[FAQ] Retirement lump sums and the applicable tax rates


There was a retirement fund contribution amount carried forward per the taxpayer’s 2019 income tax assessment. But on assessment SARS utilized the full 2019 carried forward amount by deducting it from his R500 000 ‘tax free’ portion upon retirement. On the assessment it is reflected as “Directive on deduction”.


The Income Tax Act

The amount of R500 000 that you refer to is not a ‘tax free’ amount but is the portion of the retirement lump sum benefit taken, after the election was made by the member, that is taxed at 0%. This is a cumulative amount and the 0% rate is available to the extent the taxpayer has not previously taken a retirement fund lump sum withdrawal benefit or received a severance benefit.

In any event, the amount of the retirement fund lump sum benefit that must be included in gross income, under paragraph (e) of the definition in section 1(1), is the amount received by or accrued to that person by way of a lump sum benefit derived in consequence of or following upon his or her retirement (paragraph 2(1)(a)(i) of the Second Schedule) less any deduction permitted under the provisions of paragraph 5 or 6.

Application of the principles

In this instance it is paragraph 5 of the Second Schedule that provides for the deduction to be allowed for the purposes of paragraph 2(1)(a) – it is an amount equal to so much of the person's own contributions that did not rank for a deduction against the person's income in terms of section 11F to any pension fund, pension preservation fund, provident fund, provident preservation fund and retirement annuity fund of which he or she is or previously was a member (Paragraph 5(1)(a) of the Second Schedule).

The rates, according to the relevant tax table is then allowed to this taxable amount.

Webinar Commentary

Further webinar commentary on An overview of retirement lump sums benefits can be accessed here.

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