Tax Talk: Tax on Retirement Payments Part III

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

In recent times provident funds have become more popular than pension funds. One of the reasons for this change is that provident funds pay the member’s full entitlement out on retirement and the employee has control over the money him or herself instead of being dependent on the performance of the fund as in the case of pension funds.Both the employee and employer contributes to a provident fund and the contributions are determined on a similar basis as the contributions made to pensions funds The payout by a provident fund of a member’s entitlement on resignation or dismissal can be transferred to another approved retirement fund without paying any tax.The employee will be liable for tax at the average of tax (but a minimum of 17,5 per cent) on that portion of the provident fund entitlement that is not transferred to another approved retirement fund.The payout of the employee’s provident fund entitlement at retirement forms part of the employee’s gross income.One-third of the payout is exempt from income tax.The two-thirds balance is included in gross income and is taxed as ordinary income.The marginal rate of tax will therefore apply to the balance of the payout received on retirement.The payout of the employee’s provident fund entitlement on death forms part of the employee’s gross income.One-third of the amount received is exempt from income tax and the balance (two-thirds of the lump sum) is taxed at the employee’s marginal rate of income tax.The payout is deemed to accrue to the deceased estate and not to the actual recipient of the payout.If the provident fund payout is made due to the employee’s dismissal or termination of service or due to dissolution of the provident fund, the total amount paid out by the fund will be taxed at the employee’s average rate of tax but the minimum rate of tax will be 17,5 per cent.If the employee withdraws some of his or her provident fund entitlement, the amount will be taxed at the employee’s average rate of tax in the tax year the amount is withdrawn subject to a minimum tax rate of 17,5 per cent.Whenever an amount is taxable at the average rate of tax, the Receiver of Revenue must be approached for confirmation of the rate of tax that must be applied to the payout.The provident fund must deduct the correct amount of tax from the payout prior to it being paid over to the member of the fund.The same rules set out above apply to preservation fund payouts for the various types of payout.If you intended to move your retirement benefit from a pension fund or provident fund to a preservation fund and thereafter withdraw it from the preservation fund you need to be aware that section 15(1)(j) of the Income Tax Act deems that the amount withdrawn from the preservation fund is deemed to have been withdrawn from the pension or provident fund in the tax year the transfer was made to the preservation fund.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.One of the reasons for this change is that provident funds pay the member’s full entitlement out on retirement and the employee has control over the money him or herself instead of being dependent on the performance of the fund as in the case of pension funds.Both the employee and employer contributes to a provident fund and the contributions are determined on a similar basis as the contributions made to pensions funds The payout by a provident fund of a member’s entitlement on resignation or dismissal can be transferred to another approved retirement fund without paying any tax.The employee will be liable for tax at the average of tax (but a minimum of 17,5 per cent) on that portion of the provident fund entitlement that is not transferred to another approved retirement fund.The payout of the employee’s provident fund entitlement at retirement forms part of the employee’s gross income.One-third of the payout is exempt from income tax.The two-thirds balance is included in gross income and is taxed as ordinary income.The marginal rate of tax will therefore apply to the balance of the payout received on retirement.The payout of the employee’s provident fund entitlement on death forms part of the employee’s gross income.One-third of the amount received is exempt from income tax and the balance (two-thirds of the lump sum) is taxed at the employee’s marginal rate of income tax.The payout is deemed to accrue to the deceased estate and not to the actual recipient of the payout.If the provident fund payout is made due to the employee’s dismissal or termination of service or due to dissolution of the provident fund, the total amount paid out by the fund will be taxed at the employee’s average rate of tax but the minimum rate of tax will be 17,5 per cent.If the employee withdraws some of his or her provident fund entitlement, the amount will be taxed at the employee’s average rate of tax in the tax year the amount is withdrawn subject to a minimum tax rate of 17,5 per cent.Whenever an amount is taxable at the average rate of tax, the Receiver of Revenue must be approached for confirmation of the rate of tax that must be applied to the payout.The provident fund must deduct the correct amount of tax from the payout prior to it being paid over to the member of the fund.The same rules set out above apply to preservation fund payouts for the various types of payout.If you intended to move your retirement benefit from a pension fund or provident fund to a preservation fund and thereafter withdraw it from the preservation fund you need to be aware that section 15(1)(j) of the Income Tax Act deems that the amount withdrawn from the preservation fund is deemed to have been withdrawn from the pension or provident fund in the tax year the transfer was made to the preservation fund.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.