Category: Second Schedule – Computation of gross income derived by way of lump sum benefits

“Provident fund” definition of Second Schedule

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“provident fund”, in relation to any person, means –

(a)     a fund which has in respect of the year of assessment in question or any previous year of assessment been approved by the Commissioner as a provident fund as defined in section 1 of this Act or the corresponding provisions of any previous Income Tax Act; or

(b)     a public sector fund, the rules of which provide for benefits in a lump sum exceeding one–third of the capitalised value of all benefits (including lump sum payments and annuities) to its members on retirement,

if during any such year the person was a member of such fund;

“Public sector fund” definition of Second Schedule

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“public sector fund” means a fund referred to in paragraph (a), (b) or (d) of the definition of “pension fund” or paragraph (a), (b) or (c) of the definition of “provident fund” in section 1(1);

[Definition of “public sector fund” inserted by section 91(1)(e) of Act 22 of 2012 and substituted by section 62(1) of Act 15 of 2016 and by section 38(1) of Act 23 of 2020 effective on 1 March, 2021 and applicable in respect of years of assessment commencing on or after that date]

“Retirement annuity fund” definition of Second Schedule

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“retirement annuity fund” in relation to any taxpayer, means a fund which has in respect of the year of assessment in question or any previous year of assessment been approved by the Commissioner as a retirement annuity fund as defined in section 1 of this Act or the corresponding provisions of any previous Income Tax Act, if during any such year the person was a member of such fund.

Paragraph 2 (Second Schedule) – Amount to be included in gross income

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2.

 

(1)     Subject to section 9(2)(i) and paragraphs 2A, 2C and 2D, the amount to be included in the gross income of any person for any year of assessment in terms of paragraph (e) of the definition of “gross income” in section 1 shall be—

 

(a)     any amount received by or accrued to that person by way of a lump sum benefit derived in consequence of or following upon-

 

(i)      his or her retirement or death;

 

(ii)     the termination or loss of his or her employment due to-

 

(AA)  his or her employer having ceased to carry on or intending to cease carrying on the trade in respect of which he or she was employed or appointed; or

 

(BB)  that person having become redundant in consequence of his or her employer having effected a general reduction in personnel or a reduction in personnel of a particular class:

 

Provided that this subitem does not apply to any amount received by or accrued to a person by way of a lump sum where that person’s employer is a company and that person at any time held more than five per cent of the equity shares or members’ interest in that company; or

 

(iii)     the commutation of an annuity or portion of an annuity,

 

less any deduction permitted under the provisions of paragraph 5 or 6;

[Words following subitem (iii) substituted by section 80 of Act 7 of 2010 and amended by section 62 of Act 17 of 2017 effective on 1 March 2018, applies in respect of years of assessment commencing on or after that date]

 

(b)     any amount –

 

(iA)   assigned in terms of a divorce order granted on or after 13 September 2007 under section 7(8)(a) of the Divorce Act, 1979 (Act No. 70 of 1979), to the extent that the amount so assigned-

 

(aa)   constitutes a part of a pension interest, as defined in section 1 of the Divorce Act, 1979 (Act No. 70 of 1979), of a member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund; and

 

(bb)   is due and payable on or after 1 March 2012 to a person who is the former spouse of that member by that pension fund, pension preservation fund, provident fund or provident preservation fund or retirement annuity fund;

 

(iB)    that is transferred for the benefit of that 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; and

 

(ii)     other than an amount contemplated in item (a) or subitem (iA) or (iB), received by or accrued to that person by way of a lump sum benefit from or in consequence of membership or past membership of any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund,

 

less any deduction permitted under paragraph 6;

[Item (b) amended by section 62(1) of Act 17 of 2017 and by section 3(1)(a) of Act 12 of 2024 effective on 1 September, 2024 and applicable in respect of years of assessment commencing on or after that date]

 

(c)     any amount transferred for the benefit of that person on or after normal retirement age, as defined in the rules of the fund, but before retirement date, less any deductions permitted under the provisions of paragraph 6A; and

[Item (c) added by section 62(1) of Act 17 of 2017 and substituted by section 3(1)(b) of Act 12 of 2024 effective on 1 September, 2024 and applicable in respect of years of assessment commencing on or after that date]

 

(d)     any amount transferred for the benefit of that person within the same fund as contemplated in paragraph 6B(a), 6B(b) or 6B(f) and any amount transferred on termination of membership in that fund or as contemplated in paragraph 2(1)(b)(iA) to another fund for the benefit of that person as contemplated in paragraph 6B(c), 6B(d), or 6B(e), less any deductions permitted under the provisions of paragraph 6B.

