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Retirement fund lump sums

Source: Momentum ASAP newsletter Aug. 2014

This article will focus on the changes made to the tax tables applicable to retirement fund lump sums and illustrate the application thereof, especially if a person receives multiple lump sums during his/her lifetime.

Tax implications on withdrawals

Withdrawals are made prior to retirement and are common in the following instances:

  • Resignation from pension or provident funds
  • Withdrawals from preservation funds
  • Emigration withdrawal made from retirement annuities
  • Withdrawals made in terms of a divorce order against an ex-spouse’s retirement funds.

Deductions:

When determining the taxable portion of a lump sum, the following amounts can be deducted:

  • The taxpayer’s own contributions that did not rank as a tax deduction against the person’s income,
  • Any amount transferred for the benefit of the taxpayer to any other approved fund.

The total amount determined above may not exceed the amount of the lump sum benefit in respect of which it is allowable as a deduction

Aggregation:

Aggregation rules apply in respect of lump sums received. Therefore all of the following lump sums must be aggregated prior to applying the applicable tax table:

  • Retirement lump sums received after 1 October 2007,
  • Withdrawal lump sums received after 1 March 2009,
  • Severance benefit lump sums received after 1 March 2011.

Once the tax is determined, it will be reduced by the tax attributed to these previous lump sums, applying this tax table.

Taxable portion Tax rates 2014/2015
R0 – R25 000 Nil
R25 001 – R660 000 18% of amount in excess of R25 000
R660 001 – R990 000 R114 300 plus 27% of amount in excess of R660 000
R990 001 + R203 400 plus 36% of amount in excess of R990 000

Tax implications on retrenchment or retirement or death

The retirement tax table will apply in the following instances:

  • The retrenchment of the taxpayer where a severance benefit (as defined in the Income Tax Act) is received;
  • The retrenchment of the taxpayer where a withdrawal is made from the employer retirement fund due to that retrenchment,
  • The retirement of the taxpayer;
  • The death of the taxpayer.

Deductions:

When determining the taxable portion of a lump sum, the following amounts can be deducted:

  • The taxpayer’s own contributions that did not rank as a tax deduction against the person’s income,
  • Any amount transferred for the benefit of the taxpayer to any other approved fund.

The total amount determined above may not exceed the amount of the lump sum benefit in respect of which it is allowable as a deduction

Aggregation:

Aggregation rules apply in respect of lump sums received. Therefore all of the following lump sums must be aggregated prior to applying the applicable tax table:

  • Retirement lump sums received after 1 October 2007,
  • Withdrawal lump sums received after 1 March 2009,
  • Severance benefit lump sums received after 1 March 2011.

Once the tax is determined, it will be reduced by the tax attributed to these previous lump sums, applying this tax table.

Retirement tax table:

Taxable portion Tax rates 2014/2015
R0 – R500 000 Nil
R500 001 – R700 000 18% of amount in excess of R500 000
R700 001 – R1 050 000 R36 000 plus 27% of amount in excess of R700 000
R1 050 001 + R130 500 plus 36% of amount in excess of R1 050 000

Source: Momentum ASAP newsletter Aug. 2014

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