Benefit tax loophole shrinks

THE Ministry of Finance has issued information to clarify and explain recent developments regarding tax on death benefits from pension funds.

According to the Permanent Secretary of the Ministry, Calle Schlettwein, the Income Tax Act of Namibia requires a pension fund to provide annuities to members mainly, and other benefits only as additions to this central purpose. He said this requirement that, “Inland Revenue detected a number of pension funds that in terms of their rules only pay out a lump sum death benefit to a member and no annuities.”The Ministry defines mainly as more than 50 per cent for tax purposes and said, “it should be noted that annuities are taxable and a lump sum death benefit exempt from tax”.This practice of giving lump sum death benefits and no annuities is therefore, “not in conformity with the Income Tax Act,” the ministry maintains.In order to address this non-compliance the ministry issued Practice Note 5 of 2003 in September last year.The Practice Note obliges fund administrators to amend their rules before the end of February this year, although the deadline has now been extended to before the end of February 2005, said Schlettwein.”Inland Revenue Directorate has recently decided that until such time that the rules are rectified Inland Revenue will treat the lump sum death benefits as annuities.”However, following the meaning of “mainly” (+50 per cent), the ministry has decided that lump sum benefits will be divided on a 51/49 per cent bases for tax purposes.Fifty-one per cent of lump sum death benefits will now be taxed as annuities while the rest will remain untaxed as a death benefit.Furthermore, in terms of current legislation, one third of the 51 per cent will also be exempt from taxes, the Ministry said.He said this requirement that, “Inland Revenue detected a number of pension funds that in terms of their rules only pay out a lump sum death benefit to a member and no annuities.”The Ministry defines mainly as more than 50 per cent for tax purposes and said, “it should be noted that annuities are taxable and a lump sum death benefit exempt from tax”.This practice of giving lump sum death benefits and no annuities is therefore, “not in conformity with the Income Tax Act,” the ministry maintains.In order to address this non-compliance the ministry issued Practice Note 5 of 2003 in September last year.The Practice Note obliges fund administrators to amend their rules before the end of February this year, although the deadline has now been extended to before the end of February 2005, said Schlettwein.”Inland Revenue Directorate has recently decided that until such time that the rules are rectified Inland Revenue will treat the lump sum death benefits as annuities.”However, following the meaning of “mainly” (+50 per cent), the ministry has decided that lump sum benefits will be divided on a 51/49 per cent bases for tax purposes.Fifty-one per cent of lump sum death benefits will now be taxed as annuities while the rest will remain untaxed as a death benefit.Furthermore, in terms of current legislation, one third of the 51 per cent will also be exempt from taxes, the Ministry said.