05 - Retirement Planning

Question 1

What are the different types of clients you can get in respective of retirment?

Answer 1

• Person before retirement
• Person who withdraws before retirement
• Person at retirement or on death
• Person receiving annuity after retirement

Question 2

How will you treat the different clients in respective of retirement?

Person before retirement

Answer 2

Person A (before retirement)

• What is the maximum tax deductions in respect of contributions to retirement funds
• Tax in investment (before withdrawal/retirement/death)
• Investment Choices
• Calculations of possible shortfall (lecture 3)

Question 3

How will you treat the different clients in respective of retirement?

Person who withdraws before retirement

Answer 3

Person B (withdraws before retirement)

• When can a person withdraw before retirement date
• Transfers from one fund to another fund
• Tax on withdrawal lump sum benefits

Question 4

How will you treat the different clients in respective of retirement?

Person at retirement or on death

Answer 4

Person C (about to retire or died)

• When can a person retire?
• Knowledge and skills needed
• Taxation of lump sum benefits
• Options with benefits: retirement and death

Question 5

How will you treat the different clients in respective of retirement?

Person receiving annuity after retirement

Answer 5

Person D (already retired)

• Different types of annuities
• Tax aspects surrounding annuities
• Tax in investment
• Investment choice
• What happens on death of this person?

Question 6

When can I belong to a pension fund?

Answer 6

Pension Funds

• A natural person may only belong to a pension fund if such person is a person is employed by an employer (i.e. if the person is an employee).
• A partner in a partnership is regarded as an employee of the partnership, and may thus belong to a partnership; but
• i.Where a partner was an employee before becoming a partner, the maximum retirement funding salary of such a partner will be equal to his/her pensionable salary 12 months before becoming a partner.

Question 7

When can I belong to a provident fund?

Answer 7

Provident Funds

• A natural person may only belong to a provident fund if such person is a person is employed by an employer (i.e. if the person is an employee).
• A partner in a partnership is regarded as an employee of the partnership, and may thus belong to a partnership; but
• i.Where a partner was an employee before becoming a partner, the maximum retirement funding salary of such a partner will be equal to his/her pensionable salary 12 months before becoming a partner.

Question 8

When can I belong to a retirement annuity fund?

Answer 8

Retirement Annuity Funds

• Only a natural person may be a member of a Retirement Annuity Fund.
• A member of a retirement annuity fund however does not need to qualify as an employee, as opposed to pension and provident funds where an employment relationship is a requirement – i.e. any natural person may be a member of a retirement annuity fund.

Question 9

When can I belong to a pension preservation fund?

Answer 9

Employers previously had to apply to participate and potential members had to be members of employer’s fund. The Definitions in Income Tax Act – 2008 changed this requirement, where “preservation fund will be untied from the employment relationship”. Employee can choose own preservation fund.

Employment during membership is thus not a requirement, but membership is limited to:

• A. Former members of a pension fund or provident fund whose membership of that fund has terminated due to—
  
  • i) resignation, retrenchment or dismissal from employment and where member elected to have a lump sum benefit that is payable as a result of this termination transferred to that fund;
  • ii) the winding up or partial winding up of that fund, if the member elects or is required in terms of the rules to transfer to this fund; or
  • iii) a transfer of business from one employer to another in terms of the Labour Relations Act, and the employment of the employee with the existing employer is transferred to the new employer, if the member elects or is required in terms of the rules of the pension fund to transfer to the preservation fund.
• B. Former members of any other pension preservation fund or a provident preservation fund—
  
  • i) If that fund was wound up or partially wound up; or
  • ii) if an existing member of a pension/provident preservation fund elects to transfer the benefit to another pension preservation fund;
• C) Former members of a pension fund or nominees or dependants of such former members where an “unclaimed benefit” as defined in the Pension Funds Act is due or payable by the fund; or
• D) Ex-spouses of members of a pension fund or pension preservation fund who have elected to transfer to fund amounts awarded to such ex-spouses in terms of any court order contemplated in section 7 (8) of the Divorce Act.

Question 10

When can I belong to a provident preservation fund?

Answer 10

Employers previously had to apply to participate and potential members had to be members of employer’s fund. The Definitions in Income Tax Act – 2008 changed this requirement, where “preservation fund will be untied from the employment relationship”. Employee can choose own preservation fund.

