Two Bills have recently been published in their final form, giving effect to the amendments announced in the Budget Speech last February. The most significant amendments relate to the decision to simplify the calculation of the taxable portion of lump sums from pension, provident and retirement annuity funds, and to reduce the tax burden on such sums. Most of the other amendments consist of minor changes to wording in several sections of and Schedules to the Act.
Retirement Lump Sums
The calculation of the taxable portion of lump sums from funds on retirement has been simplified and amended so that they are taxed less heavily than has hitherto been the case. Members of pension and retirement funds are legally entitled to withdraw up to one third of the amounts standing to their credit when they retire. Provident fund members receive the whole amount due to them by the fund. In the past the taxable portion of lump sums from funds was determined by two linked formulas, A and B in the Second Schedule to the Act, which were both complicated and often unfair to taxpayers at the lower end of the economic spectrum. The amendments address these two shortcomings.
The starting point for the amendments is the introduction of a definition of "retirement fund lump sum benefit" in section 1 of the Income Tax Act 58 of 1962 ("the Act"), being the aggregate of the amounts received by or accrued to any person during the year by way of lump sum benefits derived in consequence of or following upon retirement or death, less allowable deductions
A person will still be able to commute one third of any lump sum and then use the balance to purchase an annuity. However, it has been found that, where the balance is less than R50 000, the cost of administration makes it uneconomical to invest such a sum in an annuity, as R50 000 buys an annuity of only R4 500 per annum. Consequently it is now provided that, where the balance after commuting one third does not exceed R50 000, it may be paid out in full. What this amounts to is that a person whose balance in a fund does not exceed R75 000 may withdraw the entire amount. This amendment has been achieved by changing the definitions of "pension fund" and "retirement annuity fund" in section 1.
Under the new dispensation, where the sum in the fund exceeds R75 000, all retirees will still be entitled to make the one third commutation, of which a lifetime aggregate of R300 000 will be exempt from tax. The next R300 000 will be taxed at 18% the next R300 000 at 27% and the balance at 36%. Neither the tax rebates for natural persons nor any assessed loss may be taken into account in calculating the tax payable on such sums. Moreover, where the person earned less than the tax threshold in the preceding year, no tax will be deducted from the lump sum.
During the past couple of years the long term insurance industry has come under fire and suffered several adverse decisions by the funds adjudicator with regard to punitive charges imposed when members withdraw prematurely from funds. In addition, it has come to light that certain fund administrators have been bulking the balances in the bank accounts of the funds under their care and using the larger balances to extract better rates of interest from their bankers. Contrary to the legislation, they have appropriated the excess interest for themselves instead of passing it on to the fund members. This led to negotiations and agreements between the authorities and the administrators and insurance funds in terms of which the funds agreed to return substantial sums to the members. These payments have been defined as extraordinary lump sum payments and are exempt from tax in terms of paragraph 2C of the Second Schedule to the Act, which identifies three categories of such payments:
- the reimbursement, in terms of an agreement between the Minister of Finance and the long-term insurance industry; of excessive penalties imposed on persons who withdrew prematurely from retirement annuity funds;
- amounts awarded as part of retirement fund surpluses; and
- amounts awarded to members or former members of retirement funds as a share in the profits made by fund administrators from bulking bank balances.
Donations made to or for the benefit of any traditional council, traditional community or tribe as defined in the Traditional Leadership and Governance Framework Act are exempt from donations tax in terms of section 56(1)(f). Such entities are themselves exempt from tax under section 10(1)(t)(vii).
Farmers who are natural persons are entitled to apply the rate of tax applicable to the average of their income for the past five years to the actual income from farming for the current year. Where a person commences farming activities, the average income obviously cannot be determined on this basis until five years have elapsed. The First Schedule provides a somewhat clumsy method of arriving at a deemed average income for the initial period. This has been simplified so that the average income for such a farmer is now two thirds of the actual income.
Amongst the tests to determine whether or not an independent contractor is an employee for the purposes of deducting employees’ tax is whether the employer exercises control and supervision over the contractor as to the manner in which the duties are performed. This test will now apply only if the services are rendered on the customer’s premises.
Moreover, if the contractor throughout the year of assessment employees three or more full time employees, who are not connected persons in relation to the contractor and who are on a full time basis engaged in the business, the contractor will be deemed to be independent. Previously the qualifying number was four such employees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.