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TAX3761 - Exam Notes - Learning Unit 10 - 17 Notes/Summary 2024 CA$20.01   Add to cart
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TAX3761 - Exam Notes - Learning Unit 10 - 17 Notes/Summary 2024
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  • Course
  • Taxation of business activities and Individuals (TAX3761)
  • Institution
  • University Of South Africa (Unisa)
  • Book
  • A Student\'s Approach to Income Tax

TAX3761 - Learning Unit 10 - 17 Notes/Summary Notes and summaries of learning unit 10-17 10 - Individuals : Income and expenses 11 - Fringe Benefits and allowances 12 - Lump sum benefits 13 - Non-residents 14 - Prepaid taxes 15 - Trusts 16 - Donations Tax 17 - Estate duty

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  • September 2, 2024
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,LUMP SUMS (SEVERANCE BENEFITS) RECEIVED FROM AN EMPLOYER (paragraph (d)
and (f) definition of ‘gross income’)



A severance benefit is defined in the Act as

1. the person receiving the lump sum has reached the age of 55 years, or

2. the termination of the person’s employment is basically as a result of their incapacity
to carry on working due to medical reasons, or

3. the termination of the person’s employment is as a result of their employer ceasing to
trade, or because of a reduction in the workforce by the employer (“reduction in the
workforce” condition will not apply if the recipient of the severance benefit held more
than 5% of the share capital in the company employing him).

Where none of the above three conditions apply, a lump sum from an employer will be
included in taxable income and taxed according to the normal tax table.



There are two types of payments by employers which fall into this category.

• Compensation for termination of employment or office: (paragraph d(i)
definition of ‘gross income’ and definition of severance benefits in section
1(1)).
o Lump sum paid by the employer to the employee is included in full in
gross income unless it is a severance benefit.



• Compensation of amounts due (paragraph (f) definition of ‘gross income’).
o Any amount received or accrued in substitution of amounts due under a
contract of employment or service must be included in gross income.

,RETIREMENT FUND LUMP SUM BENEFITS AND TAX CALCULATION (paragraph (e)
definition of ‘gross income’ and paragraphs 2(1)(a) and 5))

it is important to make sure that you check whether the person withdrew or retired from
the fund, as this makes a substantial difference to the calculation of the tax payable.



Where a person receives a retirement fund lump sum as a result of death or, in certain
circumstances, retrenchment, the receipt will be treated in the same way as if the
taxpayer had retired.

There is essentially a four-step process when calculating the tax payable on a lump
sum benefit on retirement (or death or retrenchment):

1. Establish the amount of the lump sum benefit
2. Subtract any allowable deductions in order to determine, the
3. Taxable amount of the benefit and then
4. Refer to the retirement lump sum benefit tax table to determine the tax payable.

The deductions include contributions to various pension, provident and retirement
annuity funds that have not previously been deducted from the taxpayer’s income.
Should there be any contributions disallowed in the current year, they must also be
taken into account as a deduction. Any portion of the benefit that is transferred to
another “approved fund” may also be subtracted.



A member of a retirement annuity fund is not entitled to any benefit before reaching
normal retirement age.



By law, a member of a pension fund and/or a retirement annuity fund can only take up to
one-third of their interest/benefits in the form of a lump sum (except where the total
retirement interest in the fund does not exceed R247 500, in which case the full benefit
can be taken in the form of a lump sum). However, a member of a provident fund could
take their full benefit in the form of a lump sum (irrespective of the value of the full
benefit) up to 1 March 2021.



From 1 March 2021 new members of provident funds will be allowed to receive only
one-third of their interest/benefit as a lump sum and the remaining two-thirds will be
annuitised.

, Example 15.1

R1500 = R500 000 lump sum and the balance of R1000 000 will be used to
purchase a compulsory monthly pension. Lydia will be taxed on the R5000 p/m as it will
be included in her gross income along with any other income she might receive.

Example 15.2

As this fund was provident fund, Pieter may take the full R2750 000 as a lump sum.



Retirement funds will pay lump sums when the following happens:

• Retirement – terms of the rules of the fund person is entitled to a lump sum when
reached the normal retirement age and elected to retire (paragraph 2(1)(a)(i))
• Death (paragraph 2(1)(a)(i))
• Termination or loss of employment due to:
o Employer stopped carrying on the trade.
o Person became redundant (paragraph 2(1)(a)(ii))
• Commutation of an annuity for a lump sum benefit (paragraph 2(1)(a)(iii))
• Transfer on or after normal retirement age but before retirement date (paragraph
2(1)(c))
• Divorce Order (paragraph 2(1)(b)(iA)
• Direct transfer between funds of the same member (paragraph 2(1)(b)(iB))
• Certain other events (paragraph 2(1)(b)(ii)

Date of accrual of benefit:

Lump sum accrues on the earliest of the following dates:

• Date on which an election is made to retire
• Date on which any amount is deducted from the fund for the benefit of a
member’s spouse in terms of a divorce order.
• Date on which the benefit is transferred to another retirement fund
• Date of death of the member

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