Employment during membership is thus not a requirement, but membership is limited to:

• A. Former members of a provident fund whose membership of that fund has terminated due to—
  
  • i) Resignation, retrenchment or dismissal from employment and where member elected to have a lump sum benefit that is payable as a result of this termination transferred to that fund;
  • ii) The winding up or partial winding up of that fund, if the member elects or is required in terms of the rules to transfer to this fund; or
  • iii) A transfer of business from one employer to another in terms of the Labour Relations Act, and the employment of the employee with the existing employer is transferred to the new employer, if the member elects or is required in terms of the rules of the pension fund to transfer to the preservation fund.
• B. Former members of any other provident preservation fund—
  
  • i) If that fund was wound up or partially wound up; or
  • ii) If an existing member of a pension/provident preservation fund elects to transfer the benefit to another pension preservation fund;
• C. Former members of a provident fund or nominees or dependants of such former members where an “unclaimed benefit” as defined in the Pension Funds Act is due or payable by the fund; or
• D. Ex-spouses of members of a provident fund or provident preservation fund who have elected to transfer to fund amounts awarded to such ex-spouses in terms of any court order contemplated in section 7 (8) of the Divorce Act.

Question 11

How are contributions to a retirement vehicle treated in respect of taxes?

Answer 11

Contributions – tax deduction before 1 March 2016:

• Pension Fund
  
  • s11(k) & 11(l) – Income Tax Act
• Provident Fund
  
  • s11(l) – Income Tax Act
• RA
  
  • section 11(n) – Income Tax Act
• Pension Preservation and Provident Preservation Funds
  
  • No contribution is made by the member (funds are transferred from another fund as discussed above) and therefore no deduction from a “normal tax” point of view.

Question 12

RA - section 11(n) – Income Tax Act

Answer 12

Before 1 March 2016:

• Deduction for member contributions equal to the greater of:
  
  • 15% of the taxpayer’s non-retirement funding income after deducting from such income deductions admissible against his income which is not retirement funded and certain other deductions; or
  • R3 500 minus the amount, if any, that the taxpayer is allowed to claim as a deduction in respect of current contributions made by him to a pension fund; or
  • R1 750
• Excess contributions may be carried forward to the following tax year and applied in the following tax year subject to the above limit.

Question 13

Pension Fund: s11(k) & 11(l) – Income Tax Act

Answer 13

Before 1 March 2016:

• Member (employee) is allowed an annual deduction for income tax purposes to the extent that he/she makes contributions to a pension fund, of the greater of:
  
  • R1 750; or
  • 7.5% of remuneration from retirement funding employment.
• Excess contributions may not be carried forward to following tax year and used as a deduction for contribution made.

Question 14

Provident Fund: s11(l) – Income Tax Act

Answer 14

Before 1 March 2016:

• Member (employee) was not allowed any deduction for income tax purposes to the extent that he/she made contributions to a provident fund.

Question 15

Pension and Provident fund contributions

Employers (s11(l) before amendment)

Answer 15

Before 1 March 2016:

•An employer was allowed to deduct contributions to a pension or provident fund to a collective maximum (i.e. in respect of all funds) of 10% of the approved remuneration of the employee. The Commissioner could however allow more than the said 10%, and in practice 20% of such remuneration was allowed.

Question 16

Partner and Pension Funds

Answer 16

The definitions of pension fund and provident fund were changed in

The Taxation Laws Amendment Act, 2008 (still applicable) -

A Partner is now regarded as an employee for purposes of fund rules.

“Retirement - funding employment” (the provision relating to remuneration of a partner who had been an employee) – was inserted in the legislation and the same provision was deleted from the definition of pension fund.

Results thereof:

•If a partner was an employee prior to becoming a partner, such

partner’s Retirement Funding Income is equal to the salary earned in the12 mths prior to becoming a partner;

•If a partner was not an employee previously of the partnership,

such partner’s Retirement Funding Income is equal to his/her share of the profits from the partnership;

•Where a new partner thus has not previously been an employee, such partner’s contribution to the pension fund is not limited.