[Subparagraph (1) amended by section 92(1)(a) and (b) of Act 22 of 2012 and by section 48 of Act 34 of 2019. Item (d) added by section 3(1)(c) of Act 12 of 2024 effective on 1 September, 2024 and applicable in respect of years of assessment commencing on or after that date]

 

(2)     An amount contemplated in subparagraph (1)(b) shall be deemed to accrue to a person –

 

(a)     in the case of an amount contemplated in subparagraph (1)(b)(iA), on the date on which the amount is due and payable as contemplated in subparagraph (1)(b)(iA)(bb); and

 

(b)     in the case of an amount contemplated in subparagraph (1)(b)(iB), on the date of its transfer.

Paragraph 2A (Second Schedule) – Amount to be included in gross income for lump sum benefit from public sector fund

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2A.    Where any lump sum benefit is received or accrues from a public sector fund, the amount to be included in the gross income of any person in terms of paragraph (e) of the definition of ‘gross income’ in section 1 shall be deemed to be an amount equal to the amount determined in accordance with the following formula:


A  =  B   x   D

        C

in which formula-

(a)       ‘A’ represents the amount which has to be determined;

(b)       ‘B’ represents-

(i)      where the number of completed years of employment of a person who is or was a member of a fund are in terms of the rules of that fund taken into account for the purpose of determining the amount of a benefit payable by the fund, the number of completed years of employment of the member after 1 March 1998, including previous or other periods of service approved as pensionable service in terms of the rules of any fund after 1 March 1998, other than completed years of employment representing-

(aa)   any benefit of a person who is a member of any public sector fund, which is after 1 March 1998 paid for the benefit of any person into another public sector fund in respect of any previous or other periods of service or membership accounted for prior to 1 March 1998 in terms of the rules of any public sector fund; or

(bb)   years of pensionable service recognised as such in terms of Rule 10.5 or 10.6 of the Rules of the Government Employees Pension Fund, contained in Schedule 1 to the Government Employees Pension Law, 1996 (Proclamation No. 21 of 1996), to the extent that those years are not taken into account under item (aa);or

(ii)     where the number of completed years of employment are not taken into account as contemplated in subitem (i), the number of completed years after 1 March 1998 during which the member had, until the date of accrual of any benefit, been a member of any public sector fund or funds;

(c)       ‘C’ represents-

(i)      where the number of completed years of employment of a person who is or was a member of a fund are in terms of the rules of that fund taken into account for the purpose of determining the amount of the benefits payable to any person by the fund, the total number of completed years of employment so taken into account; or

(ii)     where the number of completed years of employment are not taken into account as contemplated in subitem (i), the number of completed years during which the member had, until the date of accrual of any benefit, continuously been a member of any public sector fund or funds; and

(d)       ‘D’ represents the lump sum benefit payable to the person.

2B.    ……….

Paragraph 2C (Second Schedule) – Lump sum benefit received or accrued subsequent to retirement, death, withdrawal or resignation

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2C.    Any lump sum benefit, or part thereof, received by or accrued to a person subsequent to the person’s retirement or death, or withdrawal or resignation from any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund or the winding up of any such fund, and in consequence of or following upon an event that is prescribed by the Minister by notice in the Gazette and contemplated by the rules of any such fund or the approval of a scheme in terms of section 15B of the Pension Funds Act or paragraph 5.3(1)(b) of the Schedule which amends regulation 30 of the Regulations under the Long-term Insurance Act shall not constitute gross income of that person.

Paragraph 3 (Second Schedule) – Deemed accrual immediately prior to death

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3.     Any lump sum benefit which becomes recoverable from-

(a)     a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund; or

(b)     an insurer as defined in section 29A(1) if that lump sum benefit is payable by, or provided in consequence of membership or past membership of, a fund contemplated in subparagraph (a),

in consequence of or following upon the death of a person who is or was a member of that fund must, on the date of payment of that lump sum benefit, be deemed to have accrued to that person immediately prior to the death of that person: Provided that-

(i)      so much of any tax payable as is due to the provisions of this paragraph may be recovered from the person by whom the lump sum benefit in question is received;

(ii)     where any annuity or portion of an annuity (including a living annuity) which becomes payable on or in consequence of or following upon the death of a person who is or was a member of any such fund has been commuted for a lump sum, such lump sum shall for the purposes of this paragraph be deemed to be a lump sum benefit which has become recoverable in consequence of or following upon the death of such person;

(iii)    where any such lump sum benefit becomes payable but the dependants or nominees of that member or past member elect an annuity (including a living annuity) that is purchased or provided by that fund, no lump sum benefit shall be deemed to have so accrued to the extent that the lump sum benefit was utilised to purchase or provide the annuity; and

(v)     where any such lump sum benefit is paid to a pension preservation fund or provident preservation fund as an unclaimed benefit as defined in the Pension Funds Act, no lump sum benefit shall be deemed to have so accrued.

