Retirement lump sum tax benefit

Tax-free for former members; taxable for active members upon retirement.

Are you a member or former member of a retirement fund who has received an allocation from an actuarial surplus pertaining to such fund, and not sure what the tax treatment is?

The good news is that if you are a former member of a retirement fund by virtue of you having resigned, been retrenched, or already retired, such payment will be tax-free. According to an Advance Tax Ruling issued by the South African Revenue Service (Sars) on May 12 2009, any lump-sum payment arising from the distribution of an actuarial surplus to former members of the fund will not be included in gross income.

This non-inclusion of the amount in gross income has the effect of making such a payment tax-free, and therefore does not need to be declared on any IRP5 or IT3 certificate.

When completing your tax return, however, it is a good idea to include such a lump sum in the section “”amounts considered non-taxable””, especially if you are required to complete a statement of assets and liabilities. If you do not show this amount, you may end up with an unexplained increase in your net assets, which could trigger an audit. Any refund that may be due to you would be delayed as a consequence of such audit.

The news is however not as good if you are an active member of a retirement fund, and the actuarial surplus is added to your share of fund – this amount, according to the Advanced Tax Ruling, will not be excluded from the gross income under paragraph 2C of the Second Schedule upon your eventual resignation, death, withdrawal or retirement from such fund.

The effect of this statement is that the taxable portion of your lump sum (after taking into account any general exempt amounts) will include the distribution of the actuarial surplus.

However, the position is slightly different if you were a member of a government pension fund prior to January 1 2005. Any lump sum payments relating to service prior to this date remains free of tax, and while the Advance Tax Ruling is silent in this regard, it could be argued that this tax-free concession should apply to any portion of the actuarial surplus that can be attributed to service prior to this date.

TAXtalk: www.taxtalk.co.za.

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