Question 17

Retirement Funding - Contributions – tax deduction after 1 March 2016

Answer 17

Contributions – tax deduction after 1 March 2016:

• Pension Fund, Provident Fund & Retirement Annuity Fund: s11(k) (amended) for members/employees & 11(l) (amended) for employers
• Pension Preservation and Provident Preservation Funds: No contribution is made by the member (funds are transferred from another fund as discussed above) and therefore no deduction from a “normal tax” point of view

Question 18

Retirement Planning – Deductions: Contributions as from 1 March 2016

Answer 18

Section 11(k) was amended and section 11(n) repealed and the deduction regime for contributions to all retirement funds (the deduction regime for retirement annuity, pension and provident funds is now harmonised).

The maximum deduction allowed against income from trade i.r.o contributions to all retirement funds (pension, provident & retirement annuity funds) is the lesser of:

• (i) R350 000, or
• (ii) 27.5% of the greater of :
  
  • (a) Remuneration (other than in respect of any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit) as defined in paragraph 1 of the Fourth Schedule or
  • (b) Taxable income (other than in respect of any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit) as determined before allowing this deduction)
• The old reference to income from “retirement-funding employment” is removed as such a distinction is no longer required in the new deduction regime.
• Any amount contributed by a member in any previous tax year that has not been allowed a deduction against income, and not been allowed against a lump sum (2nd Schedule of Income Tax Act) or allowed as an exemption against compulsory annuity income (S10C of the income Tax Act) is deemed to be a contribution in the current year of assessment (s 11(k)(ii)).
• Any contribution made by an employer to a pension, provident or retirement annuity fund is deemed to have been made by the member (employee) (s 11(k)(iii))

•

Question 19

Remuneration

Answer 19

• “Remuneration” is defined in paragraph 1 of the Fourth Schedule to the Income Tax Act and it includes any payments, (in cash or otherwise) such as: Salary/wages, leave pay, overtime, bonus, gratuity, fees, pension, fringe benefits, allowances, taxable amount on vesting of shares (employees share schemes), annuity, restraint of trade payments etc.
• The amount paid by an employer towards a pension, provident, or retirement annuity fund is now also a fringe benefit (Par 2(l) of the 7th Schedule to the Income Tax Act) and is thus included in remuneration.
• As far as a travel allowance is concerned, the value included in remuneration is: “80 per cent of the amount of the taxable benefit as determined in terms of paragraph 7 of the Seventh Schedule: Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of such amount must be included”
• “Remuneration” does not include fees paid to a person for services rendered in the course of any trade carried on by him independently from the payer of such fees.
• “Remuneration” also does not include any amount paid or payable to any employee wholly in reimbursement of expenditure actually incurred by such employee in the course of his employment.

Question 20

Taxable income

Answer 20

Taxable Income” means the sum of:

• The amount remaining after deducting from income the allowable deductions against such income; and
• All amounts to be included or deemed to be included in the taxable income of any person in terms of the Income Tax Act.
• The preamble to section 11 of the Income Tax Act reads as follows:
• “For the purposes of determining taxable income derived by any other person from carrying on any trade, there shall be allowed as deductions from the income of such a person so derived–“
• The amended section 11(k) does not specifically state that the deduction is also against income derived otherwise than from the carrying on of a trade. The deduction under the amended section 11(k) can therefore only be deducted from income if it is derived from carrying on a trade, which means income like annuity income (voluntary and compulsory), interest payments and taxable capital gains can thus not be included for purposes of “remuneration” or “taxable income” here.
  
  • Ignore passive type of income - except rental income; must include
• It however appears that SARS/National Treasury has intimated that they do not have an issue with passive income such as annuity income and taxable interest to be included as part of taxable income or remuneration (where applicable), but the current legislation does not reflect this sentiment (not income from trade).
• It is uncertain whether taxable capital gains will be allowed as an inclusion – different feedback received on this issue – not allowable in terms of current legislation (not income from trade).
• Hopefully clarity in this regard will be given in the Taxation Laws Amendment Act to be promulgated later in 2016.
• For exam purposes do not include annuity income, taxable interest or taxable capital gains in the calculation. If this is amended via the Taxation Laws Amendment Act you will be informed and it may then be included.
• As discussed in previous slide: Unused deductions may be rolled over to the next tax year (as currently only with RA’s);
• Any non-deducted contributions that remain upon retirement may 1st be applied to the lump sum (2nd Schedule of ITA) and then the annuity income generated from compulsory annuities (s 10C);
• As discussed in previous slide: All employer contributions is now fringe benefit taxable (these contributions will be treated as if they have been made by the employee). The employer is now able to deduct the full contribution made on behalf of employee (s11(l) as amended) for income tax purposes;
• Employer contributions to defined benefit funds – deduction based on a formula prescribed in the Income Tax Act.

