Question:
I am considering a new retirement annuity with 10X, but I am confused by the terminology regarding the tax treatment and definition of “arrear” vs “excess” retirement annuity contributions. Am I correct in assuming that I can claim up to R1 800 p.a. as “arrear contributions” for those past years when I did not contribute the maximum tax free amount to my retirement annuity and that I can carry over R1 800 p.a. until such time as I have used up all of my arrear retirement annuity tax free allowances not used in the past? Also, is there a limit to how many previous tax years that I can go back to use this allowance and carry it forward? With regard to “excess contributions” am I correct in assuming that this refers to retirement annuity contributions in the current tax year which are in excess of my 15% of income allowed and that I can carry this" excess" into the next and subsequent tax years until such time as I have used up my cumulative “excess”? As a simple example, if my non-pensionable income is R200 000 and I am allowed an retirement annuity tax deduction of 15% (R30 000) and I contribute R60 000 to a 10X retirement annuity in the current tax year, am I allowed to carry over the “excess” of R30 000 to the next tax year (assuming that my income in the next tax year remains unchanged at R200 000)?
Answer:
Don, The "arrear contribution" refers to an additional current year contribution that is related to a previous tax year in which you did not claim your maximum allowable deduction. This extra contribution of R1 800 can be claimed annually in respect of all previous years in which you did not claim your full 15% (of non-pensionable income) deduction. So if you contributed R9 000 to an retirement annuity last year and you have contributed R18 000, then you can make an additional contribution of R1 800 (over and above your 15% of non-pensionable income) in each of the next five years. However, the contribution limit to all retirement funds together (including retirement annuities) is set to increase to 27 5% of gross income from 1 March 2016 so claiming this is unlikely to offer a major added benefit. The tax saving on R1 800 (a number which has not changed for many years) has lost much of its significance anyway. Over 40 years, you could claim additional contributions of R72 000, for a total tax saving of R29 520. The present value of that at 6% inflation is only around R11 000 (and that's your best outcome). You can go back for as many years as you have contributed to an retirement annuity and provided SARS with the relevant proof in each year. SARS keeps a record of your "excess contributions" (contributions not allowed for tax). It will deduct these from your taxable income in future years to the extent that your future contribution in any tax year falls below the maximum contribution limit for that year (either under the current "15% of non-pensionable income" rule, or under the new "27,5% of taxable income" rule). Any contribution not claimed for tax is returned to you untaxed when you retire (either added to your tax-free cash lump sum, or as untaxed annuity income).
