You cannot claim the costs, either initial or ongoing, that you incur in buying an annuity (a pension), as a tax deduction "in the generation of income".
This is according to Vlok Symington, the manager of employment income in the law administration services department of the South African Revenue Service (SARS).
Symington was responding to questions that were raised at a recent meeting of the Personal Finance/Old Mutual Investors Club in Cape Town.
However, it was pointed out that different SARS offices around the country were applying different principles and in some instances the costs were being allowed as a deduction.
Symington says SARS is working towards applying the law in a consistent way throughout the country. He says SARS officials are "bound to the official SARS view in relation to a particular matter. "In theory (and in practice) one should therefore only get one answer."
However, Peter Stephan, a legal adviser at Old Mutual, says there is no reason why you should not apply to have the costs of an annuity written off against taxable income.
At the Investors Club meeting the issue of whether the costs of a living annuity could be paid separately from the returns of the annuity to reduce the amount being drawn down, was also raised. In terms of tax regulations, people receiving a living annuity must draw between five percent and 20 percent of the residual capital value of the annuity on an annual basis. If the costs (about two percent) could be paid in cash from the five percent, then effectively the draw down would be only three percent.
Symington points out that this would be contrary to regulations.
A SARS practice note from 1996 states that the annuity draw-down has to be net of costs. This means that the costs must be deducted from the capital sum first and then the annuity calculated.
For example
Where R100 000 is invested and the initial costs are 5.5 percent, the annuity (of between five percent and 20 percent) will be calculated on the net amount of R94 500.
The following year, the capital amount will be the original amount, plus investment growth, less initial costs, less the annuity paid. This capital amount will then be the base amount for the next year from which annual costs (about two percent) must be deducted first and then the new annuity of between five percent and 20 percent must be calculated.
On the issue of claiming the costs of a living annuity against income, Symington says another SARS note states that costs are not deductible under section 11(a) of the Income Tax Act. The note states that the costs associated with annuity products fall into two categories: initial investment costs and subsequent additional costs over the lifetime of the annuity.
"The initial costs associated with providing a so-called living annuity or equity-linked annuity are debited against the capital invested. The long-term insurer owns the capital used to purchase the annuity. It follows that the costs are incurred by the insurer and not by the annuitant.
"It cannot, therefore, be argued that the annuitant incurred these costs in the production of the annuity income, and no deduction of these expenses is therefore available under section 11(a) of the act.
Insurer owns the capital
"Subsequent costs over the lifetime of the annuity are also debited to the underlying capital. The insurer, as mentioned before, owns the capital. The costs are therefore an expense incurred by the insurer and it cannot be argued that the annuitant incurred these costs in the production of the annuity income. No deduction of these expenses is therefore available under section 11(a) of the act."