The taxing issues of retirement
23 April 2012
Posted by: SAIT Technical
Tax Talk by Matthew Lester
For the 2012/13 tax year the interest income exemption is R22 800 for those under 65 years old and R33 000 for those over 65.
A new regime due to be implemented on March 1 2013 will grant an exemption of R30 000 per annum on all investment income, not only interest. The nitty gritty will only be known when the draft tax bill is made available in June. But we do know that SARS intends to cap the use of the exemption at R500 000 per taxpayer in a lifetime.
Presumably the meter will only start running on the cap from the 2014 year of assessment. Otherwise there will be a mad scramble for past tax returns to ascertain what has been utilised to date. So nobody is going to hurt for some time to come.
Investment income exemptions are intended to encourage the taxpayer to accumulate savings through a lifetime and shield pensioners from tax in retirement.
The R30 000 p/a capital gains tax exemption provides some additional relief. Thereafter CGT can be levied at a maximum 13.33%. Dividend income is stunted by dividends tax at 15% flat rate. Thus the benefit of allowing these forms of income to be offset against the general income exemption could actually hurt the taxpayer if the exemption could be used later to shield interest income that can be taxed at 40%.
A R500 000 lifetime exemption sounds generous. But it will only buy a pension of R3 000 a month, maybe less.
Perhaps a compromise is needed. How about the suggestion that the R500 000 cap will no longer apply after age 65? That way at least the pensioner is safe. The over-65 taxpayer will then be guaranteed a tax threshold of R99058, plus a R30 000 annual interest exemption, plus a R30 000 CGT exemption - an effective potential tax threshold of R159 058. And those over 75 will get R170 889.
The solution is at hand - save through a retirement annuity. That way all income on the investment is shielded from tax until retirement, without using up the exemptions. And the investment will be tax deductible.
But the problem is broader. Banks are proudly offering interest rates at around 5.5%, when inflation is over 6%. They are advertising to make investors poorer, before any tax is levied.
We can only switch to equities and pray.