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2015Taxation 4Silke chapter 12

The taxation of

RETIREMENT BENEFITS

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Employee can choose

Lump sum paid out once

off

Second Schedule

Fixed amount, paid out

repetitively, ito a contract

Gross Income def par (a)

Lump sums vs. Annuity

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Lump sums

Received

Lump Sums from

an Employer

Paragraph (c) or (cA)

Paragraph (d) or (f)

Lump sum from a Fund

Paragraph (e) and

(eA)

Types of lump sums

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par (d) or (f)“ Severance Benefits”

Any voluntary reward or amount, received or accrued for, in respect of the relinquishment, termination, loss, repudiation, cancellation

or variation of any office or employment of any appointment AND

> 55 years OR Employee suffers from ill heath, is incapable, or infirmity

of holding office OR Termination due to

Employer ceasing to carry out trade for which the taxpayer was employed for

Redundant (See later for additional checks!)

IF MET, TREATED AS A LUMP SUM FROM A FUND.

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Lump sums from

funds

Retirement lump sum

Retirement Death

Pre-retirement lump sum

Resignation Withdrawal

Lump sums from funds

Type of event = NB

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Pre-retirement lump sums

Taxable income from lump sum benefits

Rate of tax

Not exceeding R25 000 0% of taxable incomeExceeding R25 000 but not exceeding R660 000

18% of taxable income exceeding R25 000

Exceeding R660 000 but not exceeding R990 000

R114 300 plus 27% of taxable income exceeding R660 000

Exceeding R990 000 R203 400 plus 36% of taxable income exceeding R990 000

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Retirement lump sumsTaxable income from lump sum benefits

Rate of tax

Not exceeding R500 000 0% of taxable incomeExceeding R500 000 but not exceeding R700 000

R0 plus 18% of taxable income exceeding R500 000

Exceeding R700 000 but not exceeding R1 050 000

R36 000 plus 27% of taxable income exceeding R700 000

Exceeding R1 050 000 R130 500 plus 36% of taxable income exceeding R1 050 000

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‘Retire’ = becoming entitled to annuity / lump sum benefit ‘Taxpayer retires when he/she dies or reaches the ‘normal

retirement age’

Retirement

Pension Fund and Provident Fund

Date on which the member becomes entitled to retire from employment

RAF, Pension Preservation Fund, Provident Preservation Fund

Date that the member attains 55 years of age

Any fund Date on which the member becomes permanently incapable of carrying on his / her occupation due to sickness, accident, injury or incapacity through infirmity of mind or body

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Amounts received due to termination of the taxpayer’s employment due to

Employer having ceased / intending to cease to carry on the trade in respect of which he or she was employed; OR

Becoming redundant due to a general reduction in personnel Did the employee at any time hold ≥ 5% of the share

capital/ members’ interest?

Termination of the taxpayer’s employment

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Taxpayer’s own contributions to the fund which were disallowed in terms of sections 11(k) or 11(n)

Divorce order: Amount transferred for the benefit of the taxpayer to another fund as a result of an election by the non-member spouse

Amount transferred for the benefit of any person which is deemed to have accrued to the person on the date of the transfer (from any fund to any fund)

Amount, to the extent that it was paid / transferred to a Pension Preservation Fund or Provident Preservation Fund as an unclaimed benefit, if it was subject to tax prior to that transfer or payment

Other amounts in respect of which formula C applies which have been paid into a fund for the taxpayer’s benefit by a Public Sector Pension Fund less the amount in symbol A in formula C which has not previously been allowed to the taxpayer as a deduction in terms of the Second Schedule in determining the amount to be included in that taxpayer’s gross income

Paragraph 5 deductions

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Taxpayer’s own contributions to the fund which were disallowed in terms of sections 11(k) or 11(n)

Divorce order: Amount transferred for the benefit of the taxpayer to another fund as a result of an election by the non-member spouse

Amount transferred for the benefit of any person which is deemed to have accrued to the person on the date of the transfer (from any fund to any fund)

