As contentious as the issue may be, the reality of life for those retiring or approaching retirement in South Africa is that savings in whatever form, including a retirement fund lump sum and tax-free investments are taxable.
But forewarned is forearmed says Gerhard Linde, senior tax consultant for HR and Human Capital Management (HCM) services provider CRS Technologies.
Linde says it’s always best to start at the beginning, in this case with a clear understanding of concepts and their relevance.
“A person who is or was a member of a retirement fund becomes entitled to a lump sum benefit when his or her membership of that retirement fund terminates. The taxable portion of the lump sum benefit is determined under provisions of the Second Schedule of the Income Tax Act No 58 of 1962, which takes into account certain allowable deductions,” says Linde.
Once determined under the Second Schedule the taxable portion of the lump sum benefit is included in the taxpayer’s gross income and is subject to the rates of tax applicable to lump sum benefits.
A lump sum benefit is any amount payable to a member or former member of a retirement fund in consequence of his or her membership or past membership in that specific retirement fund.
“There are retirement fund lump sum withdrawal benefits that one has to be cognisant of – that is the amount that becomes payable when a member terminates his or her membership in that retirement fund before reaching retirement age – for any reason other than retirement, death or retrenchment,” Linde adds.
Once the taxable portion of a retirement fund lump sum withdrawal benefit has been determined under the Second Schedule of the Act, the tax thereon will be calculated by applying the tax table applicable to retirement fund lump sum withdrawal benefits.
Linde explains that tax relief of R500 000 on retirement lump sum benefits is allocated once in a lifetime – “in other words when it is used up you cannot claim it again. For example, if a person used R300 000 of the R500 000 with the first lump sum, the balance left is R200 000 and once this is used up this relief is not available again.”
Tax Free Investments were introduced as an incentive to encourage household savings and can provide some tax relief on retirement savings by first exploring the tax free investment option.
This incentive is available as of from 1 March 2015.
“The way this works is you don’t have to pay income tax, dividends tax or capital gains tax on the returns from these investments, you can only contribute a maximum of R33 000 per year. Moreover there is a lifetime limit of R500 000 per person … if a person exceeds the limits, there is a 40% penalty of the excess amount.
“The above information merely provides an informative overview on the workings of the discussed topics and should be treated as such, furthermore it should not to be seen as the full extent of the tax consequences of these topics,” Linde adds.
CRS Technologies’ core focus is to introduce solutions that enhance people management in business by guiding decision makers through legislation, regulation, technical requirements and tech innovation that characterise HR and HCM today.