Lump sum benefits

Question 1

When are lump sum benefits payable from a fund?

Answer 1

Lump sum benefits are paid on

• retirement,
• death, or
• other reasons than death or retirement (resignation is one such reason).

Retirement
When a person retires from a retirement fund a certain portion of the lump sum can be tax free.

The balance is then the amount that is included in the taxpayer’s gross income.

The amount included in gross income is ring-fenced against deductions and the full amount that included in gross income is also part of taxable income.

Question 2

How are lump sums taxed?

Answer 2

The taxable lump sum is then “separated” from the rest of his taxable income and taxed at rates applicable to retirement fund lump sum benefits only.

In practice it is best to simply leave the taxable lump sum out of gross income and tax it separately.

The two amounts of tax can then be added together

Paragraph (e) of the definition of “gross income”
The paragraph includes the following in a persons gross income:
- a retirement fund lump sum benefit
- a retirement fund lump sum withdrawal benefit

Question 3

What is the definition of a retirement fund lump sum benefit?

Answer 3

“Retirement fund lump sum benefit” means an amount

determined in terms of paragraph 2(1)(a) of the Second Schedule.

Question 4

What is the definition of a retirement fund lump sum withdrawal benefit?

Answer 4

“Retirement fund lump sum withdrawal benefit” means an amount determined in terms of paragraph 2(1)(b) of the Second Schedule.

Question 5

2 (1) (b) (iA) Withdrawal Benefit - Divorce Order

Answer 5

Amount paid by a pension fund to a non-member spouse of a pension fund (court order for a divorce)

Divorce on or after 13 Sept 2007

• Non-member will be liable for withdrawal tax
• Non-member can avoid tax by requesting that amount be transferred to another approved fund on her behalf - para 6(1) (a) (i)

Exception - Divorce BEFORE 13 Sept 2007 - Tax free for both spouses.
- However, will only be transferred to non-member spouse when benefits accrue to member.

Question 6

2 (1) (b) (iB) Withdrawal Benefit - Normal Transfer

Answer 6

Person transfers an amount from one retirement fund to another.

Person resigns from pension fund

• Takes it in cash - will be taxed - 2(1)(b)(ii)
• Transfers to another approved fund - 2(1)(b)(iB) - qualifies for a deduction under para 6(1) (a) (ii)

Transfer from Pension to Provident does not qualify for
6 (1) (a) (ii) deduction

Question 7

2 (1) (b) (ii) Withdrawal Benefit - Any Other Lump Sum

Answer 7

• Takes it in cash - will be taxed - 2(1)(b)(ii)

Exception
Surplus distribution under section 15B of PFA paid after retirement, resignation or death is tax free under paragraph 2C

6(1)(b)

Question 8

Movement of transfer for para 6(1) (a) (i) Deduction

Paragraph 6 of Second Schedule

Answer 8

Pension - penion, pension preservation, RA
Pension preservation - penion, pension preservation, RA

Provident - provident, provident preservation, penion, pension preservation, RA
Provident - provident preservation, pension preservation, RA

RA - RA

Question 9

Movement of transfer for para 6(1) (a) (ii) Deduction

Paragraph 6 of Second Schedule

Answer 9

Pension - penion, pension preservation, RA
Pension preservation - penion, pension preservation, RA

Provident - provident, provident preservation, penion, pension preservation, RA
Provident - provident preservation, pension preservation, RA

RA - RA

Question 10

Deductions - “other withdrawals” – par 6(1)(b)

Paragraph 6 of Second Schedule

Answer 10

In any other case the aggregate of:

(i) Member contributions that did not rank for deduction under section 11(k) or 11(n).
- (Contributions made by member that was over and above the maximum limits for retirement fund contributions)

(ii) Any amount transferred into the fund from which taxpayer now withdraws and was transferred as a result of an election made in terms of section 37D(4)(b)(ii)(cc) of the Pension Funds Act.

