Retirement annuity - is it taxed in RSA and Australia?

[Go RSA]

I can now get an income from my Retirement annuity as I am over 55. I emigrated 17 years ago.

The options are to:

• take an annuity on the full amount, or
  
• take 1/3 cash and the rest as a monthly annuity.
  

Does anyone know:

1. What tax will be payable in Australia for the annuity and, if taken, the capital amount?

2. What tax deduction will be made in South Africa?

I look forward to your comments and guidance.

[Pixi]

Let me start off by saying I have no practical experience in this cross country ra and my little knowledge of the Aus tax system is just enough to be dangerous, but heres my attempt:

Article 18 of the double tax agreement says : Pensions and annuities from sources in one contracting state and paid to a resident of the other contracting state shall be exempt from tax in the firstmentioned contracting state to the extent that such pensions and annuities are included in taxable income in the other state. . Now the way my boere-english understands this: all though SA is the true source of your annuity , you will not pay tax in SA (only if your general rate of tax in SA is higher than in OZ you will pay in SA).

NOw this in itself is weird, normally you first pay tax where the source is, and then if the second country has a higher tax rate, you just pay the difference in percentage to the second country.

Then just on your 1/3 lumpsum - we were suppose to have changes 1 Oct 2007, but its been quiet and I think this changes will only now start in March 2008. It used to be that only R120,000 of your lumpsum was exempt and the rest was taxed on your average rate of tax. Now it is going to be - first R300,000 no tax, then from 300,000 to 600,000 its 18%, then from 600 000 to 900 000 its 27% and above 900,000 its 36% . The company of your ra will know exactly when this comes into place.

So thats how SA will treat your lumpsum, but I have no idea what Aus is going to do.

So ja, actually I gave no answer, just talking in the wind, but maybe some can give us clarity. If you do find out via some other source than the fourm, please keep us posted

[Go RSA]

It used to be that only R120,000 of your lumpsum was exempt and the rest was taxed on your average rate of tax. Now it is going to be - first R300,000 no tax, then from 300,000 to 600,000 its 18%, then from 600 000 to 900 000 its 27% and above 900,000 its 36% .

Pixi

Thanks for your insight. Thats great info about the increase in the exempt portion of the lump sum. I didn't know that. So it will be worth waiting for that change to start. My wife and I both have RAs. Do you know if the exempt portion is per person or per family?

Regarding the taxing of the annuity in RSA, one has to wonder how RSA be able to monitor that you are paying tax in the second country.

Does anyone know how the RSA monthly annuity amount is regarded for tax purposes in Australia. I spoke to my accountant and he says he has no idea! He says that if it were an Australian super payment, you would get a 15% deduction and the balance is added to your taxable income if you are under 60. Over 60 its all tax free. I wonder whether Australia will do the same when the source is in RSA.

[Pixi]

This R300 000 exemption is definately per person - . And yeah its difficult to get hold of someone who actually knows. A option can be if you go onto SARS website - they have an ATR section - an advance tax ruling - you can ask them how a matter will be treated in SA, they tell you in writing and thats then your proof that that is the way it will be. May be ATO also has such a story. Good luck

[woodag]

I went through the same exercise in the last year or so. Although some of the denizens of this forum said that they were getting income in Australia from SA RAs, nobody seemed to be able to say anything specific.

I had two RAs trapped in SA. They were not worth very much. In fact one was worth less than R22,500 which I found meant that I was able to take all of it in cash rather than just one third of it. I don't know if that threshold value changes over time (say, indexed to CPI), but it was R22,500 about a year ago. The other RA I used to purchase a "Living Annuity" which I am drawing down at the maximum rate of 20% p.a. (By that time I had learned the merit of keeping things as simple as possible, and it turned out to be easier not to take one third of that one as cash).

Of the lump sum I received from the first RA, about 12% was deducted for SA tax. I have no idea how the tax was calculated. From what Pixi said above, maybe no tax had to be paid in SA, but given the difficulty in dealing with anybody in SA from here, I can tell you I am not going to bother with it.

I have received the first two of the (six-monthly) payments from the Living Annuity. No SA tax was deducted from those payments.

As for the Aussie tax - I don't know. At least, not yet - I guess I am about to find out soon when my tax return gets submitted. I suspect that will be a learning exercise for the accountant who does my tax too. When, some time ago, I asked him how it would work, I came away no wiser. I tried looking it up in a superannuation book that I have, and from that I got the impression that it would be treated as normal income and so in effect taxed at marginal rate (but the whole thing was way too complicated for me to bother with).

[Bob]

I can't answer from a South African point of view . . . only offer what happens to annuities, etc. here in Australia, if that's any help?

