TAXATION OF RETIREMENT FUND LUMP SUM PAYMENTS
Home > Preservation FundsTAXATION OF 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 R315 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.
Lump sum benefits payable by approved funds are aggregated for tax purposes and subject to tax as detailed below.
Retirement or Death
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. This amount is subject to tax at the following rates less any tax previously paid:
Taxable amount |
Tax Liability |
Up to R315 000 |
0% |
R315 001 – R 630 00 |
18% x taxable amount in excess of R315 000 |
R630 001 - R945 000 |
R56 700 + 27% x taxable amount exceeding R630 000 |
R945 001and above |
R141 750 + 36% x taxable amount exceeding R945 000 |
The taxable lump sum cannot be set-off against any assessed loss of the taxpayer.
On Withdrawal from the Fund
As from 1 March 2009, the taxable portion of a pre-retirement lump sum from a pension or provident fund is the withdrawal 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:
Lump Sum |
Tax Liability |
R0 - R22 500 |
0% |
R22 501 – R 600 000 |
18% of the amount exceeding R 22 500 |
R600 001 - R900 000 |
R103 950 + 27% of the amount exceeding R600 000 |
R900 001 and above |
R184 950 + 36% of the amount exceeding R900 000 |
In all cases, the tax-free portions from either a pension, provident or retirement annuity fund will not be less than the lesser of the lump sum benefit or any contributions made to the fund by the member which were not previously allowed as deductions.
The retirement and death table and withdrawal table must be viewed cumulatively taking into account previous retirement and withdrawal benefits for purposes of applying the tables.
New Proposed Rules on Withdrawal of Pension, Provident Funds, Preservations Funds is NOT YET being applied by SARS.
Commutation of Small Annuities
It confirms that not more than one-third of a member's interest in the fund may be commuted for a single payment unless the full benefit that a member of a pension fund, pension preservation fund or retirement annuity fund becomes entitled to in that fund does not exceed R75 000 in which even the total retirement interest may be commuted.
SARS Revenue Practice Notes applicable to retirement funds (GN 16)
Date of issue of addendum: 30 March 2010
Disclaimer: Please note that the content above is for general information purposes only and is not indented to be legal and/or financial advice.
Information contained herein should not be acted upon without further consultation with your professional legal and/or financial adviser.
