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Study outcomes

Retirement benefits On the successful completion of this study section you should be able
to:

SILKE Chapter 9 • Calculate the taxable income portion of employer lump sum benefits
• Calculate the taxable income portion of fund lump sum benefits
Leanie Groenewald • Calculate the individual’s taxable income that integrates the taxable
portion of retirement benefits; and
• Explain the tax consequences of lump sum benefits received.

SILKE chapter 9 – excluding 9.3.3 (Public sector pension funds), 9.5 (life
policies and divorces).

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Introduction 2nd
Retirement fund contributions Lump sum received Schedule
of the Act

Employer RSA Funds (Gross Income par (e))

Gross Income par Gross Income par (f)
(d)(i) Compensation Commutation of RLB RLWB
for loss of office amounts due
Severance benefit (SB): On retirement
Before
• Employer pays lump sum to employee who /death/certain
retirement
loss of office
leaves employment AND
RSA Contribute • Attained the age of 55 years OR
Retirement
• Permanently incapable of holding office due Net amount included in gross income
funds
Taxable fringe to sickness, accident, injury, infirmity OR when member elects to retire
Employer s11(l) • The employer ceased to carry on Amount received less
Pension Fund benefit for employee trade/retrenchment AND employee does Allowable deductions ito par 5 & 6
Retirement Annuity Fund 7th Schedule not hold > 5% of shares
Provident Fund
Employee s11F Taxed according to Taxed according to
Severance benefit: taxed according to RLB scale RLB scale RLWB scale
If not – natural person’s tax scale

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Lump sums from employers –

Exam Technique
Gross income par (d)/(f)
Different types of lump sums are taxed according to different tax scales, therefore
different columns should be used for the tax calculation:
RLB and severance RLWB Normal income
benefits par(d)(i) Consider whether severance benefit to
Lump sum received due to loss of determine in which column it should be
Gross income…. included
office/employment Will accumulated leave
Taxation depends on event and not type of fund payments be included in
Taxable income GI in terms of par (d)?

What does
“commutation”
RLB tax scale RLWB tax scale Normal tax scale mean? Consider whether severance benefit to
par(f)
determine in which column it should be
Primary, secondary and tertiary rebates may Commutation of amounts due
included
not be deducted from tax on lump sums
The cumulative principle applies when
calculating tax

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Retirement funds Retirement funds – RLB

Normal retirement age:
* Pension/provident fund = date on which member becomes entitled to retire from employment
• Pension fund (PF)
What is the * RAF/preservation fund = 55 years
• Pension Preservation fund (PPF) difference between * Any fund = if permanently incapable of carrying on occupation (sickness/accident/injury etc.)
these funds?
• Provident fund (PrF) PrF and PrPF may Loss of office/employment
Transfer before
• Provident Preservation fund (PrPF) receive FULL amount as The employer ceased to carry on
electing retirement
lump sum if the person trade/retrenchment AND
• Retirement Annuity fund (RAF) was already 55 years employee does not hold > 5% of Commutation of after reaching
old on 1 March 2021 Retirement/death shares an annuity retirement age
(par 2(1)(a)(i)) (par 2(1)(a)(ii)) (par 2(1)(c))
May elect max of 1/3 as lump sum (except if member dies) (par 2(1)(a)(iii))

If 2/3 of total value ≤ R165 000/deceased – may elect full amount to be taken as
lump sum Allowable deductions:
• ALL own contributions previously disallowed as a deduction
• Amounts transferred to another fund Example 3

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Retirement funds – RLWB Previous contributions disallowed as deduction

Consider contributions not allowed as Contributions not allowed
Transfer a deduction in the following order:
Other (Resignation) as a deduction until
between funds (par 2(1)(b)(ii)) 1. Lump sum (par 5&6) 28 February 2023
(par 2(1)(b)(iB))
2. Annuities s10C
3. s11F deduction Current year contributions
Allowable deductions: may only be considered
Amounts transferred to allowable Previous year’s contributions
• Deduction for ALL previously disallowed own for s11F not yet deducted ito par 5/6
funds
contributions or s10C will qualify for s11F
• Amounts transferred to allowable funds EXCEPT provident fund
contributions made before
1 March 2016

Remember:
The lump sums taxed according to other scales are NOT taken into account in
the taxable income used in determining the s11F and s18A deductions

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Exemption against annuities (s10C) Example 1

Exemption against purchased annuities (s10A)
• Annuities – included in gross income s1 par (a) • Annuities – included in gross income s1 par (a) Example 2
• Exemption – s10C if not yet allowed as a deduction in terms of s11F or par
• Exemption – s10A – capital element is exempt (amount will be given)
5/6 of the Second Schedule
• All non-deductible contributions are pooled What if a taxpayer
retires on the last day of
Annuities a yoa?

Retirement lump sum s11F deduction

Consider against lump sum and annuity:

contributions not allowed as a deduction until What if a taxpayer dies
28 February 2023 in a yoa?

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Tax: cumulative effect when taxing lump sumsCurrent

benefit taxed
Taxable portion of Taxable portion of all Amount to apply @ higher rate
current lump sum previous lump sums current table to
RLB received or accrued
RLB/RLWB/SB on/after 1 Oct 2007

RLWB received or accrued Example 4 and 5

on/after 1 March 2009

SB received or accrued
on/after 1 March 2011

NB: Two steps:

1. Calculate tax on total of current plus all previous lump-sums already received –
apply the table triggered by the current event.
2. Less: “Hypothetical tax” already paid on previous lump-sums
NB: Hypothetical tax based on the table triggered by the current event!!

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Questions and homework

• Question 1 (Ken Merlot) –in class
• Question 2 (Jose Ferreira - integrated) – mark in class next week
• Question 3 (Marco Pearson) – on your own (integrated)
• Question 4 (Kobus Nel) – on your own (integrated)

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