All of us workers have superannuation that we've built up over the years we were in the workforce.

The superannuation is made up by 9% of our wages/salaries being deposited regularly into a Super Scheme which we can access on reaching retirement age (55 for those born in the 1950s).

Some of us also chipped in various amounts out of pay from time to time

So . . . out total superannuation amount, on retirement, is made up of what the company put in for us (the 9%) and what we've put in for ourselves.

You can roll the whole lot over into an Annuity or Allocated Pension or take it as cash once we reach 55.

The Australian gov't wants us to save for our retirement, so offers us a 15% tax rebate on the income.

If you have a $30 000 a year income stream from an Allocated Pension that you rolled your money over into, then the gov't will give you $4 500 ($30 000 x 15%) off your total income tax bill for the year. . . . . not a bad little tax break!

Also, there's the "Length of Life" (or whatever the taxman calls it!) whereby you are deemed to get a certain amount tax-free for yourself out of the total amount that you put into the Annuity or Allocated Pension.

The A.T.O. has length of life scales for the average man and woman in Australia.

At 55, the average bloke in Australia is deemed to have around 25.2 years of life left in him.

To keep the figures nice and easy, I'll pretend that you put $504 000 into an Allocated Pension scheme for yourself.

If you divide $504 000 by 25.2 years that you have left, you'd be taking out $20 000 a year!

The Australian gov't lets you get an income stream from your Allocated Pension of $20 000 a year (assuming you rolled over $504 000 out of your super) before it even starts to tax anything.

In other words, the first $20 Grand is deemed to be tax-free on that amount!

This tax break is in addition to the 15% tax break you get, previously mentioned.

Once you reach 60, the tax rules are even more liberal.

Everything is tax-free!

Just to add oil to the fire, South Africa is pretty much an unkown quantity, like the rest of Africa.

An Annuity now may seem quite a lot, but in 20 years' time that same annuity may be worthless if South Africa goes down the sink!

Zimbabwe if a classic case.

A Rhodesian thinking of leaving his super there would have been tempted to do so 25 years ago, if offered Z$1 000 a week.

The same Z$1 000 a week today wouldn't even buy the paper the currency is printed on!

[woodag]

Welcome back Bob!

. . .

If you have a $30 000 a year income stream from an Allocated Pension that you rolled your money over into, then the gov't will give you $4 500 ($30 000 x 15%) off your total income tax bill for the year. . . . . not a bad little tax break!

Also, there's the "Length of Life" (or whatever the taxman calls it!) whereby you are deemed to get a certain amount tax-free for yourself out of the total amount that you put into the Annuity or Allocated Pension.

The A.T.O. has length of life scales for the average man and woman in Australia.

At 55, the average bloke in Australia is deemed to have around 25.2 years of life left in him.

To keep the figures nice and easy, I'll pretend that you put $504 000 into an Allocated Pension scheme for yourself.

If you divide $504 000 by 25.2 years that you have left, you'd be taking out $20 000 a year!

The Australian gov't lets you get an income stream from your Allocated Pension of $20 000 a year (assuming you rolled over $504 000 out of your super) before it even starts to tax anything.

In other words, the first $20 Grand is deemed to be tax-free on that amount!

This tax break is in addition to the 15% tax break you get, previously mentioned.

Well, yes and no. You can get both a 15% rebate and the deduction determined by life expectancy, but not both of those on the same income. For various largely historical reasons, money in superannuation is divided into various parts. That has implications for the tax payable on an income stream purchased with that superannuation money. A tax deduction (depending on the term or life expectancy) only applies for certain parts, and the 15% rebate applies to the rest.

The bottom line is still that you will pay no tax on super funded income streams if you are over 60, and little if any tax before that age.

[Bob]

I didn't want to go into "deductible" and "undeductible" contributions and their tax implications.

It gets too complicated. . . . and Super is complicated enough?

You get the tax breaks on that component which has already had the income tax paid on it.

Suffice it to say, that if someone were to bring a sum of money from overseas, then it would be voluntarily contributed to a person's superannuation, therefore getting the tax breaks allowable for it . . . . the "deductible" part of the equation.

That is what's appropriate in knowing about money brought over from South Africa by somebody resident here in Australia.

. . . . but you are dead right in what you say!

[Cindylou]

Hi Go RSA

Just a quick question - did you emigrate formally?

My mother has received payment from her Living Annuity since she emigrated in 2004. The payments are made every six months directly from Liberty Life to her Aus bank account for which she had to apply to SARB for approval. SARB required proof that the annuity was funded by "normal pension funding" (in her case a couple of RA's) and when she submitted her tax return in Aus she had to provide ATO with this proof - otherwise it would have been taxed as foreign income.

