How Sars has changed tax for annuitants

DUDU RAMELA: Sars recently changed the way taxes are calculated for living annuities from March 1, 2022. It required annuity providers, including Allan Gray, to withhold a fixed rate higher than the rate they apply based on the personal income tax table for some clients from the 2022/23 tax year. The change aims to reduce the tax shortfall clients may face at the end of the tax year by applying fixed tax rates calculated by Sars, which considers the multiple sources of income they may receive to living annuity income.

Carrie Norden is a senior tax specialist from Allan Gray, and she joins us now to discuss the rationale behind this change and the impact it may have on your annuities. Carrie, thank you so much for joining us this evening. Perhaps let’s start with how the new rates are calculated.

CARRIE NORDEN: Yeah. Sars, as you mentioned, has issued fixed rates to annuity providers that apply to annuity income from March 1.

These fixed rates have been calculated by Sars based on the latest available data it has from employees and annuity providers. So it has taken all the sources of employment income into account in calculating the rates. Other sources of income, such as rental income, interest income and so on weren’t taken into account. The rates were based on the 2022/23 personal income tax tables, taking the annual tax-free base into account.

Additionally, Sars also considered things such as retirement fund contributions [and] medical aid tax credits. Provisional taxpayers, for example, are unlikely to be impacted or to receive fixed rates, because they have other sources of income outside of employment income. But if you earn a salary and an annuity, for example – that’s two sources of employment income or one or more annuity – then you could have been impacted by this change.

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DUDU RAMELA: I’d like for us to expand on that in terms of whom has been impacted, who needs to just pay attention here, and what has changed.

CARRIE NORDEN: Those who need to pay attention are people who receive more than one source of employment income. That is, for example, salary income and annuity income, or more than one annuity from different insurers, different sources.

DUDU RAMELA: Can those people then who are affected opt out, and what should they consider as they make the decision?

CARRIE NORDEN: Your annuity provider should have communicated to you whether you appeared on the Sars fixed-rate list for the current tax year. For example, Allan Gray sent communications to all taxpayers, including the actual rate you receive, per taxpayer.

It’s very important to note that you are allowed to opt out of this fixed rate, and you don’t have to have it applied to your annuity income – and you need to do this in writing to your annuity provider, and you are also able to do it at any point during the tax year.

DUDU RAMELA: When somebody hears the word ‘tax’, someone can literally have a mini heart attack, because it can be so complicated. So where can investors get some professional assistance?

CARRIE NORDEN: Yes, particularly with this issue, you want to calculate what your pay-as-you-earn tax liability might be, and whether you can afford this additional higher rate up front or not. These calculations often have very many moving parts. So if you have a financial advisor and/or tax practitioner who assists you, it’s very important that you consult with them, so that they can advise you on the best course of action, taking all your individual factors into consideration.

I also just wanted to point out that annuity providers don’t have in-depth insight into each taxpayer, [into] how Sars has calculated the rate for that taxpayer.

If there are any questions in that regard we encourage you to reach out Sars for assistance, while remembering that if you have any concerns you are allowed to opt out. Then later on, if you want a higher rate applied to your income, you are always able to contact your annuity provider to apply that higher rate at your own election later on.

But if in doubt opt out, essentially.

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DUDU RAMELA: Sure. I think maybe we could just reiterate this in terms of why Sars introduced these changes in the first place.

CARRIE NORDEN: This is very important. Sars is trying to assist taxpayers here to prevent a tax shortfall on your assessment, which they may not have expected, or they may not have budgeted for, because annuity providers and employers calculate pay-as-you-earn tax only looking at the income that they administer.

But if you’re earning employment income from more than one source, when they are combined on assessments that could push you up into a higher tax bracket.

And because each employer is also applying the annual tax-free base, that could also mean your tax liability has not been calculated exactly correctly on each income payment that you receive.

So in order to prevent taxpayers from having this unexpected surprise, Sars has tried to do this calculation for these taxpayers and then give them an option to have this higher rate applied up front – or to opt out if they don’t want it to be applied.

DUDU RAMELA: Carrie, it’s important to understand the impact of the Sars fixed tax rate on your cash flow, and for people to be aware of their options.

CARRIE NORDEN: Yes. Very important. So you need to look at your situation holistically, bearing in mind that you could still have a shortfall assessment. These rates are not an exact science, but were based on the latest historical data. But also, if you’re planning on making, say, retirement-fund contributions, and if you’re going to benefit from additional medical expenses or tax credits, for example, these will impact your overall tax liability. So try to do your calculation as best you can with the assistance of a financial advisor, if you have one.

But you also need to work out if you can afford this additional liability up front to be deducted from your annuity income.

Oh, I just wanted to point out that, even though salary income has been factored in in these calculations, these fixed rates have only been issued to annuity providers. So it won’t impact your salary from your actual employer. It’s only the annuity income that you receive.

DUDU RAMELA: Very interesting to note. Thank you very much for helping us make sense of all of that. Carrie Norden is a senior tax specialist at Allan Gray.

This article first appeared on Moneyweb and was republished with permission. Read the original article here.