Tax Update 2014: Plenty of Good News

When first glancing at the tax changes for 2014, it appears as if little has changed. There have been the usual adjustments of income tax table brackets, allowable deduction amounts, rebates and medical aid credits – all simply allowing for annual inflation erosion. But, on closer investigation, there are a few additional opportunities for tax relief that you need to be aware of.

No tax on first R500k of your retirement lump sum

During 2014/15, the first R500 000 of a lump sum taken on retirement or retrenchment will be taxed at 0%. This compares with R315 000 in 2013/14. This is a lifetime allowance, though. Once a tax payer has, for example, taken R500 000 in cash after retrenchment, he or she will be paying tax of between 18% and 36% on any further lump sums taken at retirement or following a future retrenchment.

Making use of the compulsory annuity ‘carry-over’ of unused deductions

For income tax purposes, Section 10C exempts any unused deductions for receipts and accruals on or after March 1 2014 from compulsory annuity income. When calculating the taxable lump sum to be included in a taxpayer’s gross income in the year of retirement, certain deductions are allowed, stemming from the taxpayer’s contributions to a pension or retirement annuity fund that did not qualify for a deduction in terms of section 11(k) or 11(n). Previously, the taxpayer lost this deduction if they did not use it in the year of retirement. As from March 1, 2014, the unused deductions described above can be offset against the retiree’s annuity income on a “first come, first serve basis” every year until all unused deductions have been utilised. This applies to all compulsory annuities (guaranteed life and living annuities), but not to voluntary annuities.

Certain investment policies can now be ceded to retirement funds

As a result of the 2011 amendments to the Income Tax Act, funding deferred compensation agreements between employers and employees via life insurance policies are no longer viable. Many employers still have these policies in place, though. If employers cede the existing policy to a pension or provident fund, the tax man will view this as a tax neutral event. However, beware – if the employer cedes the policy to the employee’s individual retirement annuity, this will be seen as a fringe benefit for the employee and taxed at the time of the cession.

Medical aid relief for disabled persons now include parents’ expenses

When the taxpayer, her spouse or her child is disabled, the medical expense rules relating to disabled persons apply, providing more tax relief than for other under 65s. In addition, there is potentially relief for an able-bodied person with no disabled child or spouse too. Financial planners need to pay attention to taxpayers under the age of 65 who pays for the medical expenses of a disabled immediate family member, such as a parent.  These taxpayers can add their disabled parents’ expenses to their own medical expenses before calculating whether part of their expenses and contributions qualify for additional relief according to the “7.5% of taxable income” rule. Their total expenses would need to be significant before additional tax relief sets in.

Income disability pay-outs now tax-free

Effective from March 1, 2015, the payout on income disability policies will be tax-free, even when the contributions to the policy were previously deducted from the policyholder’s taxable income.

Change in donations treatment can lower running costs of property

Tax-deductible donations are limited to 10% of annual taxable income, including a gain. From March 1, 2014 there is now roll over relief on any disallowed donation amounts. It will be deemed a contribution made in the following year/s of assessment. Donations can also include immovable property. This clause is particularly useful for taxpayers owning large pieces of land that are expensive to maintain.

It now becomes worth their while to donate all or part of these properties to public benefit organisations without paying any capital gains or donations tax, and potentially reaping the tax relief benefits of a section 18A donation for many years after the donation. It is also possible to retain partial use of the land, leading to a partial deemed donation.

While the changes listed above are very specific to certain taxpayers, it is encouraging that the taxman is generally responsive to proposals to amend the Income Tax Act in instances where it does not yet appear to be fair.