According to an employee’s tax deduction directive, tax amounting to R1,499,385.66 was deducted from a lump sum benefit of R4,352,460.17 in respect of a living annuity of a deceased member. The nett proceeds were then distributed to the beneficiaries. Are the inheritances received by the beneficiaries further taxed? One of the beneficiaries received R428,712.42 but claims the original lump sum provision was around R560,000 and is seeking tax relief.
Important:
This answer is based on tax law year ending 28 February 2020.
Answer:
The commutation of a living annuity will constitute a lump sum benefit and is deemed to have accrued to the annuitant immediately before the date of death. This applies where the lump sum is taken after death. See paragraph (ii) of the proviso to paragraph 3 of the Second Schedule of the Income Tax Act. The tax tables relevant to lump sums will then apply.
In terms of the proviso to this paragraph, “so much of any tax payable as is due to the provisions of this paragraph may be recovered from the person by whom the lump sum benefit in question is received”. No further normal tax will arise when the executor pays the net amount to the heirs.
It is impossible to comment on the last sentence as we don’t know what the basis of the view is.