On the lump sum taken at retirement , should the employee portion of contributions towards the Provident Fund be excluded and not being taxed?
Important:
This answer is based on tax law for the tax year ending 28 February 2017.
Answer:
You have not given any indication of what the grounds of the assessment, the grounds of the objection or the basis for the disallowance of the objection was. We accept that the retirement date was before 1 March 2016.
We agree with your view that, under paragraph 5(1)(a) of the Second Schedule to the Income Tax Act, the person’s own contributions (you refer to employee portion) that did not rank for a deduction against the person’s income in terms of section 11(k) or (n) to any provident fund of which he or she previously was a member can be deducted against the lump sum on retirement. It doesn’t increase the R500 000, but reduces the lump sum.
The transfer on the change from a provident fund to a pension fund (by the employer) would have been a paragraph 2(1)(b)((iB) transfer, but would have qualified for the paragraph 6(1)(b)(v) deduction. It is then possible that SARS’s view is that the amount of the transfer has previously been allowed to the person as a deduction in terms of the Schedule in determining any amount to be included in that person’s gross income.