Category: Section 10A (ITA) – Exemption of capital element of purchased annuities

Section 10A

 

  1. Definition of “annuity amount” substituted by section 8 of Act 113 of 1993.

 

  1. Words following paragraph (c) of definition of “annuity contract” substituted by section 17 of Act 60 of 2008.

 

  1. Definition of “annuity contract” substituted by section 11 of Act 85 of 1974, amended by section 11 of Act 21 of 1995 and amended by section 19 of Act 53 of 1999.

 

  1. Definition of “commencement” substituted by section 11 of Act 85 of 1974.

 

  1. Definition of “expected return” substituted by section 11 of Act 85 of 1974.

 

  1. Definition of “purchaser” inserted by section 19 of Act 53 of 1999.

 

  1. Definition of “statutory actuary” inserted by section 19 of Act 53 of 1999 and substituted by section 24 of Act 31 of 2013 effective on 12 December 2013.

 

  1. Definition of “valuator” substituted by section 11 of Act 28 of 1997 and deleted by section 19 of Act 53 of 1999.

 

  1. Subsection (2) substituted by section 11 of Act 21 of 1995, section 11 of Act 28 of 1997 and section 19 of Act 53 of 1999.

 

  1. Paragraph (3)(c) added by section 8 of Act 113 of 1993.

 

  1. Subsection (4) amended by section 11 of Act 28 of 1997, section 19 of Act 53 of 1999 and section 14 of Act 59 of 2000.

 

  1. Subsection (5) substituted by section 11 of Act 85 of 1974 and amended by section 19 of Act 53 of 1999.

 

  1. Paragraph (6)(b) amended by section 19 of Act 53 of 1999.

 

  1. Paragraph (7)(a) substituted by section 11 of Act 85 of 1974.

 

  1. Subsection (9) deleted by section 271 of Act 28 of 2011 effective on 1 October 2012.

 

  1. Subsection (10) substituted by section 271 of Act 28 of 2011 effective on 1 October 2012.

 

  1. Subsection (11) added by section 11 of Act 5 of 2001 and substituted by section 15 of Act 32 of 2004 and section 17 of Act 31 of 2005 effective on 8 November 2005.

 

  1. Section 10A inserted by section 8 of Act 65 of 1973.

“Annuity contract” definition of section 10A of ITA

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“annuity contract” means an agreement concluded between an insurer in the course of his insurance business and a purchaser, in terms of which –

 

(a)     the insurer agrees to pay to the purchaser or the purchaser’s spouse or surviving spouse an annuity or annuities (whether to one such person or to each of them) until the death of the annuitant or the expiry of a specified term;

 

(b)     the purchaser agrees to pay to the insurer a lump sum cash consideration for such annuity or annuities; and

 

(c)     no amounts are or will be payable by the insurer to the purchaser or any other person other than amounts payable by way of such annuity or annuities or, where an annuity is payable for a minimum term and such annuity is in the event of the death of the annuitant before the end of such term to continue to be payable to some third person for the balance of that term, amounts which may be so payable to such third person by way of such annuity,

 

but does not include any agreement for the payment by any insurer of any annuity which is under the rules of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund payable to a member of such fund or to any other person;

“Expected return” definition of section 10A of ITA

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“expected return”, in relation to an annuity under an annuity contract, means an amount determined in a manner contemplated in this section as representing the sum of all the annuity amounts which may, as at the commencement of the annuity contract, be expected to become payable by way of the annuity from the said commencement;

“Purchaser” definition of section 10A of ITA

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“purchaser”, in relation to an annuity contract means –

 

(a)     any natural person and includes such person’s deceased or insolvent estate; or

 

(b)     a curator bonis of, or a trust created solely for the benefit of, any natural person where the High Court has declared such person to be of unsound mind and incapable of managing his own affairs and such Court has ordered the appointment of such curator or creation of such trust, as the case may be;

Subsections 2, 3, 4, 5, 6, 7, 8, 10 and 11 of section 10A of ITA

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(2)     There shall be exempt from normal tax so much of any annuity amount payable to a purchaser or his spouse or surviving spouse (as contemplated in paragraph (a) of the definition of “annuity contract” in subsection (1)), or to the deceased or insolvent estate of such spouse or surviving spouse as is determined in accordance with subsection (3) to represent the capital element of such amount.

(3)     The capital element of an annuity amount shall be –

(a)     a sum determined in accordance with the formula

             Y   =      A      x   C

                          B

in which formula –

(i)      “Y” represents the sum to be determined;

(ii)     “A” represents the amount of the total cash consideration given by the purchaser under the annuity contract in question as contemplated in paragraph (b) of the definition of “annuity contract” in subsection (1);

  

(iii)    “B” represents the total expected returns of all the annuities provided for in the annuity contract in question; and

(iv)    “C” represents the aforesaid annuity amount; or

(b)     where, by reason of any unpredictable contingency (other than the death or survival of any person), any amount payable by way of any annuity under the annuity contract in question is uncertain at the date on which the first payment by way of an annuity becomes due under that contract, such sum as may on the basis of a fair and reasonable calculation be taken to be the capital element of the aforesaid annuity amount: Provided that the said sum shall be determined in such manner that the capital element of all the annuity amounts becoming due during any year of assessment in respect of all the annuities under the said contract does not in total exceed an amount determined in accordance with the formula

