FAQ - 6 April 2016
06 April 2016
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Tax treatment of living annuities
Q: Please would you confirm
if 'living annuities' are going to be incorporated into the new R247, 500
commutation ruling in future?
A: The law relating to the commutation of a living annuity wasn’t
changed when the retirement reform relating to provident funds was done. In other words it has remained the same. The question of whether or not a commutation
is possible is best addressed to the fund itself.
In terms of the definition of a
"living annuity” in section 1(1) of the Income Tax Act (paragraph (c)) the full
remaining value of the assets (the value of assets which are specified in the
annuity agreement) may be paid as a lump sum when the value of those assets
become at any time less than an amount prescribed by the Minister by notice in
To the best of our knowledge GN
1164 of 30 October 2008: Notice in terms
of paragraph (c) of the definition of "Living Annuity” in section 1 (Government
Gazette No. 31554) is still applicable.
In that notice the Minister of Finance, prescribe that the amount
referred to in paragraph (c) of the definition of "living annuity” in section 1
of the Income Tax Act, 1962, must be an amount of R50 000, if any of the value
of the annuity or any part of the retirement interest was previously commuted
for a single payment; or R75 000, in any other case. The Old Mutual document also refers to this. We agree that there may be a need for this
amount to be increased, but as was said, no changes were announced when the
most recent amendments were made to the legislation.
The SARS form "Request for a Tax
Deduction Directive (Form E)” (updated in March 2016) requires an answer to the
question "Was any value of the annuity or retirement interest previously
commuted for a single payment?” and also refers to the GN16 annuity (GN16 was
withdrawn in February 2016).
to treat assets inherited before 2001 for capital gains tax
Q: I would appreciate it if you could confirm what the current
situation is regarding capital gains tax on shares inherited before 2001. Par
20(1)(a) stipulated that assets acquired by inheritance before 1.10.2001 are
regarded as having been acquired by the heir for an expenditure of nil on the
date on which the heir became unconditionally entitled to the asset - the base
cost was seen as NIL.
A: You are correct that the issue
arises whether any expenditure is actually incurred for the purposes of
paragraph 20(1)(a) when an asset is acquired before the valuation date by
inheritance. This issue is relevant,
amongst other things, in determining ‘B’ in the time-apportionment base cost
formula and in applying the kink tests in paragraphs 26 and 27. At first glance one might conclude that the
expenditure is nil, since no consideration appears to be given for the asset.
But in the context of capital
gains, the definition of ‘asset’ in paragraph 1 is wide and includes personal
rights such as an heir’s vested right to claim delivery of an asset bequeathed
under a last will and testament once the liquidation and distribution account
has lain open for inspection and no objection to it has been lodged with the
When the actual asset is acquired
the personal rights referred to above are extinguished. The market value of the
personal rights at the time of their extinction represents the ‘expenditure’
actually incurred in acquiring the asset.
Applying this principle to an
asset acquired by inheritance, the sequence of events is as follows:
First, upon accrual, the person
acquires a right to claim delivery of the asset for no consideration.
Next, the personal right to claim
delivery of the asset is extinguished upon acquisition of the ultimate asset.
The proceeds from the disposal of the personal right to claim delivery are
equal to the market value of the ultimate asset, while the cost of the personal
right is nil. This will give rise to a pre-CGT gain, but it is not relevant for
purposes of the Eighth Schedule, since the disposal occurs before valuation
Finally, the expenditure actually
incurred for the purposes of paragraph 20(1)(a) on the acquisition of the
ultimate asset is equal to the market value of the personal right to claim
delivery immediately before it is disposed of through extinction.
The disposal of a personal right
to claim delivery in return for the actual asset is well recognised in the time
of disposal rules in paragraph 13.
Disclaimer: Nothing in these queries and answers 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 answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.