Car allowances are not normally taken into account in calculating pensionable income, but a portion may be used to fund a retirement annuity, Hein Daffue of Sanlam Legal Services said in the group's latest "Ex Lege".
It is regularly debated whether retirement annuity contributions can be deducted from the full car allowance, before allowing for travelling expenses; or only from the taxable car allowance after travelling expenses are deducted; or from no part of the car allowance.
Daffue said several local Receivers of Revenue held the same view, that an retirement annuity deduction would be allowed on the unexpended portion of a car allowance.
However, it should be borne in mind that other tax experts suggest retirement annuity contributions would not be deductible from any part of the car allowance.
Using an example to show the effect of deducting retirement annuity contributions from the full car allowance before travelling expenses (the first option) suggested that R7 500 could be allowed as retirement annuity contributions:
R
Pensionable cash salary150 000
Non-pensionable car allowance50 000
Gross income200 000
LESS DEDUCTIONS
Deemed travelling expenses30 000
Pension contributions (7,5% of R150 000)11 250
RA contributions (15% on R50 000)7 500
Taxable income 151 250
Using the same example to show retirement annuity contributions only deducted from the taxable car allowance after allowing for travelling expenses meant R3 000 would be allowed:
R
Non-pensionable car allownance50 000
LESS
Travelling expenses30 000
20 000
RA contributions (15 % of R20 000) 3 000
This results in taxable income of R155 750, instead of R151 250, as in the first example.
Daffue said this second example makes good sense. However, the picture will not become clear until a practice note is issued by the Commissioner for Inland Revenue.