Question 21

What is the amount of tax incurred within the investment?

Answer 21

• The tax within the investment (i.e. before the member withdraws, retires or dies) is 0%
• in terms of the 5 Funds approach it is taxed in the untaxed policy holder’s fund (Sec 29A of the Income Tax Act).

Question 22

What is Regulation 28 of the Pension Funds Act?

Answer 22

Investments in a pension/provident/retirement annuity/pension preservation/ provident preservation fund are regulated by Regulation 28 of the Pension Funds Act which broadly speaking limits the investment to the following:

Asset Classes

• No more than 75% may be invested in equities
• No more than 25% may be invested in property
• No more than 90% may be invested in a combination of equities and property

Entities

• No more than 5% may be invested in the sponsoring employer
• No more than 15% may be invested in a large capitalisation listed equity, and 10% in any single other equity
• No more than 20% may be invested with any single bank

Other and Offshore

• No more than 15% may be invested off-shore
• No more than 2,5% may be invested in “other assets”. Derivative instruments are not defined, leaving them to fall within this “other assets” category

Question 23

When is a member allowed to withdraw?

Pension/Provident Fund

Answer 23

Definition

Withdrawal refers to withdrawing the fund value (lump sum) from a pension, provident, retirement annuity, pension preservation or provident preservation fund before retirement or death.

Pension & Provident Funds

• on resignation/dismissal/retrenchment from employment (and thus resignation from pension/provident fund) or where the fund is wound up.

Question 24

What is a member allowed to withdraw?

Retirement Annuity Fund

Answer 24

Retirement Annuity Fund

Where the member’s interest in the fund is less than an amount determined by the Minister of Finance in the Government Gazette: this amount is currently R7 000.

NB the amount of R7 000 is calculated per fund, i.e. not per retirement annuity contract (policy) or per insurer.

Where the member:

i. Ceases to be a resident
ii. Departs from the Republic on expiry of a visa for work purposes, or a visa for “visit” purposes.

In respect of i. above: the provision from 1 March 2008 but before 1 March 2016 was that the member had to formally emigrate, and the emigration had to be recognised by the South African Reserve Bank (certain formal steps need to be taken for this to happen).

Formal emigration as discussed above differs from “ceasing to be a resident” – residence from an income tax perspective depends on:

i. Where a person ordinarily resides;
ii. If a person does not ordinarily reside in South Africa, the physical presence test is used to see if the person is still a “resident” in South Africa for tax purposes.

However: It appears that SARS is still, after 1 March 2016, requiring “formal emigration” before allowing the commutation of an RA policy of a South African permanently leaving South Africa – see SARS External Guide – Tax Directive: Emigration and Cessation of Work Visas . SARS is thus equating “ceasing to be a resident” to formal emigration”.

Question 25

When is a member allowed to withdraw?

Pension Preservation Fund and Provident Preservation Fund

Answer 25

Pension Preservation Fund and Provident Preservation Fund:

• Where a member has transferred funds from a pension fund to a pension preservation fund or from a provident to a provident preservation fund (e.g. on resignation from employment),
• one withdrawal (the member may withdraw the full benefit or less depending on his/her wishes) is allowed from the pension preservation fund or provident preservation fund before retirement.

Divorce

• Divorce award payments made ito section 37D of the Pension Funds Act will not prevent transfers to a preservation fund and will not affect the 1 withdrawal option available to members of preservation funds.

Emigration

• Members may not access benefits upon emigration like with RA’s – Submissions have been made to Treasury in this regard
• Previously the member had to transfer his/her full benefit from a pension fund to a pension preservation fund or from a provident to a provident preservation fund and one withdrawal was allowed after transfer, but this has since been changed and the member may now, on resignation from the pension or provident fund take an amount in cash and then transfer the balance into a pension preservation or provident preservation fund, where after the one withdrawal as discussed above will be allowed – see RF 1 of 2012.

