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MODULE 13: RETIREMENT BENEFITS (Definitions s1 (provident fund, provident…
MODULE 13: RETIREMENT BENEFITS
2nd schedule, Silke Chapter 9
How funds work
the fund makes investments using the contributions
benefits are paid out to member as a result of
divorce
retirement
death
withdrawal
NOT an exhaustive list
members pay over contributions to the fund
Overview
Provident fund
e.g. Minemakers provident fund
total value given as lump sum on retirement until 28/2/2018
from 1/3/2018: 1/3 lump sum and 2/3 annuity
condition of employment
(*) Retirement Annuity fund
e,g, Liberty, Sanlam, Allan Gray
1/3 lump sum and 2/3 annuity
independent and NOT a condition of employment
(*)Pension fund
e.g. GEPF, Eskom PF
1/3 lump sum and 2/3 annuity
condition of employment
(*) where the member is deceased, the full amount can be taken as a lump sum - pension fund, pension preservation fund, retirement annuity fund def (s1)
Types of lump sums
Lump sum received
lump sum from an employer
Restraint of trade received
cB
amount received from an employer on termination of employment to NOT undertake/engage in certain occupation/trade/employment for a defined period of time
capital in nature
amount R/A to natural person
but taxed in gross income as a special inclusion ito par cA/cB
NOT a lump sum for these purposes and is taxed in full in the hands of the individual who received the payment
N.B! s11 (cA) deduction
cA
labour broker,personal services provider
Compensation of loss of office
par d
iro the relinquishment/termination/loss/repudiation/cancellation/variation
of any office or employment AND
by an employee/dependent/nominee of employee
amount received from employer OR
any amount (excl annuities), including voluntary award received/accrued
policy of insurance (not from funds)
Commutation of amounts due
par f
in commutation of amounts due under any
contract of employment or service
received or accrued
commutation = substitution or conversion
any amount
e.g. paying out amount instead of providing notice period on termination of services by emplyer
lump sum from a fund
par (e) of the GI s1 def
retirement fund lump sum benefits
loss of office or employment
commutation of annuity
retirement/death
page 360
tax
amount to be taxed
EQUALS inclusion in GI ito par (e)
amount received from fund
N.B! deductions ito par 5 may NOT exceed the amount of the lump sum benefit iro which it is allowable as a deduction
cannot create a loss in GI
par 5 deductions
divorce order
TP own contributions to the fund which were disallowed ito s11F
for ALL: only allowed as a deduction if NOT exempt under s10C or NOT previously deducted per 2nd schedule
N.B! lump sum received (actual) LESS deductions permitted per par 5/6 = Taxable portion of lump sum in GI
therefore, the NET PORTION is the amount included in GI and NOT the actual lump sum received
LESS deductions ito par 5
retirement fund lump sum withdrawal benefit
divorce
withdrawal
transfer between funds
page 360
amount to be taxed
EQUALS inclusion in GI ito par (e)
N.B! deductions ito par 6 may NOT exceed the amount of the lump sum benefit iro which it is allowable as a deduction
LESS deductions ito par 6
cannot create a loss in GI
amount received
par 6 deductions
N.B! type of event is important
retire par 1 of 2nd schedule def
become entitled to annuity/lump sum benefit received
on retirement date
TP retires when he/she dies OR
reaches the normal retirement age
s1 def
RAF/Pension/Provident preservation
member attains 55 years of age
Any fund
member becomes permanently incapable of carrying on his occupation due to sickness/accident/injury/incapacity through infirmity of mind or body
Pension/provident fund
member becomes entitled to retire from employment for reasons OTHER than sickness/accident/injury/incapacity through infirmity of mind or body
par 4
Timing
any lump sun benefit shall be deemed to have accrued to a person who is a member
at the EARLIEST of the date
an amount is deducted from the benefit ito s37D of the Pension Funds Act e.g. housing loans, insurance, etc
when the benefit is transferred to another retirement fund
election is made for the amount to be paid
of the death of the member
par 4(2)
ignore
Other Provisions
par 5(3), 6(3)
par 4(3)
par 4(2)bis
Cumulative tax
STEPS
2) Tax table applicable
3) Tax on prior lump sums
1) Cumulative lump sum
4) Tax on current lump sum
slides 46-50
Source of pension received
Resident
include 100% of foreign pension in GI
exempt non-SA portion s10(1)(gC)
amount R/A under the social security system of foreign country
YES
FULL exemption
