Our recent three-part series on completing your tax return drew further questions about tax. We put our readers' questions to the South African Revenue Service (SARS).
Guardians can claim for disabled dependants' expenses
AW Jones, of Durban, writes:
I have followed your D-I-Y Tax Return articles with great interest and congratulate you on your initiative. I have a number of questions, particularly under Part 5.15 Deductions, the answers to which will be of great help to parents, like ourselves, and guardians of mentally handicapped children/dependants that do not reside at home but who are residents at homes which specifically cater for the care of the mentally handicapped.
These people fall under the Mental Health Act and receive a monthly disability grant.
1. Apart from medical costs, what other expenses can be claimed - for example boarding fees, cost of personal upkeep, travelling expenses and annual holidays?
2. Obviously, it is the responsibility of parents and/or guardians to provide lifelong financial support for their handicapped dependants.
In doing so, I am given to understand that by establishing a "special trust" for the dependant and by investing a lump sum in a standalone pension there are certain tax concessions. Is this correct and what is the tax rate? I understand that 18 percent will apply.
3. Residents at homes for the mentally handicapped invariably share rooms with two or more residents. Sharing brings with it social and behavioural problems and residents cannot enjoy optimal privacy. To overcome this, larger rooms can be subdivided into single rooms for which parents or guardians have to pay a once-off payment of R20 000 for the cost of conversion.
Is there any provision in the Income Tax Act which will allow the R20 000 to be considered as a donation, especially if the home is exempt from income tax in terms of Section 10 of the Act?
Also bearing in mind that when the handicapped person dies there will be no refund of the R20 000 or even part thereof.
SARS replies:
Any expenditure necessarily incurred and paid by a taxpayer in consequence of any physical disability suffered by the taxpayer, his spouse or child or stepchild, will be considered for a deduction.
The same tax rates that apply to individuals apply to special trusts except that no rebates apply.
To enable the donor to claim the donation as a tax deduction the home would have to have been approved in terms of section 18A of the Income Tax Act. The requirements as set out in section 18A must also be complied with. Presently section 18A status is only granted to certain secondary and tertiary educational institutions. However, the provisions of the Income Tax Act regulating the tax exempt status of public benefit organisations is being amended.
Misleading RA rebates favour taxman
Dr DA Taylor (letter by e-mail) writes:
In your "DIY tax return" pages on June 16, the information concerning deductions apparently claimable on a retirement annuity (RA) is misleading.
Assume your non-pensionable income is X. Because your payments into an RA exceed 15 percent of X, you can claim 15 percent of X as a tax deduction - right?
Wrong! If you are also claiming other deductions (assume these total Y) for other expenses (such as professional subscriptions), the tax authorities deduct Y from your non-pensionable income to arrive at what they are pleased to call your "taxable non-pensionable income". Thus you are only permitted to claim 15 percent of (X-Y) as a deduction for RA payments.
As Y approaches X, your claim approaches valuelessness.
It amounts to the following: the tax authorities use your total income to calculate your tax where this maximises your payments, but attributes all the deductions you claim to just the non-pensionable fraction of your total income, where this minimises tax relief.
One arm of the government maximises the non-pensionable proportion of the salaries it pays certain of its employees (to save money at their expense). Another arm then minimises their incentive to offset this with an RA.
SARS replies:
The Income Tax Act makes provision for a deduction of 15 percent of taxable income (excluding retirement-funding employment) as a deduction to current RA funds. When determining taxable income, the following deductions must not be taken into account: Contributions to a retirement annuity fund ; donations; medical and dental expenses; and capital development expenditure.
Should an allowance such as a travel allowance be included in the non-retirement funding component of your income, the unspent amount of such allowance will be used in the determination of the amount to be contributed to non-retirement funding income.
Pension fund tax rules do nothing for savings
K House (letter by e-mail) writes:
I recently resigned from a government department where I paid pension for nearly four years.
I chose to transfer 100 percent of my pension to a preservation fund. Firstly, my broker was informed that government pensions could not go into a preservation fund; it had to be a pension fund, which we have now done.
Secondly, SARS has deducted tax from the total amount, (only on the member's portion), referring to formula C of paragraph 1 of the second schedule of the Income Tax Act of 1962.
I believe it is unconstitutional to force former employees to invest their hard-earned cash in a particular place, and deducting tax on the member's portion goes against all the promises about tax-free transfers and encouraging savings. And then there's the mystery of who is earning the next 20 years' interest on my member's portion.
SARS replies:
The rules of the original fund to which the contributions were made prescribe the conditions for withdrawals and determine the resignation benefit, which accrues to the member. This portion attracts income tax, which is regarded as a member contribution to the fund. It should be noted that a preservation fund may not accept members' contributions.
Tax on such contributions will be levied in terms of paragraph 1 of the Second Schedule of the Income Tax Act.
When you must submit a provisional tax form
GW van der Veen, of Pretoria, writes:
According to your DIY Tax Return article, the way I understand it, people whose income consists of pension, interest on investments and savings accounts do not have to hand in provisional tax forms. Also: Can a special tax return be designed for pensioners?
SARS replies:
The following individuals are not required to register for provisional tax purposes:
* Individuals below the age of 65 who earn taxable non-employment income below R2 000 a year - that is R2 000 above your tax-free interest earnings (R4 000 for those under the age of 65 or R5 000 for people 65 and over for the 2001/2 tax year); and
* Individuals age 65 and older if their annual taxable income consists exclusively of remuneration, interest, dividends or rent from the lease of fixed property and does not exceed R80 000 a year.
A project is being launched to investigate the simplification of the income tax returns.