The Second Schedule to the Income Tax Act, No 58 of 1962 (Act) (Second Schedule), deals with the computation of gross income that a person receives by way of lump sum benefits. On 23 May 2017, the South African Revenue Service (SARS) released Issue Two of Binding General Ruling 31 (BGR 31), with the intention of providing clarity as to when an amount constitutes interest, as opposed to forming part of the lump sum benefit, for purposes of the Second Schedule. 

BGR 31 states that different practices currently exist in the retirement fund industry relating to the late payment of a lump sum benefit. Some fund administrators include this amount to form part of the lump sum benefit payable to a member, whereas other administrators pay the amount separately to the member as interest.

Legal framework

In terms of paragraph 1 of the Second Schedule, a “lump sum benefit” includes the following:

  • any amount determined in respect of the conversion of an annuity or portion of an annuity payable by or provided in consequence of membership or past membership of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund; and
  • any fixed or ascertainable amount (other than an annuity) payable by or provided in consequence of membership or past membership of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund.

The above amounts will constitute a lump sum benefit whether paid in one amount or in instalments, but does not include any amount deemed to be income accrued to a person in terms of s7(11) of the Act. Section 7(11) relates to amounts paid out of the fund to the person’s spouse on divorce.

Lump sum benefits can take the form of a retirement fund lump sum benefit (retirement benefit) or a retirement fund lump sum withdrawal benefit (withdrawal benefit). Separate tax rates apply to amounts received as retirement benefits and amounts received as withdrawal benefits. In terms of s1 of the Act, any retirement benefit or withdrawal benefit must be included in a person’s gross income, in terms of paragraph (e) of the “gross income” definition. Paragraph 2(1)(b) of the Second Schedule states that a withdrawal benefit includes, among others, any amount that is transferred for the benefit of a person to any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund from any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund of which that person is or previously was a member. In terms of paragraph 2(2) of the Second Schedule, the amount transferred is deemed to accrue on the date of its transfer.

However, retirement benefits and withdrawal benefits are taxed at a lower rate than the rates that apply to a person’s normal taxable income. For example, for the 2018 year of assessment, any withdrawal benefits between R25,000 and R660,000 are taxed at 18% whereas the portion of any retirement benefit up to R500,000, is not subject to any tax. On the other hand, any income that forms part of a person’s taxable income is subject to higher rates. For example, for the 2018 year of assessment, if a person’s taxable income is R500,000, she will pay R97,225 plus 36% on the difference between R500,000 and R410,460.

In terms of s10(1)(i) of the Act, R23,800 of the interest received from a South African source by a natural person under the age of 65, is exempt from income tax. If the person is older than 65, R34,500 of the interest received will be exempt. Any interest received during a year of assessment in excess of these amounts, is subject to income tax at the normal rates that apply to taxable income.

Ruling

BGR 31 states that interest on the late payment of benefits is any interest that is defined, as such, in terms of the rules of the fund. Any interest that increases a fund’s benefit liability does not form a separate component from the benefit that is payable to the member and will be subject to tax under the provisions of the Second Schedule. Where an amount is transferred from one fund to another, the full amount (including fund growth) is considered to be a lump sum benefit and will be subject to the provisions of the Second Schedule. Interest that arises as a result of late payment of the benefit and therefore in addition to the benefit liability must be reflected separately and an IT3(b) certificate must be issued and submitted to SARS as per the prescribed processes.

Comment

The effect of BGR 31 is that where a person receives a portion of their lump sum benefit late, there will no longer be a risk that the fund administrator will treat the amount as interest, which will be taxed as taxable income instead of being taxed as a withdrawal benefit or a retirement benefit. This is to the benefit of individuals as any interest that a taxpayer receives due to late payment will be subject to a lower tax rate and BGR 31 should therefore be welcomed