A far-reaching judgment was recently given by the Cape Tax Court dealing with the fiscal consequences of a taxpayer acquiring a so-called living annuity. In particular, the taxpayer invested an amount of approximately R6million into a life annuity which gave him an initial guaranteed income of approximately R42 000 per month. These amounts could be revised annually at the insistence of the taxpayer, subject to the taxpayer being limited to directing the insurer to pay amounts equal to not less than 5% and not more than 20% annually of the total value of the "investment" so made by the taxpayer. Pursuant to the entering into of the agreement, the taxpayer was taxed on the monthly amounts on the basis of these amounts constituting an annuity.
It was held that the distinction between the payment of a capital debt in instalments and annuity is not easy to identify. Amongst others it was indicated that, should one acquire an annuity, the capital sum disappears and there is no debt due by the insurer to the taxpayer in those circumstances.
Even though the court observed that the agreement bore the likeness to an annuity, it was indicated that the capital was not foregone by the taxpayer. The main characteristics of an annuity are that –
it provides for fixed payments even if it is divided into instalments;
it is repetitive;
it is chargeable against some person.
In the circumstances it was held that, all that the taxpayer did, was to agree to tie up his capital in order to receive payment and that the agreement only provided for the return of all capital plus income derived therefrom until the capital was exhausted. Accordingly it did not constitute an annuity.
The effect of this judgment (which is subject to appeal) is far-reaching. For instance, the question arises whether there may be contraventions of the Long-term Insurance Act in these type of circumstances as only annuities can be issued by insurers. In addition, if the agreement constituted a loan arrangement where the debt remained intact, the taxpayer will now be taxed on the "interest" associated with the investment irrespective of whether or not it is actually paid to the investor.
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The Davis Tax Committee's First Interim Report on Estate Duty was released for public comment on 13 July 2015.
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