Heirs to beneficiaries of voluntary annuities will no longer be subject to tax on the full annuity payment.
This is detailed in the Income Tax Act 1997 approved recently by Parliament. The legislation also included:
* Clarity on the position of heirs of provident fund members who had used all or part of their lump sums to purchase an annuity;
* The first steps towards bringing civil servants in line with private sector retirement fund members, as well as closing a tax loophole being exploited mainly by municipal retirement fund employees.
John Kinsley, a general manager at financial services company, Syfrets, said in terms of the legislation the heirs of anyone who used a lump sum to purchase a voluntary annuity (a regular income from an investment) would be subject to the same method of taxation as was the dead annuitant.
Until the amendment, both the capital and interest of a voluntary annuity were included in the taxable income of the heir (other than the deceased spouse.
Kinsley said when a voluntary annuity contract was issued, the life assurer declared the proportions of the annuity that came from capital and interest.
He said the amendment would particularly benefit people who had purchased back-to-back investments, where an annuity was funding another investment, such as an endowment policy.
The new legislation means that people who used their provident fund lump-sum payment to buy an annuity (pension) are now no longer in doubt about their tax position.
Kinsley said the Estate Duty Act had previously not been clear on the taxation of annuities bought with provident funds after the beneficiary's death.
The Estate Duty Act now states that the annuity bought from a provident fund lump sum will be exempt from estate duty.
From March 1 next year civil servants will gradually lose the tax advantages they received on lump sum payments at retirement.
Any benefits accruing after March 1 this year will be subject to the same lump sum taxation that applies to the private sector, but vested rights up to the date will be protected and no tax will be payable on that portion of a lump sum.
Municipal retirement fund members will no longer be allowed to transfer their money into a private sector fund without paying lump sum tax. Municipal workers have been transferring on a large scale.