Treatment of lump sum receipts
Retirement Lump sum benefits
Retirement fund lump sum benefits There are two categories of lump sum benefits –
-Retirement fund lump sum benefits; and
-Retirement fund lump sum withdrawal benefits.
A retirement fund lump sum benefit refers to a lump sum from a pension, pension preservation, provident, provident preservation or retirement annuity fund upon either, retirement, death, or termination of employment due to redundancy or an employer ceasing trade. A retirement fund lump sum withdrawal benefit refers to a lump sum from any one of the above mentioned funds which is payable other than as a result of retirement, death, termination of employment or redundancy.
Lump sum benefits must be aggregated – from 1 October 2007 in respect of retirement fund lump sum benefits, and from 1 March 2009 in respect of retirement fund lump sum withdrawal benefits. Once all lump sum benefits are aggregated, the tax due is calculated in accordance with the respective tables below. Tax payable on previous lump sums is deducted from the total tax payable to arrive at the tax payable on the current lump sum.
Retirement Lump sum benefits rates for 2013.
As from 1 October 2007, the taxable portion of a lump sum from a pension, provident or retirement annuity fund on retirement or death is the lump sum less any contributions that have not been allowed as a tax deduction plus the taxable portion of all lump sums previously received. As from 1 March 2011, certain severance benefits are also taxed in terms of this table. This amount is subject to tax at the following rates less any tax previously paid:
Taxable Portion of lump sum
R315 001 – R630 000
18% of the amount over R315 000
R630 001 – R945 000
R 56 700 + 27% of the amount over R630 000
R141 750 + 36% of the amount over R945 000
The taxable lump sum cannot be set-off against any assessed loss of the taxpayer.
Withdrawal Lump sum benefits for 2013
As from 1 March 2009, the taxable portion of a pre-retirement lump sum from a pension or provident fund is the amount withdrawn less any transfer to a new fund plus all withdrawal lump sums previously received. This amount is subject to tax at the following rates less any tax previously paid:
Taxable Portion of withdrawal
R184 950 + 36% of the amount over R900 000
Receipt by employee (taxability)
Any lump sums (other than lump sums from pension, provident or retirement annuity funds) will fall into gross income either in terms of par (c), (d) or (f) of the definition. Where the recipient receives such amounts because of retirement due to ill health, infirmity or superannuation, it will be taxed subject to the provisions of section 10(1)(x), section 7A(4A) and section 5(10). These provisions (paragraphs (c), (d) and (f) of the definition of gross income) thus ensure that any amount received as a consequence of employment will be included in gross income regardless of the fact that such receipt might be of a capital nature. Where a contract of employment was prematurely terminated by agreement and the taxpayer received payment of the amount he would have been entitled to had the contract run it’s course, the amount was held to fall into gross income (ITC 517, 12 SATC 263). The same will apply where the taxpayer is paid in lieu of notice (ITC 63, 2 SA TC 253) or leave (but see the section 10(1)(x) provisions).
(a) Payments for restraint of trade
In terms of para (cA) of the definition of “gross income”, any compensation received by or accrued to a natural person, labour broker or personal service company or trust in respect of a restraint of trade agreement entered into after 23 February 2000, is now included in such person’s “gross income”. Note that paragraph (cA) does not refer and therefore does not apply to a company or close corporation. Prior to that date such compensation was regarded as a receipt of a capital nature in the hands of individuals, trusts and companies. However, section 11(cA) has been introduced and such compensation when included in the abovementioned person’s “gross income” may be
deducted over the number of years in respect of which· the restraint is in force or three years, whichever is the shorter period, by the payer (employer).
(b) Payments on termination of service
Section 10(1)(x) provides for an exemption of R30 000 per taxpayer (in a lifetime) of amounts received under par (d) of the definition of gross income (i.e. lump sums and not annuities) or if the requirements of section 7A(4A) are met. This exemption is applied cumulatively and both husband and wife qualify separately for this exemption. Please read and study paragraph (d) of the definition, section 10(1)(x) and section7A(4A).
In terms of section 7A(4A) such lump sum amount (where certain requirements are met) will be taxed according to the rating formula contained in section 5(10). Please read and study this section. It is the practice of revenue to regard accumulated leave pay paid to a retiring employee as a payment which qualifies for the section 10(1)(x) and section 7A(4A) relief. See also section 5(10)(f) in relation to the average rate of tax to be used for any lump-sum received.
Payment by employer (deductibility)
A deduction may only be claimed in respect of expenses incurred for the purpose of producing income for the employer (section 11(a) – “in the production of income”). Furthermore, there must be a reasonably close connection between the expenditure by the employer and the production of his income but a retired employee does not normally produce income for his ex-employer. See ITC 1326, 43 SA TC 44 . where, in its return of income for the tax year ended 28 February 1975, the appellant, a private company whose sole shareholders and directors were A and B, sought to deduct the sum’ of R9 000 paid out to B as ‘compensation award to retiring director’. The deduction was disallowed. Held that the appellant had failed to discharge the onus of showing that the R9 000 in issue had been paid out in the production of income and that the said sum was, therefore, not deductible. Voluntary awards on retirement of employees do not stand on the same footing as bonuses payable to staff from whom continuing service can be expected. So, where the taxpayer made ex gratia payments to retired employees in recognition of past services, the finding of the court was that the payments were not expenditure in the production of income.
In W F JOHNSTONE CO LTD v CIR, 1951(2) SA 283(AD), 17 SATC 235 . the appellant company had established a superannuation and provident fund for the benefit of its employees in the year 1934. Four employees retired, one was awarded a pension and the other three gratuities were paid on retirement. The resolution of the Board of Directors under which these gratuities were paid recorded that the payments were made “in recognition of services rendered to the company”. The Commissioner for Inland Revenue having disallowed the deduction of these amounts in the determination of the appellant’s taxable income, the company appealed to the Special Court for Hearing Income Tax Appeals. The Special Court dismissed the appeal and confirmed the assessments made by the Commissioner, holding that the payments did not form part of the ordinary operations undertaken by the company for the purpose of conducting its business, nor were they payments made for the purpose of earning income, nor were they payments made wholly and exclusively for the purpose of appellant’s trade.
See also PROVIDER v COT, 17 SATC 40 ,