YOUR MONEY: Tackling tax

Question:

I refer to Elke Brink’s comments made on RSG’s Op en Wakker programme regarding disallowed contributions.

I’m a pensioner and don’t want to evade taxes, but rather fully use all tax concessions. I’m especially concerned about estate duty and capital gains tax.

My income consists of a monthly pension from my former employer as well as drawing down 2.5% of my living annuity. Currently, I contribute 27.5% of my taxable income, from discretionary investments, to an existing retirement annuity, where the capital gains are accumulating.

If I interpret available information correctly, I can contribute a larger amount (for example, income from years two and three) as a “disallowed contribution” to the existing annuity. All income codes, such as salary, bonus, interest received, dividends and so forth, will be set off against this amount in subsequent tax years. I presume that the taxable income will then constitute only the capital gains (-R40,000 x 40%) on the contribution from the discretionary investments? If that is the case, can I drastically lower my estate duty and capital gains tax?

I would appreciate it if you can confirm my assumption. Any alternative suggestions are also welcome.

J van Staden

Answer:

Absolutely. Section 10C is an incredible tax optimisation tool, as well as an estate planning mechanism. It is very underutilised and not well known. Some investors do not like the concept of using it earlier on in life as you are “locking” your investments into a retirement annuity pre-retirement and then converting it into a living annuity — still quite a strict product. However, I think it’s a fantastic benefit to optimise.

To summarise:

• You are allowed to save up to 27.5% of your taxable income in a retirement annuity (while working this can also consist of a pension or provident fund). These contributions can be claimed back from the South African Revenue Service on an annual basis up to a maximum of R350,000 a year.
• Anything over and above your 27.5%/R350,000 a year will accumulate in a “pool” — referred to as disallowed contributions. At retirement (anything past the age of 55) — this can be set off against your income tax. Let’s use an example. Your “pool” has a value of R2m. You are drawing an income that has a R500,000 annual tax effect. You can offset this lump sum against your income for four years — and essentially pay no tax until this pool is depleted.
• If already retired, you can transfer a lump sum to a retirement annuity and immediately “retire” from the product again and move the funds to your living annuity — where you can now offset the tax effect. Keep in mind there is always a one-year delay. Should you, for example, invest funds before the end of February 2024, the offset benefit will be possible only in 2025.
• By using the retirement annuity followed by the living annuity, you manage estate planning as well, as both these products will not form part of your estate and transfer to your loved ones immediately.

To answer your question — yes, it will mainly be the capital gains tax effect on the sale of the discretionary investments. And also knowing that you will lose some liquidity as the living annuity has stricter rules.

Optimising section 10C at any given time can have incredible tax efficiency and estate planning outcomes in a portfolio.

Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch

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