GEPF (Government Employees Pension Fund)

• However specific rules with regards to a transfer from the Government Employees Pension Fund (GEPF) to another fund.
• Rule 14.4.1 of the Rules of the GEPF provides as follows:
  
  • “Such transfer shall be made subject to the rules of the approved retirement fund specifying that, with reference to the transfer benefit,
  • any subsequent lump sum benefit payable by that fund or any successor fund to the member and/or his beneficiaries shall be limited to one third of the said transfer benefit, with interest.
  • The balance of the member’s transfer benefit with interest, after deduction of any lump sum payment referred to above,
  • shall be applied for the purchase of an annuity, albeit immediately or upon the member’s ultimate retirement.”
• The following is thus important where a transfer benefit is transferred from the GEPF to a pension preservation fund:
  • i) The full benefit has to be transferred to the pension preservation fund, i.e. the member will not be allowed to take a portion in cash and transfer the balance to the pension preservation fund.
  • ii) If the member elects to take a withdrawal before retirement, such withdrawal will be limited to one-third of the fund value, and if the member takes the full one-third as a withdrawal, the member will not be allowed a further lump sum on retirement – the member will have to annuitise the full amount on retirement.
  • In practice, it would appear that there are funds that interpret this rule differently.

Question 26

When is a transfer between funds allowed?

Answer 26

• In the case of a pension or provident fund, as transfer to another fund is only allowed when the member resigns from employment or is dismissed or retrenched.
• In the case of a retirement annuity fund, pension preservation or provident preservation fund transfers are generally speaking allowed at any time.
• The following transfers are allowed to take place tax-free:
  
  • Provident - Provident/Preservation, Pension/Preservation, RA
  • Pension - Pension/Preservation, RA
  • RA - RA

Question 27

What are the restrictions in transferring into a pension preservation fund?

Answer 27

Where an amount is transferred into a pension preservation fund from a pension or another pension preservation fund it may not be transferred in such a way that it is split between more than one pension preservation fund – RF 1 of 2012.

Where an amount is transferred from a pension preservation fund such amount may only be transferred to:

• one pension fund;
• one pension preservation fund;
• one retirement annuity fund;
• a combination of one pension preservation fund and one retirement annuity fund;
• a combination of one pension fund and one pension preservation fund and; or
• a combination of one pension fund and one retirement annuity fund.

Question 28

How is withdrawal taxed?

Answer 28

Tax at withdrawal from retirement fund

Second Schedule to the Income Tax Act (par 6)

Question 29

What does the Income Tax Act say about taxation on withdrawals?

(Second Schedule to the Income Tax Act (par 6))

Answer 29

After 1 March 2009

Par 6 of 2nd Schedule as per the Taxation Laws Amendment Act 2009:

Taxable portion = Withdrawal Lump Sum LESS:

• Amounts transferred to approved funds (see slide 53);
• Contributions which did not previously rank as a deduction i.t.o section 11(k);
• Any amounts taxed upon transfer from one retirement fund to another (like Pension to Provident Fund transfers);
• Any pre - 1998 amounts transferred from Public Sector Funds (or former par(a) or (b) funds) – the tax- free amount is calculated on the full amount transferred to another fund;
• Any divorce awards previously taxed when transferred to a retirement fund.

Approved transfers

Approved transfers are as per (par 2(b)(iB)) of 2nd Schedule:

• Pension -> Pension, Pension Preservation and RA
• Pension Preservation -> Pension Preservation and RA
• Provident -> Provident, Provident Preservation, Pension Preservation and RA
• Provident Preservation -> Provident Preservation, Pension Preservation and RA
• RA -> RA

Taxtables

(not applicable where the member withdraws as a result of a ‘retrenchment’ situation)

• R0 – R25 000 0% of taxable amount
• R25 001 – R660 000 - 18% of taxable amount above R25 000
• R660 000 – R990 000 - R114 300 + 27% of taxable amount above R660 000
• R990 001 and above - R203 400 + 36% of taxable amount above R990 000

Question 30

How are withdrawals from the GEPF treated?

