (3) and paragraph 12 (1) (c) to (i), inclusive, of the First Schedule)”.  Subparagraph (i)(aa) contains the 15%, R3 500 or R 1500 limits.  

In terms of proviso (cc) to section 11(n) "any current contributions (excluding any amount referred to in item (aa) of this proviso) to any retirement annuity fund or funds which are made by the taxpayer as a member of such fund or funds during a year of assessment and do not qualify for deduction from his or her income for that year under subparagraph (i) (aa) shall be carried forward and, except to the extent that such contributions have been exempted under section 10C or accounted for under paragraph 5(1)(a) or 6 (1)(b)(i) of the Second Schedule, be deemed for the purposes of subparagraph (i) (aa) to be current contributions made to the fund or funds in question during the next succeeding year of assessment”.  

So basically the Act provides that the deduction must be made in the year of the contribution to the extent allowed (even from an amount below the tax threshold) and it is only the excess that can be carried forward.  The amounts carried forward must be reflected on the assessment and by not claiming them in the year of contribution the taxpayer loses the future deduction.  The Second Schedule confirms that it is only "the person’s own contributions that did not rank for a deduction against the person’s income in terms of section 11 (k) or (n)” that can be deducted against the lump sum.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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