Normally when cashing out a living annuity there is a tax (over 30%) withheld at source from the amount to be cashed out before paying the beneficiary. The beneficiary could be an individual, a trust, a welfare organization, or his estate. The taxpayer is preparing his estate plan and raised the following questions regarding living annuities: 1. If cashed out to a welfare organization section 18A approved NPO, will the above tax still be withheld before cashing out? 2. If his estate should be the beneficiary cashing out the living annuity, would this create an estate duty liability in his estate? 3. If his estate made a 'donation' to a section 18A approved NPO, would this allow for a deduction against the tax liabilities of the estate?
Important:
This answer is based on tax law year ending 28 February 2020.
Answer:
I don’t comment on the “normally when cashing out a living annuity there is a tax (over 30%) withheld at source from the amount to be cashed out before paying the beneficiary”. For purposes of the Income Tax Act, “living annuity” means a right of a member or former member of a … retirement annuity fund, or his or her dependant or nominee, or any subsequent nominee, to an annuity purchased from a person or provided by that fund on or after the retirement date of that member or former member in respect of which … (a) the value of the annuity is determined solely by reference to the value of assets which are specified in the annuity agreement and are held for purposes of providing the annuity; (b) …; (c) the full remaining value of the assets contemplated in paragraph (a) may be paid as a lump sum when the value of those assets become at any time less than an amount prescribed by the Minister by notice in the Gazette; The value was increased.
In terms of the Regulation issued during June 2020, Tito Titus Mboweni, Minister of Finance, withdrew all previous notices issued in terms of paragraph (c) of the definition of 'living annuity' in section 1(1) of the Income Tax Act, 1962 (Act 58 of 1962) and prescribe that the amount referred to in paragraph (c) of the definition of ‘living annuity’ in section 1(1) of the Income Tax Act, 1962, must be an amount of R125 000. The commutation of a living annuity will constitute a lump sum benefit and is deemed to have accrued to the annuitant immediately before the date of death. This applies where the lump sum is taken after death. See the paragraph (ii) of the proviso to paragraph 3 of the Second Schedule of the Income Tax Act. The tax tables relevant to lump sums will then apply. In terms of the proviso to this paragraph, “so much of any tax payable as is due to the provisions of this paragraph may be recovered from the person by whom the lump sum benefit in question is received”. So, the tax is levied on the deceased. We are not sure why you consider that the living annuity is included as property in the estate – see section 3(2)(i) of the Estate Duty Act. It is only the excess contributions, not applicable here, that will be deemed to be property in the estate. No deduction, under section 18A or otherwise, can be made against the lump sum. You must also check with the provider of the annuity if the annuity can be bequeathed to a trust or a PBO.