Answer 30

• Where withdrawals are made from the GEPF and other Par (a) & (b) funds, e.g. the Transnet Retirement Fund) and the member belonged to this fund before 1 March 1998, a formula has to be applied to establish the taxable portion of the lump sum, as lump sums received from GEPF (and other funds e.g. Transnet Retirement Fund) were only taxable form 1 March 1998.
• Calculated in terms of Par 2A of the 2nd Schedule to the Income Tax Act:
  
  • A = B/C x D, where
  • A = the taxable portion of the lump sum;
  • B = The number of completed years of service as member of the GEPF after 1 March 1998;
  • C = The total number of completed years of service as member of the GEPF ; and
  • D = The lump sum payable to the member.

Question 31

When is a member allowed to retire?

Answer 31

Definition of “normal retirement age” as per section 1 of the Income Tax Act, which essentially provides:

• i. A member of any fund (pension, provident, retirement annuity, pension preservation and provident preservation fund) may retire on becoming “permanently incapable of carrying on his or her occupation due to sickness, accident, injury or incapacity through infirmity of mind or body”.
• ii. If not as a result of a situation contemplated in i. above, in the case of a pension or provident fund, the date on which the member becomes entitled to retire form employment (NB – bear in mind that where we are dealing with a provident fund, and a member has not reached age 55 or is not “disabled” as per i. above, any lump sum received by such member will be taxed as a “withdrawal benefit”, irrespective of the fund rules, unless the Commissioner on application directs otherwise – Par 4(3) of the 2nd Schedule to the Income Tax Act).
  
  • Income Tax Act amended from 1 March 2015: before this date a lump sum was deemed to accrue to the member at the earliest of the happening of certain events, including retirement, i.e. at normal retirement age.
  • The effect of this was that a member of a pension/provident fund was compelled to retire from such a fund upon reaching normal retirement age.
  • The deeming provision with regards to retirement was removed – the practical effect is now that the member can “preserve” his benefit in the pension/provident fund until he elects to retire from the fund, if the fund rules allow for this.
• iii. If not as a result of a situation contemplated in i. above, in the case of a retirement annuity, pension preservation or provident preservation fund, the date on which the member reaches the age of 55. Member is not compelled by the Income Tax Act to retire at age 55 though – no maximum age provided at which member must retire (one must however always check the rules of the fund and the provisions or the provisions of the specific contract to establish whether the client will be obliged to retire or not).

Question 32

What are the benefits available to a member on retirement?

Answer 32

Pension, retirement annuity and pension preservation fund

• the member will only be allowed to take one third as a lump sum and the balance (2 thirds) will have to be used to purchase a compulsory annuity, unless the total value of the member’s retirement interest in the fund is R247 500 or less (before 1 March 2016 this amount was R75 000). NB the amount of R247 500 is calculated per fund, i.e. not per retirement annuity contract (policy) or per insurer.

Provident and provident preservation fund

• A member may take the whole retirement interest as a lump sum on retirement (there is of course nothing prohibiting the member to take a smaller portion as a lump sum, or to take no portion as a lump sum and use the balance to purchase a compulsory annuity if the fund rules provide for it).
• Effective from 1 March 2018, Provident Funds will be subject to the compulsory annuitisation regime (i.e. similar to pension funds etc. discussed above).
• The following rules will however apply:
  
  • i.Balances in provident funds as at 1 March 2018 (and any subsequent growth thereon) need not be annuitised, i.e. it can still be taken as a lump sum;
  • ii.If a provident fund member is older than 55 years of age as at 1 March 2018, the mandatory annuitisation requirements will not apply to contributions to the fund together with any growth thereon, made by that person as a member of the fund, as from this date. NB: this is only applicable if the member retires from that specific provident fund. If the funds are transferred to another fund, the member will be treated similar to a person that is younger than 55 on 1 March 2018 (see i. above).

Dependents

• Pension, provident, retirement annuity, pension preservation and provident preservation funds: Dependants and/or nominees (beneficiaries) may take the whole amount as a lump sum, but could also take a smaller lump sum, or no lump sum and use the balance to purchase an annuity with. NB – also subject to rules of fund.
• Benefits will include fund value, but may also include “approved group life benefits”: the term “approved group life benefits” essentially refers to group life insurance on the life of the member provided within the pension or provident fund, as opposed to loose standing group life cover provided by the employer through an insurer, but not through the pension or provident fund.

