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Revealed: The tax benefits of lump sum payments

by , 28 January 2014
This week, the spotlight is on lump sum payments. Read on as we tell you about tax advantages of these payments.

In this article, we told you what lump sum payments are. Now we're going to tell you about the tax benefits.

Tax benefits of lump sum payments

  • Lump sum payments enjoy special treatment, exemptions and deductions.
  • If you're an employer or retirement funding company, you must submit application forms (selected according to the nature of the lump sum) to SARS before paying the lump sums. You can find these forms on the SARS website.
  • Lump sum benefits aren't subject to Standard Income Tax on Employees (SITE). You must reflect the tax you deduct as Pay As You Earn (PAYE) on the IRP5 certificates.
  • When you receive a gratuity on retrenchment you're entitled to the R30 000 exemption irrespective of your age.
  • When you receive a gratuity on resignation or retirement  you're entitled to the R30 000 exemption in the following circumstances:
  1. You're 55 years or older
  2. You retire due to ill health
  • The Practical Tax Loose Leaf Service explains that you're not entitled to the R30 000 exemption on the grounds that you were retrenched if you were a director of the company concerned and you, at any time, held more than 5% of the issued share capital or member's interest in the company or CC.
  • You're only allowed the R30 000 exemption once in a lifetime.
  • When you resign from a pension fund, provident fund, you can either transfer amounts to another approved fund or withdraw the full amount.
  • When you withdraw from a retirement fund, the first R22 500 is tax-free. This is a life-time exemption and doesn't apply per withdrawal.
  • When you retire or die, the first R300 000 of your lump sum is exempt from tax, unless you've withdrawn prior to this, effectively reducing the exemption to R22 500. If you withdraw from your retirement fund before retirement, you'll pay more tax.
  • If you retire from the public sector, a part of your lump sum will be fully exempt, while the other part will attract tax.
  • Antedated 'gratuities' don't qualify for the R30 000 exemption. But, they do qualify to be taxed at a rating amount if you meet certain requirements in terms of Section 7A (4A) of the Income Tax Act.

If you want more information on lump sum payments, click here.

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