Death and taxes: How does it work for RAs?

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A Fin24 user who has lost her husband seeks tax advice on his retirement annuities.

She writes: My husband passed away in February 2015. He had three retirement annuity (RA) policies as well as a living annuity.

These have now all been paid out by the respective life insurer less tax at the rate that my husband was being taxed at.

My late husband, although 73, was still fully employed and thus the tax rate applied was the same as was used for his PAYE approximately 30%. My husband was forced to take early retirement in 2002 and his pension fund was invested in its entirety into the living annuity. He also received a lump sum retrenchment package – which is reflected under the income section on his IT 34 as a gratuity.

My husband told me that he had not cashed in the RAs as he was waiting for the tax free threshold to increase to R500 000.

I have checked all of his tax returns since 2002 and nowhere is payment of the tax free portion reflected.

My questions are the following:

1. How would the tax-free portion be reflected on his IT34 – is there a specific code? Does it reflect under the income section?
2. Does one forfeit the tax-free portion when one has passed away – or should it still be taken into consideration.
3. How does one go about getting SARS to investigate this and see whether the incorrect tax has been deducted.

Piet Nel, SA Institute of Tax Professionals responds:

The taxing of lump sums from retirement funds changed with effect 1 October 2007 or 1 October 2009, and with respect to severance benefits (retrenchment included) 1 March 2011.  

You say that, on retrenchment, the full retirement interest was used to acquire a living annuity.  

In terms of paragraph 3 (of the Second Schedule to the Income Tax Act) any lump sum benefit which becomes recoverable from a retirement annuity fund (or an insurer), if that lump sum benefit is payable by, or provided in consequence of membership or past membership of a retirement fund, in consequence of or following upon the death of a person who is or was a member of that fund must, is on the date of payment of that lump sum benefit, deemed to have accrued to that person immediately prior to death. 

The act continues by providing that where any annuity or portion of an annuity (including a living annuity) which becomes payable on or in consequence of or following upon the death of a person who is or was a member of any such fund has been commuted for a lump sum, such lump sum shall for the purposes of this paragraph be deemed to be a lump sum benefit which has become recoverable in consequence of or following upon the death of such person.  

This means that the commutation of the living annuity is treated as a retirement benefit and should have been taxed accordingly. The R500 000 that you refer to applies to all retirement fund lump sum benefits received after 1 March 2015 and is available on death.

The rate if tax is not 30%, but either 27% or 36%, but we may not have enough information here.  It is advisable to consult a tax practitioner as it would require that an objection be made to the assessment.  

* Have a question? Send it to us and we will find an expert to answer.

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