Question 33

What are the benefits available to a member on death?

Answer 33

Distribution of death benefits of all the above funds are subject to the provisions of Sec 37C of the Pension Fund Act, which effectively required the following from the trustees of the fund:

• If the member is survived by dependants only: Within a period of 12 months of the death of the member, the benefits must be paid to some or all of such dependents in proportions as may be deemed equitable by the board of the fund.
• If the said board does not become aware or cannot trace any such dependant within the 12 month period and the member has nominated a nominee (who is not a dependent) in writing:
  
  • The benefit must be paid to such nominee (beneficiary), but
  • If the debts of the estate of the deceased member is more than the assets of the estate, an amount equal to such shortfall must be paid into the estate, and the balance, if any, to the nominee.
  • If the member is survived by both dependants and nominees: The benefit must be paid to such dependents and nominees in such proportions as the board deems equitable (this provisions is applicable to nominations made on or after 30 June 1989).
  • If the fund does not become aware or cannot trace any dependant of the member within 12 month period and the member has not nominated any nominee: the benefit must be paid to the estate of the member.

Question 34

How is a dependant defined in the Pension Funds Act?

Answer 34

Dependant is defined in the Pension Funds Act as:

• a person in respect of whom the member is legally liable for maintenance;
• a person in respect of whom the member is not legally liable for maintenance, if such person—
  
  • i. was, in the opinion of the board, upon the death of the member in fact dependent on the member for maintenance;
  • ii. is the spouse of the member;
  • iii. is a child of the member, including a posthumous child, an adopted child and a child born out of wedlock.
• a person in respect of whom the member would have become legally liable for maintenance, had the member not died;

Question 35

How is a death benefit dealt with from an estate duty point of view?

Answer 35

Estate Duty: Generally speaking benefits in a pension, provident, retirement annuity, pension preservation, and provident preservation fund is not subject to estate duty on the death of a member.

However

• where a member of such a fund makes a contribution to such a fund on or after 1 March 2015,
• and the contribution (or part thereof) was not deductible under Sec 11(k) (i.e. when the contribution was made) or in terms of the 2nd Schedule to the Income Tax Act (i.e. deductible from lump sums taken by the member before such member died),
• or exempted from compulsory annuities in terms of Sec 10C (this will be discussed in detail in the second lecture),
• the portion that had not been deducted/exempted on death will be included in the estate of the deceased for estate duty purposes. This aspect will also be discussed in more detail in the 2nd lecture.

Question 36

How are retirement and death benefits taxed?

Second Schedule to the Income Tax Act

Answer 36

Taxable portion = Retirement Fund Lump Sum LESS:

• Contributions which did not previously rank as a deduction ito sec 11(k);
• Any amounts taxed upon transfer from one retirement fund to another retirement (like Pension to Provident Fund transfers);
• Any pre-1998 amounts transferred from Public Sector Funds (or former par(a) or (b) funds);
• Any divorce awards previously taxed when transferred to a retirement fund.

(Par 5 of the Second Schedule to the Income Tax Act)

Question 37

When will the Retirement Tax Table apply instead of the Withdrawal Tax Table?

Retirement Planning – Pension & Provident Fund Lump Sums on Retrenchment

Answer 37

Par 2(a) of 2nd Schedule as per the Taxation Laws Amendment Act 2009

The Retirement Table will apply if the termination of employment is due to:

• The employer having ceased to carry on, or intending to cease carrying on the trade in respect of which he or she was employed, or
• The person having become redundant because the employer had a general reduction in staff or a reduction in staff of a particular class; and
• Members are not shareholders with more than 5% share capital/member’s interest in a company.

Therefore the Retirement Table will apply in this instance and NOT the Withdrawal table like it usually would upon withdrawal from a retirement fund.

Important

• If the member decides to first transfer the benefit to a preservation fund on retrenchment
• and thereafter decides to withdraw the benefit (or a portion thereof) the withdrawal will be taxed in terms of the withdrawal table and not the retirement table.

Question 38

What is a severance benefit?