Amount, to the extent that it was paid / transferred to a Pension Preservation Fund or Provident Preservation Fund as an unclaimed benefit, if it was subject to tax prior to that transfer or payment

Other amounts in respect of which formula C applies which have been paid into a fund for the taxpayer’s benefit by a Public Sector Pension Fund less the amount in symbol A in formula C which has not previously been allowed to the taxpayer as a deduction in terms of the Second Schedule in determining the amount to be included in that taxpayer’s gross income

Paragraph 6 deductions

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RAFPENSION

PROVIDENT

Qualifying Transfer – par 2(1)(b)(iB)

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All lump sums received• Current lump sum or pre-retirement lump sum• Pre-retirement lump sums between 1 March 2009 and

current lump sum• Retirement lump sums between 1 October 2007 and

current lump sum• Severance benefits between 1 March 2011

Step 1Cumulative lump sum

•Most recent lump sum = Retirement lump sum•Retirement lump sum tax tables

•Most recent lump sum = Pre-retirement lump sum

•Pre-retirement lump sum tax tables

Step 2Cumulativ

e tax payable

•Tax on lump sums before current lump sum• The table used is based on nature of

current lump sum

Step 3Tax on

prior lump sums

• Deduct this hypothetical prior year Lump sum tax determined in Step 3 from the cumulative tax in Step 3, and you will get the tax payable on the latest lump sum received.

Step 4Tax on

the current LS

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Test your Knowledge- Silke

Example 12.8 – Lump sum from an employer and a fund combined.

Example 12.10 – Retirement, Pre-retirement and other severance benefits

Comprehensive Examples

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Services are rendered by the non resident taxpayer within and out of the Republic

The amount to be included in Gross Income of the taxpayer, must be apportioned. The net SA Lump sum paid out to the NR taxpayer (after par 5/6 deductions), is apportioned as follows:

Net lump sum x period of service within SA total period of service inside and

outside SA= the amount included per Gross Income

The amount to be included in Gross Income above, must then be taken out to be taxed separately as per the respective tax tables, depending on the latest event.

Lump sums received by Non Residents

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Public Sector Pension Funds (PSPF) The Bigger picture

Taxable portion

Attributable to pensionable service after 1 March 1998

Reduced by deductions available for private funds (paragraph 5 or

6 of the Second Schedule)

Paragraph (e) of the gross income definition

Tax-free portion

Attributable to

pensionable service prior

to 1 March

1998

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A = B x D C

A = Taxable lump sum subjected to the 2nd schedule (paragraph 5 and 6 deductions still applicable after this amount is determined)

B = number of completed years after 1 March 1998

C = the total number of completed years of employment

D = Actual lump sum benefit received

CalculationFormula C

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Transfers from a PSPF to a Provident fund

Inclusion in GI in the year of transfer = ⅔ Amount transferred from a PSPF to any provident fund

Transfer is not treated as a Lump Sum, and therefore, qualify for any deductions ito par 5/6

Amounts “remuneration” for employees’ tax purposes

No amount is actually paid to the employee when an amount is transferred / when a fund is converted

Inclusions in gross income – par (eA)

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Changes in taxing RB (s10C)1.S10C effective from 1 March 2014 for

compulsory annuities2.Previously, all annuity income received

as a result was taxed in full, and no deductions were offset against this income received.

3.S10C now allows for the non-deductible portions of the contributions once made toward these funds by the taxpayer, as a deduction against this annuity income received.

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Changes in taxing RB1.S10C effective from 1 March 2014 for

compulsory annuities2.Previously, all annuity income received

as a result was taxed in full, and no deductions were offset against this income received.

3.S10C now allows for the non-deductible portions of the contributions once made toward these funds by the taxpayer, as a deduction against this annuity income received.

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RETIREMENT (FUTURE)• All contributions deductible –

27.5% (Remuneration or Taxable Income)

• Capped at R350 000• Disallowed contributions carried

forward

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RETIREMENT (FUTURE)• Contributions to provident funds• Annuity for provident funds• 55 years and over

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END. QUESTIONS?