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TXN 201 > 8. Retirement Benefits > Flashcards

8. Retirement Benefits Flashcards

1
Q

What kind of retirement fund do salaried persons usually use?

A

Provident or pension fund

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2
Q

Hw does retirement annuity fund differ from the others?

A

It does not relate to employment

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3
Q

In what forms can a person receive a benefit upon retirement ?

A

Via lump sum, annuity or combination of both

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4
Q

How could a person receive benefits from retirement fund besides retirement?

A

Withdrawal or upon death

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5
Q

When an employer contributes lump sums to any of these fund after termination, what are they known as?

A

Severance packages

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6
Q

What are pension/provident preservation funds?

A

Where employee can invest retirement saving after retiring

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7
Q

Provident and pension funds are linked to employer, what is retirement annuity fund linked to?

A

An insurance company

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8
Q

Are the monthly contributions to these funds allowed as deductions?

A

Yes

Subject to limitations though

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9
Q

What is the only way to receive lump sum from retirement annuity fund? And why?

A

Through withdrawal because it is not linked to employment

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10
Q

Why aren’t senior citizens exempt from tax?

A

It would put too much strain on the rest of the community

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11
Q

What can retirement benefits be divided into?

A
  1. Periodic payments

2. Once off payment

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12
Q

Are there difference tax implication when benefits are received through withdrawal and upon retirement?

A

YES

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13
Q

How much can a member of pension or retirement annuity fund take as lump sum upon retirement?

A

Only up to 1/3 of total

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14
Q

When can a member of pension or torment annuity fund take the entire amount as lump sum upon retirement?

A

If 2/3 does not exceed R50000

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15
Q

How much can a member of provident fund take as lump sum upon retirement?

A

They can take the full amount regardless of how much it is

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16
Q

What happens to the balance in the fund when a person retires?

A

It is transferred to a preservation fund

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17
Q

What are the advantages of a preservation fund?

A

Savings won’t diminish

No tax attracted to fund

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18
Q

Which pension annuities are taxable for residents?

A

Any from any source

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19
Q

Which pension annuities are exempt from taxable income for residents?

A
  1. Amounts received from social security from another country
  2. Pension from outside Republic because of past employment outside Republic
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20
Q

What if a pension is received and it’s party of exempt and partly not?

A

It can be apportioned

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21
Q

Which pension annuities are non-residents taxed on?

A

Pensions from source within the Republic

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22
Q

Concerning compulsory annuities received, how much will be exempt?

A

The amount that relates to past contributions that were not previously allowed

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23
Q

What sources could annuities come from?

A
  1. Retirement, pension, provident
  2. Employer
  3. Trusts (inter vivos and testamentary)
  4. Insurance policy
  5. Sale of business (cost price in from of annuity)
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24
Q

How much of the annuity received by employee by employer is taxable?

A

Fully taxable

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25
Q

What are the characteristics of an annuity?

A
  1. Fixed, annual amount, divided into instalments
  2. Repetitive in nature
  3. Obligation to pay it
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26
Q

Why is payment for sale of business in the form of an annuity disadvantageous?

A

Because annuity will be taxed at a higher rate than a capital gain

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27
Q

What exemptions do non-residents forfeit concerning annuities?

A

Interest and dividend exemptions

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28
Q

When a distribution complies with an annuity, what is and is not exempt?

A

Interest will,be exempt

Divided will not be

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29
Q

Where will government pensions be taxed?

A

In SA no matter where the service was rendered

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30
Q

What is the conduit pipe principal?

A

Portion of annuity that is interest will train nature and is exempt but dividends do not

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31
Q

What is a purchased annuity?

A

Where taxpayer invests in insurance company and purchases the annuity

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32
Q

What part of a purchased annuity is exempt?

A

The capital portion of the annuity, because it’s capital in nature

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33
Q

What is the formula to calculate the capital portion of a purchased annuity?

A

Y = A/B x C

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34
Q

What is Y in the capital formula?

A

The capital element to be calculated

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35
Q

What is A in the capital formula?

A

Total cash price payable to insurance company

36
Q

What is B in the capital formula?

A

Sum of all expected return from annuity

37
Q

What is C in capital formula

A

Receipts during current year of assessment

38
Q

What is done with the capital amount of purchased annuity once calculated?

A

Deducted from amount received and the balance is taxable

39
Q

What if the annuity is purchased for the remainder of life?

A

Life expectancy as per table in Appendix C will be used

40
Q

What if the annuity is purchased in a foreign currency?

A

First calculate the exempt amount in the foreign currency THEN convert the taxable amount to Rands

41
Q

Where can lump sums be received from?

A

Either retirement fund or employer

42
Q

What categories can lump sums be out into?

A
  1. Withdrawal benefits

2. Retirement benefits

43
Q

What is a severance benefit?

A

A lump sum paid out by employer usually in terms of golden handshake

44
Q

What else are lump sums paid from employer called?

A

Gratuities

45
Q

What do gratuities include?

A
  1. Severance packages
  2. Accumulated leave
  3. Bonuses
  4. Golden handshakes (good work and loyalty)
46
Q

Are gratuities included in gross income?

