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FAQ - 6 April 2016

Wednesday, 06 April 2016   (0 Comments)
Posted by: Author: SAIT Technical
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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 the Gazette.  

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 and also refers to the GN16 annuity (GN16 was withdrawn in February 2016).  

2. How 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 Master.  

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 date.

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.  



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