Tax on retrenchment and pension payouts

A Fin24 user is about to be retrenched and is not sure what tax benefits he can use relating to a severance package. He writes:

I am a 62 year old male to be retrenched at the end of August 2014.

Fortunately, I am going to receive a severance package of which I believe the first R500 000 to be tax free.

I intend to pay up three years of my pension fund and only draw off my pension at the age 65.

I believe that the first R500 000 of a pension fund is tax free.

Can I claim this tax benefit on my retrenchment package and then three years later claim the tax benefit on my pension fund?

Can I claim the tax benefit on both?

Pieter Faber, technical executive: tax law at the SA Institute of Tax Professionals (Sait), responds:

The increase in the amount subject to the 0% rate from R315 000 to R500 000, for severance or retirement lump sums was announced in the budget review of 2014.

The fourth schedule to the Income Tax Act allows the commissioner of the SA Revenue Service (Sars) prescribed deduction tables that take cognisance of this change made in the budget review prior to its enactment in parliament.

Accordingly, in respect of first amounts received on or after March 1 2014, which amount received constitutes a “severance benefit” as defined, it will be subject to a progressive tax rate per the deduction tables.

In respect of first amounts received or accrued on or after March 1 2014, the first R500 000 would be subject to 0%.

If this was not the first amount received, then the taxpayer will not benefit fully from the upliftment of the 0% threshold from R315 000 to R500 000.

This is because the “historical” receipts to be deducted from the liability will be calculated not in accordance with the actual tax paid, but what the tax would have been under the new schedule.
In respect of the taxation of the retirement lump sum benefit received thereafter, the amount of the severance benefit received will be added to the “total lump sum benefits" received for the purposes of calculating the tax.

In this respect you would not again benefit from the R500 000 at 0% as you would have, in terms of the calculation, already received the benefit of the R500 000.

The total severance previously received will be, therefore, added to the retirement lump sum in calculating the tax in terms of the progressive rates.

It will be reduced by the tax on previously received retirement or severance amounts as calculated in terms of the same schedule.    
For example, if you received a R1m severance on or after March 1 2014, tax would be payable on the amounts in excess of R500 000 on the progressive severance benefit scale.

When you receive another R2m pension retirement lump sum, the tax would be determined in terms of the retirement lump sum progressive scale by adding the R1m and R2m.

From this amount of tax would be deducted the amount of tax that would apply to the aggregate of all previously received lump sums or severance as calculated in terms of the scale.

The remaining amount would be the tax liability.

- Fin24

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