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Retirement lump sum benefit tax: where there was a withdrawal from a pension preservation fund

27 March 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

The answer to this query is based on legislation as at 2014/03/27.

Q: I have a question regarding retirement lump sum benefit tax as well as withdrawal lump sum benefit tax.

I know that withdrawal from a pension preservation fund prior to retirement will be taxed according to the withdrawal lump sum benefits tax tables, according to which the first R25 000 is tax free and or everything over R990 000 gets taxed at 36%. My question is however regarding the retirement lump sum benefit tax in a scenario where a client previously had a withdrawal from a pension preservation fund and was taxed according to the withdrawal lump sum benefits tax tables, as previously explained.

The question is, should this amount that was previously withdrawn, and taxed, be added to the tax calculations in the scenario where he later on retires from his pension fund and receives 0% - 1/3rd retirement lump sum benefit? In other words, to calculate the tax on the on the 1/3rd retirement lump sum benefit, one add the previous withdrawal lump sum to the retirement lump sum, calculate the tax according to the retirement lump sum benefits table according to which the first R500 000 is tax free and everything above R1 050 000 gets taxed at 36% and then deduct the tax that the person previously paid on the withdrawal lump sum benefit? To try and make myself clear I thought to give an example depicting the two scenarios. 

 

A: CALCULATION OF TAX ON A RETIREMENT LUMP SUM: In calculating the rate of tax on a RLB (Retirement Lumpsum Benefits) the following process should be applied:

(1) calculate the tax (hypothetical amount) on the aggregate of the RLB received or accrued in the current tax year, the RLWB received or accrued on or after 1 March 2009 and RLB received or accrued on or after 1 October 2007 (severance benefits received or accrued on or after 1 March 2011 are included in the aggregate calculation),

(2) calculate the tax on the aggregate of the amounts as above but excluding the RLB received or accrued in the current tax year,

(3) the difference between the two tax amounts is the tax levied on the RLB received or accrued in the current tax year. In your example below, the hypothetical amount of tax already paid on past lump sums should be deducted from the amount of tax payable on all lump sum amounts. The hypothetical amount is the amount of tax calculated by using the tax tables in the year of retirement and not the actual tax paid on past lump sums.

Also consider whether your client received any "severance benefits” on retirement or in the past.



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