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Will my wife pay tax on this interest?

Reader’s question answered.

JOHANNESBURG – In this tax column, Piet Nel, head of the School of Applied Tax at the South African Institute of Tax Professionals (Sait), answers a reader’s question about tax on interest.

Q: I am 62 years old and going on pension in six months. I am married in community and my wife is a homemaker. To reward her with a sense of dignity I would like to give her a lump sum of R1.7 million to invest in her own name for her own independence. I was told she would be fully taxed on the interest as she is my wife. Is this true?

A: We don’t agree that your spouse will be fully taxed on the interest earned on the money that she received from you and invested in her name.  

The first principle is that the Income Tax Act (in section 7(2)) provides that any income (the interest in this instance) received by any person married in or out of community of property (the recipient) are deemed to be income accrued to such person’s spouse (referred to as the donor) if such income was derived by the recipient in consequence of a donation, settlement or other disposition made by the donor; or of a transaction, operation or scheme entered into or carried out by the donor, and the sole or main purpose of such donation, settlement or other disposition, or of such transaction, operation or scheme was the reduction, postponement or avoidance of the donor’s liability for any tax. 

It may be possible to prove that the sole or main purpose in this instance was not to avoid tax.  

The problem however is that in terms of section 7(2A) of the Act, and in the case of spouses who are married in community of property, any income derived otherwise than from the carrying on of any trade is deemed to have accrued in equal shares to both spouses. The interest earned on the investment would be so derived. In other words, each spouse would be taxed on 50% of the interest, exceeding the exempt portion thereof. And this would be so even where the investment was made only in the name of one spouse.   

There is nothing to indicate that the income does not fall into the joint estate of the spouses.  

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Wow this response is as clear as mud, but it does raise a question or too. Why would this person take a lump sum out of their pension and such an amount as the tax on the commutation would be significant. It may pay this person not to commute any of his pension and then just pay his wife R 20,000 (or an appropriate amount) each month and let her invest these funds. As she has no employment these payments could hardly be seen as income (if SARS treat these funds as income then they are thieves), the income that the husband receives would already have been taxed at his appropriate rate, also there is an issue around double taxation in this proposal

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