(iii) An amount transferred into the fund on previous withdrawal from another fund and was taxed on such transfer.
- Member previously was part of pension fund, resigned and transferred to provident fund and incurred tax on transfer

(iv) An amount transferred to a pension preservation or provident preservation fund as an unclaimed benefit and was taxed prior to such transfer.
(v) An amount transferred into a private sector fund from a Government Pension Fund as represents the tax-free portion (pre 1 March 1998 tax- free amount).

Question 11

Calculating withdrawal benefits?

Answer 11

Step 1: Amount of WB.

Step 2: Deduct paragraph 6 deductions to determine the taxable WB .

Step 3: Aggregate taxable WB with PRIOR WB’ s, RB’s and SB’s.

Step 4: Use WB table and calculate tax on aggregate as per step 3.

Step 5: Calculate tax on the aggregate of the PRIOR amounts using the WB table.

Step 6: Deduct the tax calculated in step 5 from tax calculated in step 4.

Question 12

What are the cut off dates when calculating taxation on the different lump sum amounts?

Answer 12

Determine all RETIREMENT BENEFITS that took place on or after 1 Oct 2007.

Determine all WITHDRAWAL BENEFITS that took place on or after 1 March 2009.

Determine all SEVERANCE BENEFITS that took place on or after 1 Oct 2011.

Question 13

Para 2(1)(a)

Answer 13

“any amount received by or accrued to that person by way of a lump sum benefit derived in consequence of or following upon-

(i) his or her retirement or death,

(ii) the termination of his employment due to-
- - (AA) his or her employer having ceased to carry on or intending to cease carrying on the trade in respect of which he or she was employed, or
- - (BB) that person having become redundant in consequence of his or her employer having effected a general reduction in personnel of a particular class;

Provided that this subitem does not apply to any amount received by or accrued to a person by way of a lump sum benefit where that person’s employer is a company and that person was at any time a director of that company or at any time held more than five per cent of the issued share capital or members’ interest in that company;

(iii) The commutation of an annuity or portion of an annuity, less any deduction permitted under the provisions of paragraph 5 or 6.

This allows a benefit on retrenchment (RB) to be transferred tax free to another fund. Amended with effect from 1 March 2009.

Question 14

Diff between WB and RB

Answer 14

WB

1. Pension interest assigned to non-member - Post 13 Sept 2007 divorce
2. Transfer from one fund to another (taxable transfer)
3. Cash withdrawals

RB

1. Retirement
2. Death
3. Retrenchment/Redundancy
4. Commutation of an annuity or portion of an annuity (including a living annuity).

Question 15

Deductions against RB’s - Para. 5 of the Second Schedule

Answer 15

Par5 of the Second Schedule
Deductions against paragraph 2(1)(a) lump sum benefits
(i) Member contributions that did not rank for deduction under section 11(k) or 11(n).

(ii) Any amount transferred into the fund from which taxpayer now withdraws and was transferred as a result of an election made in terms of section 37D(4)(b)(ii) of the Pension Funds Act.
(iii) An amount transferred into the fund on previous withdrawal from another fund and was taxed on such transfer.
(iv) An amount transferred to a pension preservation or provident preservation fund as an unclaimed benefit and was taxed prior to such transfer.
(v) An amount transferred into a private sector fund from a Government Pension Fund as represents the tax-free portion (pre 1 March 1998 tax-free amount).

Question 16

Calculating retirement benefits?

Answer 16

Step 1: Amount of RB.

Step 2: Deduct paragraph 5 deductions to determine the taxable RB .

Step 3: Aggregate taxable RB with PRIOR WB’ s, RB’s and SB’s.

Step 4: Use RB table and calculate tax on aggregate as per step 3.

Step 5: Calculate tax on the aggregate of the PRIOR amounts using the RB table.

Step 6: Deduct the tax calculated in step 5 from tax calculated in step 4.

Question 17

Section 7(7) of the Divorce Act

Answer 17

In terms of section 7(7) of the Divorce Act the pension interest of a party to a divorce action is deemed to be part of his/her assets in the determination of patrimonial benefits to which the parties become entitled.

This does not apply in the case of a divorce action in respect of a marriage out of community of property entered into on or after 1 November 1984 in terms of an ante-nuptial contract by which community of property, community of profit loss and the accrual system are excluded.

