There are few things more unpleasant than receiving a tax bill at the end of the tax year when you thought you had already paid your fair share.
However, people who are not provisional taxpayers and who receive annuity income from different sources are “particularly” at risk of this happening, according to Peter Stephan, senior policy advisor at the Association for Savings and Investment SA (Asisa).
“Ensuring that you are appropriately taxed during the year will ease your financial burden and eliminate surprises when submitting your tax return,” explains Stephan in a recent statement.
Essentially what happens is that insurers currently calculate pay-as-you-earn (PAYE) tax on their monthly annuities paid out as if the recipient does not receive any other income, says Joon Chong, partner at Webber Wentzel.
Each insurer calculates PAYE on their monthly annuity payable using the lowest possible marginal tax rates in the tax tables. This is because each insurer includes the impact of rebates to determine the PAYE due on the taxable earnings and assumes the recipient has no other sources of income.
Total income is what gets taxed
However, each rebate can only be taken into account once in that year of assessment on the combined taxable income of the individual.
If the individual has more than one annuity and employment income it potentially means the rebates are taken into account more than once, leading to a shortfall of PAYE amounts deducted on the total taxable earnings.
Chong, who is a member of the personal and employment tax work group of the South African Institute of Tax Professionals, says an individual older than 75 years will receive an amount of R143 850 tax-free if the rebates were applied correctly.
People younger than 65 years receive R83 100 tax-free.
Stephan points out that South Africans are required to pay income tax on their “total combined annual taxable income”. Therefore, the tax liability on the total taxable income may be much higher than the combined amount of PAYE that was applied to each separate source of income.
You might be earning a salary from which your employer deducts the monthly PAYE in line with the current PAYE tables and your allowable rebates. However, you may also receive a monthly compulsory purchased annuity from an insurance company arising from the death of your spouse.
The insurance company will deduct PAYE on the pension amount paid to you. However, in practice your employer and the insurance company are both applying the tax tables and rebates independently on each source of income and not on the combined amount of taxable income.
Stephan reiterates the warning from Chong that taxpayers are only entitled to rebates once – and not for each different source of income.
Since many taxpayers are unaware that the tax already deducted is unlikely to cover their tax liability, they have not budgeted for it. Unfortunately, this often leads to delayed payments and therefore penalties, which makes the situation worse for the taxpayer, says Stephan.
Read: Sars versus taxpayers
Tax is collected from individual taxpayers by way of PAYE and/or provisional tax. Provisional taxpayers earn income that is not subject to PAYE and are required to make two provisional tax payments in a tax year: one six months into the year of assessment and one at the end of the year of assessment.
There is also the option to make a third voluntary provisional tax payment to avoid interest on outstanding taxes by September 30 every year for individuals.
Interest and penalties
Chong says interest on underpayment is payable at 7.25% from October 1, 2020 (and 7% from November 1, 2020) to the date of payment of the outstanding income tax.
She adds that there is also potentially an underestimation penalty of 20% on the shortfall of income tax paid if the actual taxable income is less than 90% of the estimated taxable income in the second provisional tax return normally payable at the end of August (or less than 80% if the individual’s taxable income is less than R1 million).
(Provisional taxpayers pay in advance – so by August they must estimate what their total tax will be for the current tax year that ends at March 1 the following year. If they get their estimation wrong – when it’s not 80% or 90% correct – they pay an overestimation penalty if the actual tax is more, or an understatement penalty when the actual tax is less than what they estimated. ).
Stephan says in an effort to assist taxpayers, National Treasury has proposed new legislation, which will require life insurers and retirement funds to withhold PAYE without applying rebates. However, this amendment will only be effective from March 1, 2022.
“Taxpayers should be doing their calculations and requesting their employers, insurance companies or retirement funds to apply a higher rate of PAYE if they do not want to have to pay in later on.”
Chong also notes that South African and foreign interest income as well as taxable capital gain from disposal of investments and property are not subject to PAYE and are subject to income tax. The same applies to net rental income and other net trading income.
Tax payable on these sources of income would usually need to be declared and paid through provisional tax payments. Non-declaration and non-payment of these income taxes through provisional payments also result in hefty unexpected tax bills on assessments.