(Just an added point from an SA point of view; Liberty at first deducted tax and supplied her with an IRP5 until we reminded them that she was no longer liable to pay SA tax, whereupon they refunded her and no longer deduct any tax)

Not sure if this helps at all!

Cindy

[Go RSA]

Just a quick question - did you emigrate formally?

My mother has received payment from her Living Annuity since she emigrated ...

Cindy

Yes, I emigrated in July 1990.

What is a living annuity?

We have retirement annuities with Old Mutual, Liberty Life and PPS. When we want to start receiving the annuity payments, do we get a separate monthly payment from each company? Or is there a way to combine them so we get the payment from one company?

What is the thing to do - just ask the relevant company to start sending us the annuity?

Also, does anyone know what is the downside to taking the 1/3 capital option?

[woodag]

I can only answer some of that...

What is a living annuity?

A Living Annuity is a retirement income stream where you (rather than the provider) take the investment risk. It works like this. You take say R100,000 from your RA and give it to the provider for them to invest for you. You have some choice on how it gets invested. You also select the withdrawal rate, and the frequency of payments to you (monthly, quarterly etc). The withdrawal rate has to be within certain legislated limits. I think the minimum rate is now 2.5%pa and the maximum rate is 17.5%pa (at the time I started my Living Annuity about a year ago the maximum rate was 20%). At the end of the year the value of your investment will have changed, you have withdrawn a certain amount, and of course the provider is also taking their cut. You can change the withdrawal rate at the end of the year, for the next year's payments (within the limits).

So for example, if you decide you want to withdraw at 10%pa, paid quarterly, in the first year you would get R10,000 as 4 payments of R2,500. At the end of the year, say the investment earnings after charges is R7,000 your investment would be worth R100,000 - R10,000 + R7,000 = R97,000. If you continue to draw it down at 10%pa the payments for the following year would therefore be slightly less. Depending on the investment performance, and the rate at which you withdraw it, your investment could either increase or decrease. If the money runs out, that's it - finis en klaar.

There used to be similar things in Australia called Allocated Pensions, but the minimum and maximum draw down rates for those were dependent on your age. Since July this year Allocated Pensions changed a bit and they are now called "Account Based Income Streams" - there is no longer any maximum draw down rate so you can withdraw the lot any time that you want to.

What is the thing to do - just ask the relevant company to start sending us the annuity?

Well, sort of, but I doubt it will be quite so easy - it wasn't in my case. The companies will have some forms for you to fill in, and as I understand it they have to get approval from the SA Reserve Bank. The biggest complication I had came from the fact that Old Mutual told me that there was no way that they could make the payments directly my account in Australia. As far as they were concerned, the payments had to go to an account in my name in SA. Unfortunately I did not have such an account and it took months of frustration to get a suitable account opened. From what Cindy said above though, other companies may be prepared to pay to an overseas account.

Good luck!

[Go RSA]

A Living Annuity ... works like this. You take say R100,000 from your RA and give it to the provider for them to invest for you. You have some choice on how it gets invested. You also select the withdrawal rate, and the frequency of payments to you (monthly, quarterly etc).

Thanks for the info.

Do people put some of the Retirement Annuity into a Living Annuity, and some into an ordinary annuity. Or is it usually better to put it all into a Living Annuity?

Also, is the Living Annuity done by Old Mutual and Liberty Life, or by a third party?

I guess someone who has recently emigrated would know all this, but I've been away for so long I don't even know what I don't know.

[woodag]

I can only tell you why I chose a Living Annuity. What I really wanted was the "Please send it all to me now" option. A Living Annuity drawn down at the maximum rate was the closest I could get to that.

I think all the major life companies have Living Annuity products. I don't think you have to get the Living Annuity from the same company that you have the RA with. Speaking from experience though, I would try to avoid getting any more parties in SA involved than absolutely necessary, because it can be very difficult to deal with them at a distance. Having said that, there might be some merit in combining all your RAs into one annuity if you can, because that would mean that there would be only one company to deal with in the long term. When I finally managed to cash out the other RA that I had, it was quite a relief to know that there was one less mob in SA that I had to continue to deal with and worry about.

[Go RSA]

Makes sense. Thanks for your information.

[Go RSA]

Change to tax on any capital taken from a retirement annuity is effective from October 1, 2007:

The first R300000 taken upon retirement will now be tax free, with a tiered system for the higher amounts taken. The tiered tax system works as follows:

The first R300000 tax free;

R300001-R600000 taxed at 18%;

R600001-R900000 taxed at 27%; and

Lump-sum amounts above R900000 will be taxed at 36%.

http://www.businessday.co.za/Articles/Tark...aspx?ID=3008537