Z   =      1      x   A

             N

in which formula –

(i)      “Z” represents the amount to be determined;

(ii)     “N” represents the probable number of years during which annuity amounts will be payable under the said annuity contract from the date on which the first of such amounts becomes due, due regard being had to the manner in which and the frequency with which such amounts are payable; and

  

 (iii)    “A” represents the amount of the total cash consideration given by the purchaser under the said annuity contract as contemplated in paragraph (b) of the definition of “annuity contract” in subsection (1); or


(c)     where such annuity amount is payable in consequence of the commutation or termination of the annuity contract concerned, an amount determined in accordance with the formula

X   =   A – D

in which formula –

(i)      “X” represents the amount to be determined;

(ii)     “A” represents the amount of the total cash consideration given by the purchaser under the annuity contract concerned as contemplated in paragraph (b) of the definition of “annuity contract” in subsection (1); and

(iii)    “D” represents the sum of the amounts determined in accordance with paragraphs (a) and (b) as representing the capital element of all annuity amounts payable under the annuity contract prior to the commutation or termination thereof.

  

(4)     The statutory actuary of an insurer who is a party to an annuity contract shall, before payment of the first annuity amount is made under such contract, or within such period as the Commissioner may allow, make a calculation (with due regard to the provisions of subsection (5)) in the manner prescribed in paragraph (a) of subsection (3) or, if the provisions of paragraph (b) of that subsection are applicable, in accordance with that paragraph, of the capital element of all the annuity amounts to be paid under the said contract: Provided that –

  

(i)      where the capital element is calculated under the said paragraph (a), it shall be sufficient if the capital element is calculated as a percentage to be applied to each of the said annuity amounts; or

(ii)     where the capital element is calculated under the said paragraph (b), it shall be sufficient if a calculation is made of the amount to be determined in accordance with the formula in the proviso to that paragraph.

  

(5)     A statutory actuary who makes any calculation as provided in subsection (4) or any recalculation as provided in subsection (6) (b), shall do so in accordance with generally accepted actuarial principles or practice, and where a determination has to be made of the life expectancy of any person for the purpose of a calculation of the expected return of any annuity or the probable number of years during which annuity amounts will be paid under any annuity contract, the mortality tables to be used for such determination shall be the select tables in the volume of tables published in 1953 at the University Press, Cambridge, for the Institute of Actuaries and the Faculty of Actuaries, entitled “The a (55) Tables for Annuitants”, and the age of the person concerned shall for the purposes of such determination be taken to be his age on his birthday immediately preceding the commencement of the annuity contract in question.

  

(6)    

(a)     Where any annuity contract is varied so that it no longer conforms with the requirements prescribed in the definition of “annuity contract” in subsection (1), the exemption conferred by subsection (2) in respect of the capital element of annuity amounts under that contract shall not apply in respect of such amounts under that contract which become due on or after the date of such variation.

(b)     Subject to the provisions of paragraph (a), where any annuity contract is varied as to the payment of any annuity or consideration payable thereunder, the capital element of annuity amounts becoming due thereunder after such variation is effected shall, with due regard to the provisions of subsection (5), be re–calculated by the statutory actuary of the insurer concerned.

(7)    

(a)    Where the capital element of annuity amounts has been calculated as provided in subsection (4) or has been re–calculated as provided in subsection (6) (b), the insurer concerned shall furnish each annuitant under the annuity contract in question, within one month after the date on which the calculation or re–calculation is made, as the case may be, or within such further period as the Commissioner may allow, with two copies of such calculation or re–calculation, as the case may be.

(b)     An annuitant who has received the two copies referred to in paragraph (a) shall submit one of them to the Commissioner as and when required by the Commissioner.

(c)     Where the capital element of annuity amounts has been calculated as provided in subsection (4) or has been re-calculated as provided in subsection (6)(b), the calculation or re-calculation shall apply in respect of all annuity amounts which become due to any person under the annuity contract in question and shall also apply to any year of assessment subsequent to the year of assessment in which the calculation or re-calculation took place.

[Paragraph (c) added by section 24 of Act 15 of 2016 effective on 8 January 2016] 

(8)     ……….

[Subsection (8) deleted by section 17 of Act 25 of 2015 effective on 8 January 2016]

(9)     ……….

(10)   ……….

[Subsection (10) substituted by section 271 of Act 28 of 2011 and deleted by section 24 of Act 15 of 2016 effective on 19 January 2017]

(11)   Where the cash consideration given by the purchaser and the annuity amount receivable under an annuity contract is denominated in any currency other than the currency of the Republic, the capital element of that annuity amount must be calculated in terms of subsection (3) in that other currency and must be translated to the currency of the Republic by applying the exchange rate applied in terms of section 25D in respect of the annuity amount payable during the relevant year of assessment.