The recent budget increased the imputed distribution for all ARFs to 5% for any ARF funds in place at on the 31st of December2010.So for this current year the distribution for 2010 is deemed to be 5% (whether you have taken it or not).
What should you do if you have an ARF?
Many life companies have ensured that the 3% distribution (the required amount to date) had been organised for year end irrespective of client actions except where this has already been done by the ARF owner in order to make sure people are compliant.
Now they are going to have to distribute a further 2% – if your life provider is not in touch by the end of this week to inform you of this then call them and find out what is happening. It must happen within the next 10 working days to ensure that the 5% distribution for 2010 is met.
Why not just pay the tax due on the additional 2% and leave the money in the fund?
Doing this means you pay a further tax if you withdraw those same funds in the future, so you can’t just pay the tax now as an answer (paying the tax now and keeping the funds in the ARF mean you will be hit with a further tax if you decide to withdraw funds in the future, it’s that simple).
To avoid this “double taxation” it makes sense to simply receive the 5% net of tax.
Why must you act fast?
If you wait until 2011, the life company would have to deduct the tax on a deemed withdrawal of 2%. That means that the client would pay tax on a withdrawal of 7% (deemed withdrawal plus 5% income paid in December 2011) but have only received an income of 5% in 2011.
The move in the budget might be great for revenue raising, but it sucks for people whose sin was to provide for their own future and then have forced distribution of those funds whether they need them or not.