portion of the pension amount R/A from a source outside SA relate to services rendered outside SA
YES
pension received x (years out of SA/total years worked in lifetime)
Non-resident
inclusion in GI as per s9(2)(i)
the net SA lump sum paid out to the non-resident TP (AFTER par 5/6 deductions) is apportioned as follows
net lump sum x (period of service within SA/ total period of service inside and outside SA)
then the amount to be included in GI of the TP must be apportioned per s9(2)(i)
the amount to be included in GI above, must then be taken out to be taxed separately as per the respective tax tables, depending on the latest event
where services are rendered by the non-resident TP within and out of the Republic
Types of Retirement funds
Retirement annuity fund
set up by an administrator/insurer for the benefit of individual investors
taken out in the name of individual member
encourages members to save further amounts for retirement, over and above contributions to an employer pension/provident fund
NO employer-employee relationship is required
Umbrella funds
pension/provident funds operated with members from multiple employers
offer solutions to smaller employers
Provident fund
set up by employer for the benefit of its employees
objective
provide cash lump sum benefits for the members upon retirement OR
provide lump sum benefits for the dependents upon death
Preservation funds
member can make 1 withdrawal before the remaining funds are held in the preservation fund until they reach retirement age
only 2 types
pension preservation fund
provident preservation funds
when members leave a retirement fund before retirement date, their contributions can be transferred to a preservation fund
Pension fund
objectives
provide annuities/pensions for the employees upon retirement OR
provide lump sum benefits for the dependents of members upon death
set up by employer for the benefit of its employees
Definitions s1
provident fund
provident preservation fund
pension preservation fund
retirement annuity fund
pension fund
retirement date
living annuity
retirement interest
normal retirement age
Lump sums vs Annuity
employee can choose
lump sum paid out once-off (up to 1/3 for pension and RAF, 2/3 used to purchase annuity)[2nd schedule]
annuity (incl a living annuity)
gross income def par (a)
KBI v Hogan
fixed amount
repetitive
ito a contract (chargeable)
Tax consequences
Employer deductions
s11(l) deduction
Fringe benefit for employee
employer contributions par 2(l) and 12D of 7th Schedule
Contributions
no distinction in tax treatment between funds
employee and employer contributions (where employer contributions are taxed as a fringe benefit)
s11F deduction (Module 11)
Retirement
lump sum from fund (retirement or withdrawal)
taxed per 2nd schedule
lump sum from employer (severance benefit)
Severance benefit definition
taxed using a separate tax table
2nd schedule does not apply to severance benefits
because paid by the employer and not the person's retirement fund
s1 definition
included
the relinquishment/termination/loss/repudiation/cancellation/variation
of any office or employment of any appointment AND
any amount, R/A, iro
a) > 55 years or older OR
c) termination due to
redundant (general reduction of employees)
UNLESS held >5% of the shares in the company
employer ceasing to carry out trade fro which the taxpayer was employed for OR
b) employee suffers from ill health/incapable/infirmity of holding office OR
excludes
lump sums under par (d)(ii) or (iii)
if met
treated as a lump sum and taxed using a separate tax table
page 367 or slide 17 for table
What about these payments from an employer?
par d
amounts received to induce early resignation, voluntary redundancy
par d
amounts received to surrender rights to directorship
par d
unexpired portion of an employee's contract paid out due to breach of contract
par f
amounts received now to accept a smaller salary in future
par f
leave days paid out in cash
Public Sector Pension Funds (PSPF)
Rationale for retirement funds
South African Funds are governed by the Pension Funds Act
each fund has rules that need to comply with the Pension Funds Act
investing for retirement
regulated by the Financial Services Board (FSB
plan for old age
Employees' Tax integration
CGT integration
Death and funds
par 3, 3A
Exam technique
EQUALS taxable income
Normal tax liability
will include tax on lump sums
LESS taxed based on separate tax table
Working 1
LESS deduction per par 5/6
EQUALS net lump sum
lump sum
Tax on lump sum (per table) does NOT exceed R500 000
retirement lump sum from fund - par (e) special inclusion in GI (working 1)