Investment Newsletter (and related info) 03/2010

• taxation of retirement fund lump sums
• why a will is needed
• absa home employees provident fund
• money market instruments

TAXATION OF RETIREMENT FUND LUMP SUM PAYMENTS

Certain lump sum payments received on termination of service, qualify for taxation at the average rate of tax.  The average rate of tax to be used in determining the tax liability on the lump sum will be the higher of the average rate of tax in respect of taxable income (excluding the lump sum) accrued in the current and preceding years of assessment.

Lump sum payments received by the taxpayer from his employer by way of bonus, gratuity or compensation upon either reaching the age of 55, retirement due to superannuating, ill health or other infirmity are tax free to a maximum or R30 000 over the lifetime of the taxpayer.

Furthermore, all employees who lose their jobs as a result of either the employer ceasing to operate or because of a general reduction of personnel, will qualify for the R30 000 tax free concession regardless of age.  This exemption will however not apply to any present of past director of the employer company nor to any shareholder who holds or held more than 5% of a company’s shares.

Lump sums paid by the employer as a result of the death of any person that arises out of the course of the employment of that person, may qualify for an exemption up to the amount of R300 000.  The exempt amount must be reduced with the portion of a lump sum that qualified for the R30 000 exemption, as mentioned in the prior paragraph.

Read more on: Taxation of Lump Sums

Planning for the worst

Death is a certain event – plan for it

• Rich or poor, you should draw up a will to ensure the assets you’ve accumulated over a life-time go to your intended beneficiaries. “A will is not only an instrument of high net worth individuals,” says McPherson. People should be encouraged to draw up wills to reduce the administrative burden caused by intestate estates. Clear instructions on how to deal with your assets in the event of your death eliminate the chance of these assets ending up in the state-run Guardian’s Fund. Wills also make it easier for trustees to distribute death benefits in terms of Section 37C of the Pension Funds Act!
• If you are one of the thousands of South Africans relying on do-it-yourself wills you should reconsider. A poorly prepared will can be declared invalid, in which case your estate will be divided up according to the law of intestate succession! (Courtesy: FAnews Editor)

For more info on the Key Aspects of a Will

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absa home employees provident fund

Employer of Home Employee(s) (Domestic Worker)?

This unique Provident Fund from Absa offers Home Employees (Domestic Workers): Retirement, Withdrawal, Disability and Funeral Benefits in one package

• Retain your valuable employee
  Employee benefits minimize the risk of losing valuable employees. You can be assured of keeping your employees and being able to offer an attractive, competitive package to new employees.
• Tax
  The employer's contribution to the fund is tax deductible to a maximum of 20% of the total salary roll.
• Peace of mind
  The responsibilities of the employer in respect of his employees at retirement and unforeseen death or disablement are automatically reduced as this is now taken care of by a tailor-made specialist fund.
• Transferable benefits
  The accumulated benefits of members are transferable between employers, or to another approved fund.
• Ease of payment
  Contributions are levied monthly in advance, and to make life easier for you, these are done by debit order. The single contribution covers all the benefits of the fund, including those offered through the separate group schemes.

Click to learn more about absa domestic workers provident fund

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MONEY MARKET INSTRUMENTS

Fund versus account

The first step is to understand the fundamental difference between a money market fund (unit trust) and the money market accounts offered by a bank. Money market funds (or unit trusts) pool investors’ money, which is then managed by fund managers to purchase a mix of money market instruments. Money market instruments include banker’s acceptances, commercial paper, negotiable certificates of deposit and government bills. “If you delve deep into the holdings of the various funds, you will find that the assets in money market fund portfolios are mainly spread across the biggest banking institutions in the country, providing you with the protection that comes with diversification,” said Peter Dempsey, deputy chief executive, ASISA. True money market funds are regulated and afford investors certain legal protections. Investments in money market funds are also held in trust by appointed trustees.

The Collective Investment Schemes Control Act (Cisca) lays out strict rules to ensure liquidity in the money market space. These include that assets of money market funds may not be invested in money market instruments with a maturity of more than 12 months, that the average maturity of instruments held by the fund as a whole may not exceed 90 days, and fund mangers being restricted in terms of how much money they loan to institutions. The closer a fund is to a 90-day average maturity, the less liquid it becomes.

A money market account typically invests in instruments issued by a single bank and is treated like a bank account. The bank will use the funds in this account to purchase various money market instruments, but unlike a money market fund, the assets in a money market account form part of the balance sheet of the bank in question. If the bank goes under the money market account funds could be affected. (Courtesy: FAnews Editor)