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Preserve and beat the taxman

Monday, 23 June 2014   (0 Comments)
Posted by: Author: Laura du Preez
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Author: Laura du Preez (Iol)

You won’t be taxed on a share of a retirement fund awarded to you on divorce after March 1, 2009 if you transfer the money to a retirement fund.

But any amount you take in cash will be taxed as a withdrawal benefit, Kobus Hanekom, the head of strategy, governance and compliance at Simeka Actuaries & Consultants, says.

(The exception to the rule on tax-free transfers to another fund is when money is transferred from a pension fund to a provident fund or provident preservation fund – such transfers are taxed as a withdrawal benefit in your hands.)

If you are wondering whether taking the cash or transferring the money to another fund is more tax-efficient, consider the following example.

A divorced woman receives R600 000 from her ex-husband’s retirement fund in terms of a divorce order. If she transfers the money to a retirement fund and does not make any early (pre-retirement) withdrawals from any fund to which she belongs, she may, on retirement, withdraw the first R500 000 tax-free, while the next R100 000 will be taxed at 18 percent, which amounts to R18 000. This is in terms of the retirement tax table.

But if she takes the entire R600 000 as a cash withdrawal, only the first R25 000 will be tax-free, while the balance of R575 000 will be taxed at 18 percent, which amounts to R103 500. This is in terms of the withdrawal tax table.

Therefore, the price she pays for taking the benefit as cash, as opposed to transferring it to another fund, is R85 500, which is the difference between tax of R103 500 on the pre-retirement cash withdrawal and tax of R18 000 on the withdrawal at retirement (assuming that, in either case, the withdrawal is made in the same tax year). In addition, savings left in a retirement fund earn interest and dividends tax-free.

Remember, too, that the tax (including the tax-free amounts) on retirement fund withdrawals is cumulative. This means that any amount you take as a cash lump sum at divorce will be taken into account when determining the tax on any subsequent withdrawal from a retirement fund. When you finally retire, all the amounts you withdrew from any of the funds to which you belonged will again be taken into account when the tax on your lump-sum retirement benefit is calculated.

If you take a cash withdrawal, the fund will apply to the South African Revenue Service (SARS) for a tax directive. After it has received the directive, the fund will deduct the tax and pay it to SARS before paying the balance to you.

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