National Treasury, on 1 May 2020, issued an explanatory memorandum on the revised draft Disaster Management Tax Relief Bill, 2020 which, amongst other things, addresses a proposed increase in the living annuity commutation threshold. This is a draft Bill which is yet to become an Act as at time of writing but it appears that it will be effective retroactively as from 1 March 2020.
Income Tax Act definition
A ‘living annuity’ is defined and governed by s 1(1) of the Income Tax Act. Paragraph (c) of the definition provides that ‘the full remaining value of the assets contemplated in para (a) [that is, the annuity value as determined by its underlying investment value] may be paid as a lump sum when the value of those assets become at any time less than an amount prescribed by the Minister by notice in the Gazette’.
The proposal is to amend GN 1164 (promulgated in Government Gazette 31554 of 30 October 2008) so as to increase the threshold at which a living annuity can be commuted by the annuitant.
The previous minimum amount of R75 000 (R50 000 if there was a previous commutation) will be permanently replaced by an amount of R125 000, which is not limited to the covid-19 disaster management tax relief periods. (This permanent period for commutation must be differentiated from the proposed expanded drawdown access amounts, which are available for a limited period only, of four months commencing on 1 May and finishing on 31 August 2020. See 205 TSH 2020.) The effective date for this commutation will be 1 March 2020.
The definition of ‘gross income’ in s 1(1) of the Income Tax Act includes under para (a) ‘any amount received or accrued by way of annuity, including any amount contemplated in the definition of “living annuity” ‘. It follows that a commutation is treated as a once-off annuity payment amount and is fully taxable at the annuitant’s marginal tax rate. This amount is aggregated with any other taxable income, which may result in a higher tax bracket and hence an increased marginal tax rate.