A matter of interest: Recent SARS ruling regarding interest on late payment of benefits

Author: Louis Botha (CDH)

The Second Schedule to the Income Tax Act, No 58 of 1962 (Act) (Second Schedule), deals with the computation of gross income that a person receives by way of lump sum benefits. On 23 May 2017, the South African Revenue Service (SARS) released Issue Two of Binding General Ruling 31 (BGR 31), with the intention of providing clarity as to when an amount constitutes interest, as opposed to forming part of the lump sum benefit, for purposes of the Second Schedule. 

BGR 31 states that different practices currently exist in the retirement fund industry relating to the late payment of a lump sum benefit. Some fund administrators include this amount to form part of the lump sum benefit payable to a member, whereas other administrators pay the amount separately to the member as interest.

Legal framework

In terms of paragraph 1 of the Second Schedule, a “lump sum benefit” includes the following:

• any amount determined in respect of the conversion of an annuity or portion of an annuity payable by or provided in consequence of membership or past membership of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund; and
• any fixed or ascertainable amount (other than an annuity) payable by or provided in consequence of membership or past membership of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.

The above amounts will constitute a lump sum benefit whether paid in one amount or in installments, but does not include any amount deemed to be income accrued to a person in terms of s7(11) of the Act. Section 7(11) relates to amounts paid out of the fund to the person’s spouse on divorce.

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This article first appeared on cliffedekkerhofmeyr.com.