[Paragraph (v) substituted by section 83 of Act 25 of 2015 effective on 8 January 2016]

Paragraph 3A (Second Schedule) – Deemed accrual immediately prior to death – other

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3A.      Any lump sum benefit which becomes recoverable from-

(a)     a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund; or

(b)     an insurer as defined in section 29A(1) if that lump sum benefit is payable by or provided in consequence of membership or past membership of a fund contemplated in subparagraph (a),

in consequence of or following upon the death of any person other than a person who is or was a member of that fund shall, on the date of payment of that lump sum benefit, be deemed to have accrued to the deceased person immediately prior to the death of that person: Provided that-

[Words following subparagraph (b) and preceding the proviso substituted by section 96 of Act 22 of 2012 effective on 1 March 2012]

(i)      so much of any tax payable as is due to the provisions of this paragraph may be recovered from the person by whom the lump sum benefit in question is received;

(ii)     where any annuity or portion of an annuity (including a living annuity) which becomes payable on or in consequence of or following upon the death of a person other than a person who was a member of any such fund has been commuted for a lump sum, such lump sum shall for the purposes of this paragraph be deemed to be a lump sum benefit which has become recoverable in consequence of or following upon the death of such deceased person;

[Paragraph (ii) of the proviso substituted by section 96 of Act 22 of 2012 effective on 1 March 2012]

(iii)    where any such lump sum benefit becomes payable but the dependants or nominees of that person elect an annuity (including a living annuity) that is purchased or provided by that fund, no lump sum benefit shall be deemed to have so accrued to the extent that the lump sum benefit was utilised to purchase or provide the annuity; and

(iv)    where any such lump sum benefit is paid to a pension preservation fund or provident preservation fund as an unclaimed benefit as defined in the Pension Funds Act, no lump sum benefit shall be deemed to have so accrued.

[Paragraph 3A inserted by section 82 of Act 7 of 2010, substituted by section 84 of Act 25 of 2015 effective on 8 January 2016]

Paragraph 4 (Second Schedule) – Deemed accrual

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4.

(1)     Notwithstanding the rules of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, and subject to paragraphs 3 and 3A, any lump sum benefit shall be deemed to have accrued to a person who is a member of such fund on the earliest of the date-

(a)     on which an election is made in respect of which the benefit becomes recoverable;

(b)     on which any amount is deducted from the benefit in terms of section 37D(1)(a), (b) or (c) of the Pension Funds Act;

[Item (b) substituted by section 85 of Act 25 of 2015 effective on 8 January 2016]

(c)     on which the benefit is transferred to another pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund;

(d)     ……….

[Item (d) deleted by section 71 of Act 43 of 2014 effective on 1 March 2015]

(e)     of his or her death,

and shall be assessed to tax in respect of the year of assessment during which such lump sum benefit is deemed to accrue.

(2)     If upon a member’s withdrawal or resignation from or the winding up of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund on or after the fifteenth day of March, 1961, a policy of insurance is ceded or otherwise made over to or in favour of such member before the date of promulgation of the Income Tax Act, 1964, any lump sum due in respect of such policy upon its maturity or surrender before such date shall be deemed to be a lump sum benefit accruing to such member from a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, as the case may be, on the date of such maturity or surrender, or, if such member dies before such last-mentioned date, on the date of his or her death, and shall be assessed to tax in respect of the year of assessment during which such benefit is deemed to accrue as though it were a lump sum benefit derived by him or her upon his or her withdrawal or resignation from the fund or upon his or her retirement or immediately prior to his or her death, as the case may be:

Provided that if after the cession or making over of such policy any premiums are paid thereon by such member, there shall be deducted from such lump sum, in addition to any other deduction to which such member may be entitled in terms of this Schedule, an amount which bears to such lump sum the same ratio as the sum of the premiums paid by him after such cession or making over bears to the sum of all the premiums paid on such policy.

(2)bis If a policy of insurance is ceded or otherwise made over to or in favour of a person who is a member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund by that fund on or after the date of commencement of the Income Tax Act, 1964, the surrender value of such policy shall, provided such person retired or ceased to be a member of such fund on or after the fifteenth day of March, 1961, be deemed for the purposes of this Schedule to be a lump sum benefit accruing to such person from such fund on the date of such cession or making over.

(3)     . . . . . .

[Subparagraph (3) substituted by section 36(1) of Act 21 of 1995, by section 97(1)(c) of Act 22 of 2012, by section 85(b) of Act 25 of 2015 and by section 63(1) of Act 15 of 2016 and deleted by section 19(1) of Act 20 of 2022 with effect from 1 March, 2023]

(4)     ……….