The SA Revenue Service (Sars) will introduce changes to its systems from 1 March 2022 so that taxpayers who receive income from more than one source, and where one of the sources is income from a retirement fund, do not end up with a large tax bill after they have been assessed.
The changes are designed to ensure that their tax liability is spread evenly throughout the year.
Where a pensioner has one source of income during a tax year, Sars’s PAYE system typically ensures that the tax due at year-end is sufficiently covered by way of monthly PAYE withholdings.
However, where a pensioner receives more than one source of income, a tax debt may arise at year-end when Sars combines all the sources of income to determine the taxable income and the tax due.
Although the PAYE system permits a pensioner to request that a higher amount of PAYE is deducted so that any tax due at year-end is adequately covered, not many pensioners use this option, leaving them with a tax debt at year-end for which they did not budget. “This, in turn, has a significantly negative impact on Sars’s outstanding debt book,” Sars says.
In response to this, the recently introduced paragraph 2(2B) of the Fourth Schedule to the Income Tax Act enables Sars to determine the effective rate of tax in respect of the combined employment and/or pension income of a taxpayer, with reference to the latest data available to Sars. Sars will provide that rate to retirement fund administrators for the purpose of withholding PAYE.
Jenny Gordon, head: technical advice at Alexander Forbes Investments, Product and Enablement, said it seems the original reason for the legislation was to assist the surviving spouses of retirement fund members, mainly those in public sector funds.
On the death of a member, the surviving spouse would receive a spouse’s pension from the fund, but also be in employment.
“The PAYE rules require each employer, which includes a retirement fund and its administrators, to deduct PAYE tax as if that were the person’s only source of income. This means that both employers applied the rebates and used the tax tables applicable to the income they paid only.”
However, all income must be aggregated on assessment. As a result, the surviving spouse had a tax debt to Sars and did not have the disposable income to pay it, Gordon said.
The legislation has now been extended to all taxpayers who receive a pension from a retirement fund or an insurer and have another source of PAYE income. It will not affect people who have only one source of PAYE income, Gordon said.
She said a “huge amount” of work was being done to get systems ready for implementation by 1 March next year.
The original date of implementation was 1 March 2021. However, this was delayed so that the legislation could be refined.
Taxpayers still have a choice
Sars says that notwithstanding the PAYE withholding rate it provides, a pensioner may ask his or her retirement fund administrator:
- To withhold PAYE at a rate higher than the rate provided by Sars; or
- To withhold PAYE at a rate that is equal to the PAYE withholding rate under the normal PAYE withholding tables. In this case, the retirement fund administrator must inform the pensioner of the possibility that the PAYE withholding rate will be insufficient to cover the tax liability of the taxpayer on assessment.
Where Sars has not provided a PAYE withholding rate in respect of a particular pensioner, retirement fund administrators must continue to apply the normal PAYE withholding rates.
Where Sars provides a PAYE withholding rate, it will be by way of an annual directive. If a pensioner’s circumstances change during the year (for example, other employment income ceases), the retirement fund administrator may apply the normal PAYE withholding rate as opposed to the withholding rate provide by Sars with effect from the month in which it becomes aware of the change of circumstances.
Gordon said some pensioners will be grateful to have better certainty that they will not have to pay in on assessment.
“It is not an exact science, and people’s circumstances might change during the year. Administrators are working hard to attempt to design systems that recognise and apply this. Sars has been very helpful in working together with administrators to make the implementation of this work.”
This is a “make work” exercise by SARS which will effectively smooth the Fiscus’ income over the tax year; and we should not be fooled by the way that SARS has dressed up this move to give them a more humanitarian face.
It is everu person’s obligation to so arrange his financial affairs as to minimise the Income Tax he is obliged to pay, a fact that SARS finds it difficult to digest.
Whch part of their barrel will they scrape next?
My effective tax rate is confidential information, and SARS has no right to share this with a fund administrator without my permission.