Answer 38

Severance benefits are defined in section 1 of the Income Tax Act.

• It essentially includes any lump sum received from employer in respect of relinquishment, termination, loss etc, of office (employment) where the employee:
  
  • i. Is 55 years of age or older;
  • ii. Has become permanently incapable (disabled) as a result of sickness, accident, injury, infirmity of body and mind etc.;
  • iii. Is retrenched (either as a result of the employer ceasing to trade or where the employer is reducing personnel) and includes voluntary packages taken on retrenchment.
• It will not be deemed to be severance benefit if the employee owns more that 5% share/member’s interest in the company.
• If it is a benefit payable via an employer-owned policy (e.g. a deferred compensation policy), it will also not qualify as a severance benefit.
• SARS also does not view leave pay as a severance benefit as it not viewed as a payment in respect of relinquishment, termination, loss etc of office (employment) – see SARS letter to ASISA dated 12 July 2012: no direct link between ceasing of employment and leave pay received – leave pay viewed as an amount received in respect of services rendered.

Question 39

How are multiple benefits (withdrawal, lump sum and severance benefits) aggregated and treated?

Answer 39

Any lump sums received from a retirement fund (either previous withdrawal or retirement) as well as severance benefits received will be taken into account in the lump sum tax calculation upon withdrawal, retirement, death or receipt of a severance benefit, where such previous withdrawal, retirement or severance benefit was received on or after the following dates:

• Retirement lump sums which accrued on/or after 1 October 2007 will be taken into account;
• Lump sums on withdrawal benefits which accrued on/or after 1 March 2009 will be taken into account (this will include withdrawal from retirement funds due to retrenchment);
• Severance benefits as from 1 March 2011.

Steps

• Step 1 - Calculate the taxable lump sum for current tax year.
• Step 2 - Identify and add previous taxable amounts from Retirement (as from 1 October 2007) and Withdrawal (as from 1 March 2009) and Severance Payments (as from 1 March 2011)
• Step 3 - Add Step 1 + Step 2.
• Step 4 - Calculate the tax payable on the total amount calculated in Step 3 – using the Withdrawal Table (withdrawals other than on retrenchment) or the Retirement Tax Table (retirement lump sums received on retirement, death or withdrawal on retrenchment or severance benefit received)
• Step 5 - Calculate the tax payable on the previous amounts received – thus the amounts calculated in Step 2 – using the same tax table used in step 4. This amount is referred to as the “hypothetical tax”.
• Step 6 - Tax payable is Tax calculated in Step 4 less Hypothetical tax calculated in Step 5

Question 40

What is a tax-free savings account?

Answer 40

Non-Retirement Savings Vehicle – TAX-FREE SAVINGS ACCOUNT - Introduced on the 1st of March 2015 :

• An annual amount of R30 000, subject to a lifetime limit of R500 000
• may be contributed to the new savings vehicle
• and the returns & proceeds will be tax-free (i.e. the limit is on the contributions and not the investment value).
• It may be interest-bearing and non-interest bearing investment.
• Return on above investments will be exempt from income and dividends tax.
• In determining the aggregate capital gain or capital loss of a person, any capital gain or capital loss in respect of the disposal of tax-free investments must not be taken into account.
• Where a taxpayer contributes in excess of the prevailing annual and lifetime contribution limit in any year, a penalty of 40 per cent on the amount of the excess contribution will be levied by SARS on the individual.
• The introduction of tax-free investments had no effect on interest exemptions in Income Tax Act and National Treasury has indicated that the interest exemption will not be removed, but that it will also not be increased, thus eroding its effect over time as a result of inflation.
• Growth, including dividends and income reinvested not taken into account as contributions.​

Question 41

How is the tax-free savings account in terms of Estate Duty?

Answer 41

• No exemption in Estate Duty Act or any other Act with regards to estate duty
• The returns earned by the taxpayer from tax-free savings accounts prior to death =“property” as defined in the Estate Duty Act.
• Returns earned by estate after date of death = not “property” in estate.
• However amounts within tax-free investments cannot be transferred to beneficiary’s tax-free investments. Any transfer of tax-free investments from one individual (or his estate) to another will be deemed to be a contribution and subject to the annual and lifetime contribution limits of the recipient.