TAX TALK: Tax On Retirement Payments (Part 1)

In this series of articles, Cameron Kotze the Tax Partner at Ernst and Young discusses some topical tax issues for our readers.

When you retire and you have worked for the same employer for a considerable period of time, you may receive an amount from your employer to acknowledge your contribution for the years of service you have rendered to the employer. If you contributed to a retirement fund during your work life, you will also receive a pension.This article deals with the taxation of amounts received from the employer on retirement.The amount paid by your employer is entirely at his or her discretion.On retirement you may therefore receive this goodwill payment together with your accumulated annual leave not paid out by your employer.For tax purposes the total amount (referred to as a lump sum) received from your employer on retirement must be included in your gross income (including the accumulated annual leave pay out).The reason for this is that gross income as defined in the Income Tax Act specifically includes any amount, including a voluntary award, received on retirement from your employer.The first N$100 000 received on retirement from your employer is exempt from income tax.This N$100 000 is cumulative and does not apply separately to consecutive retirements.Retirement usually commences at age 55 but the N$100 000 tax exemption also applies to amounts that are paid out by the employer due to the employee’s ill health, other infirmity or old age.Should the amount paid out by the employer exceed N$100 000 and the employee meets the requirements of the Income Tax Act regarding retirement or ill health, the excess over N$100 000 may be spread over three tax years at the election of the taxpayer.The first third is deemed to be received by the taxpayer in the tax year the amount is paid out and the balance is deemed to be received in equal amounts in the next two tax years.To illustrate this by example, if the amount received from the employer on retirement is N$145 000 and the N$100 000 exemption applies, N$15 000 is deemed to be received in first tax year, another N$15 000 in the next tax year and a further N$15 000 in the following tax year.The taxable amount (in this case N$15 000) is added to the taxpayer’s other taxable income for the same tax year.To illustrate by example, if the taxpayer’s normal salary income is N$120 000 for the year, the N$15 000 referred to above that is to be included in the same tax year is taxed at 34,5 per cent because that is the tax rate that applies to the level of taxable income.The total tax payable on the N$135 000 is therefore N$33 575.Make sure you are taxed correctly on retirement because your retirement nest egg will frizzle away much sooner than you think! The more you have to start your retirement off with, the better.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.comIf you contributed to a retirement fund during your work life, you will also receive a pension.This article deals with the taxation of amounts received from the employer on retirement.The amount paid by your employer is entirely at his or her discretion.On retirement you may therefore receive this goodwill payment together with your accumulated annual leave not paid out by your employer.For tax purposes the total amount (referred to as a lump sum) received from your employer on retirement must be included in your gross income (including the accumulated annual leave pay out).The reason for this is that gross income as defined in the Income Tax Act specifically includes any amount, including a voluntary award, received on retirement from your employer.The first N$100 000 received on retirement from your employer is exempt from income tax.This N$100 000 is cumulative and does not apply separately to consecutive retirements.Retirement usually commences at age 55 but the N$100 000 tax exemption also applies to amounts that are paid out by the employer due to the employee’s ill health, other infirmity or old age.Should the amount paid out by the employer exceed N$100 000 and the employee meets the requirements of the Income Tax Act regarding retirement or ill health, the excess over N$100 000 may be spread over three tax years at the election of the taxpayer.The first third is deemed to be received by the taxpayer in the tax year the amount is paid out and the balance is deemed to be received in equal amounts in the next two tax years.To illustrate this by example, if the amount received from the employer on retirement is N$145 000 and the N$100 000 exemption applies, N$15 000 is deemed to be received in first tax year, another N$15 000 in the next tax year and a further N$15 000 in the following tax year.The taxable amount (in this case N$15 000) is added to the taxpayer’s other taxable income for the same tax year.To illustrate by example, if the taxpayer’s normal salary income is N$120 000 for the year, the N$15 000 referred to above that is to be included in the same tax year is taxed at 34,5 per cent because that is the tax rate that applies to the level of taxable income.The total tax payable on the N$135 000 is therefore N$33 575.Make sure you are taxed correctly on retirement because your retirement nest egg will frizzle away much sooner than you think! The more you have to start your retirement off with, the better.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com