Question 18

How is pension interest defined in section 1 of the Divorce Act?

Answer 18

“Pension interest” is defined in section 1 of the Divorce Act.

Pension interest in relation to a party to a divorce action is defined in respect of

• a pension fund (excluding a retirement annuity fund); and
• a retirement annuity fund.

In respect of a PENSION fund (also PROVIDENT fund) it means the benefit to which such a person would have been entitled in terms of the rules of the fund if his membership of the fund would have been terminated on the date of the divorce on account of his resignation from his office.

In respect of a RETIREMENT ANNUITY fund it is the total amount of the person’s contributions to the fund up to the date of the divorce, together with a total amount of annual simple interest on those contributions up to that date calculated at the prescribed interest at that date as per Prescribed Rate of Interest Act.

Section 37D(6) was inserted 2008
The portion of “”pension interest” of a member of a PRESERVATION pension or provident fund that is assigned to the non-member refers to what the member would have been entitled to in terms of the rules of the fund if his or her membership of the fund terminated on the date on which the decree was granted.

Question 19

Section 7(8) of the Divorce Act

Answer 19

Under section 7(8) the Court may make an order that any part that is due or assigned to the other party in terms of section 7(7), shall be paid to that other party when any pension benefits accrue in respect of that member.

Section 37D(4)(a) of the Pension Funds Act provides that for the purposes of section 7(8) of the Divorce Act, the pension interest assigned under a decree of divorce is deemed to accrue to the member on the date on which the decree of divorce is granted.

Section 37D(4)(d) provides that where the decree of divorce has been granted prior to 13 September 2007, the amount assigned to the non-member is deemed to have accrued to the member on 13 September 2007.

Question 20

Section 37D(1)(d)

Answer 20

Section 37D(1)(d) provides that a registered fund may deduct from the member’s benefit or minimum individual reserve (as the case may be)

• any amount assigned from such benefit or individual reserve to a non-member spouse in terms of a decree of divorce granted under section 7(8) of the Divorce Act
• as well as any income tax to be deducted or withheld in terms of the Fourth Schedule (tax is dealt with later).

Under section 7(8)(ii) the Registrar of the Court must notify the fund concerned that an endorsement be made in the records of the fund that that part of the benefit is so payable to the other party.

Question 21

What do severance benefits exclude?

Answer 21

“severance benefit” is defined in section 1 of the ITA.

It excludes the following:
- Lump sums benefits
- Amounts included in gross income under paragraph (d)(ii) and (d)(iii). (Proceeds of company owned policies paid to employee/director.)

Question 22

What are severance benefits?

Answer 22

lump sums on severance benefits and retirement benefits are aggregated.

“severance benefit” means
- any amount received by or accrued to a person
- by way of a lump sum from his employer (or by arrangement with the person’s employer or an associated institution in relation to that employer)
- in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s office or employment or of the person’s appointment (or right or claim to be appointed) to any office or employment, if—

(a) such person has attained the age of 55 years;
OR
(b) such relinquishment, termination, loss, repudiation, cancellation or variation is due to the person becoming permanently incapable of holding the person’s office or employment due to sickness, accident, injury or incapacity through infirmity of mind or body;
OR
(c) such termination or loss is due to—
- (i) the person’s employer having ceased to carry on or intending to cease carrying on the trade in respect of which the person was employed or appointed; or
- (ii) the person having become redundant in consequence of a general reduction in personnel or a reduction in personnel of a particular class by the person’s employer,

Question 23

Lumps payment on death of a member?

Answer 23

The lump sum is taxed in the member’s hands.

The members estate can recover the tax from the surviving spouse.

Question 24

Lump sum in the living annuity scenario.

Answer 24

On death of member, beneficiary can decide to take a lump sum or continue with living annuity or a combination of both.

In the event that it is taken as a lump sum, it will be taxed in the hands of the deceased the day before they passed away. However, the tax amount can be recovered from the beneficiary.

In the event that the beneficiary continues with the living annuity and they pass away, their beneficiary will go through a similar set of decisions and consequences as before.