A

Yes

47
Q

Which gratuity is NOT included in gross income in full?

A

Severance packages

48
Q

What is a severance benefit defined as?

A
  1. Lump sum paid out
  2. From employer
  3. Because of termination
49
Q

What are the requirements for a severance benefit?

A
  1. Person over 55 or
  2. Terminated due to illness of any kind or
  3. Employee retrenched or became redundant
50
Q

When will a severance benefit NOT be treated as a severance benefit?

A

Paid to employee who owned more than 5% of issued share capital

51
Q

How are severance benefits taxed?

A

Same as retirement lump sums!

Yay!

52
Q

How could lump sums received prior to retirement occur?

A
  1. Divorce order
  2. Transfer of funds
  3. Withdrawal from fund
  4. Dissolution of fund
53
Q

What are the deduction allowed for lump sums regarding divorce order to transfer of funds?

A

The amount that is transferred to an approved fund is deductible from lump sum

54
Q

What can be deducted from lump sum withdrawals?

A

Taxpayer’s own contributions that were not allowed

55
Q

What basis are lump sums received from retirement fund taxed?

A

Accumulated basis

56
Q

What is an approved fund for retirement annuity fund?

A

Only another retirement annuity fund

57
Q

What is an approved fund for pension/preserve fund transfer?

A

Another pension/preservation or retirement annuity fund

58
Q

What is an approved fund for transfer from provident fund?

A

All of the above fund types

59
Q

What are the allowable deduction from lump sum benefits besides circumstances NOT concerning divorced or transfer?

A
  1. Previously disallowed contributions
  2. Previously taxed divorce award transfers to approved fund
  3. Previously taxed transfer to approved fund
  4. Previously taxed unclaimed benefits transferred to preservation funds
  5. Tax-free portions of transfers from state funds
60
Q

What are the constraints of deductions?

A

They will be allowed if

  1. They haven’t previously been used as deduction
  2. They are limited to benefit recieved
61
Q

What is step 1 in calculating withdrawal benefits tax?

A

Taxable withdrawal benefit = current benefit - allowable deductions

62
Q

What is step 2 in calculating withdrawal benefit tax?

A

Add together taxable amounts of:

  1. Previous withdrawal benefits received on or aft 1 March 2009
  2. Previous retirement fund lump sum benefits received after 1 March 2007
  3. Severance benefits received on or after 1 March 2011
63
Q

What is step 3 of calculating withdrawal benefits tax?

A

Calculate tax on total benefit (step 1+ step 2) as per tables

64
Q

What is step 4 to calculate withdrawal benefit tax?

A

Calculate tax on previous benefits (step 2)

65
Q

What is step 5 in calculating tax on withdrawal benefits?

A

Tax in step 3 - tax on step 4 = tax on current lump sum withdrawal benefit

66
Q

What date will retirement fund benefits accrue from?

A

1 March 2009

67
Q

What happens when a person dies and has not yet retired?

A

They receive a lump sum benefit to their estate

68
Q

In what circumstances will a retirement fund pay a lump sum benefit?

A
  1. Retirement
  2. Death
  3. Termination due to employer ceasing or redundancy
69
Q

What age can people usually retire from retirement annuity fund?

A

55

70
Q

What happens if someone dies before they retire?

A

The lump sum is deemed to accrue to them before they died and is taxed as such

71
Q

How is involuntary retrenchment treated?

A

Retired from fund

72
Q

When is involuntary retrenchment NOT treated as retired from fund?

A

If the person was a director or owns more than 5% of the capital share

73
Q

What are the deduction allowed for benefits of lump sum upon retirement?

A
  1. Disallowed contributions
  2. divorce order
  3. Amounts transferred to approved funds
  4. Unclaimed benefits
  5. Lump sums from government funds
74
Q

What must be taken into account when deducting contributions?

A

Current year contributions

75
Q

Are contributions to provident funds ever deductible?

A

Nope

76
Q

What is taken into account for deductions of provident fund?

A

All contributions ever made

77
Q

What date does lump sum benefits accrue when from government fund?

A

1 March 1998

78
Q

What is the formula for lumps sums received from government funds?

A

A = B/C x D

79
Q

What is A in the formula for government lump sums?

A

A is the amount to be calculated

80
Q

What is B in government formula when Rules of funds take into account number of years of employment completed?

A

Total years completed of employment after 1 March 1998

81
Q

What is B in government formula when fund rule DON’T take into account completed years of employment?

A

B = completed number of years after 1 March 1998 during which had been a member of fund

82
Q

What is C in government formula where fund rule take into account employment years completed?

A

Total years completed of employment

83
Q

What is C in government formula when fund rules DON’T take into account completed year’s of employment?

A

C = number of years competed during which person had continuously been member of any public sector fund

84
Q

What is D in the lump sum formula?

A

Lump sum benefit that is payable

85
Q

Is the tax on retirement lump sum affected by annual rebates or assessed losses?

A

No

86
Q

What is done with the tax on retirement lump sum benefits that is calculated

A

It is added to net normal tax

87
Q

What are the steps to calculate retirement lump sum?

A

Same as withdrawal benefits but different table

TXN 201 (9 decks)

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