Abstract
M.Comm.
The current economic conditions in the country have compelled
various enterprises at one time or another to stop operating
in their field or to reduce the number of their work force.
Redundancies with large redundancy packages have become the
order of the day. These are associated with withdrawals from
pension or provident funds.
This study is divided in three main sections:
In the first section the taxability of lump sums (excluding
receipts from pension and provident funds) was investigated.
In accordance to paragraph (d) of the definition of Gross
Income as stipulated in section 1 of the Income Tax Act, the
following amounts are included in gross income:
...any amount, including any voluntary award, received or
accrued in respect of the relinguishment, termination, loss,
repudiation, cancellation or variation of any office or
employment of any appointment (or right or claim to be
appointed) to any office or employment..."
From the said definition it is clear that even voluntary
awards made by employers to employees under certain
circumstances will form part from their Gross Income. The type
of the amounts and the circumstances under which they form
part of a taxpayer's Gross Income were taken into account.
Particular attention was devoted to lump sum receipts from
redundancy packages, accumulated leave money, voluntary awards
and deferred remuneration schemes. The tax implications for
both the employer and employee were considered in detail.
Tax consultants are often approached by taxpayers for advice
on converting a pension fund to a provident fund or on the tax
implications of lump sums received from the said funds. The
main purpose of this section of the study was to find possible
solutions for such issues.
This section of the study dealt exclusively with pension and
provident funds. Particular attention was paid to the
following aspects:
To what requirements pension and provident funds had to
comply in order for the Commisioner to approve such funds;
What tax implications do contributions by employer and
employee hold for these funds;
The tax implications of lump sums received on retirement,
death or resignation on these funds; and
Other implications that could influence membership to these
funds.
The conclusion was that it was not possible to institute a
general guideline. In addition to the tax implications of the
said funds, there were also various other factors that
influenced the choice between provident and pension funds.
Some factors that must be borne in mind and that must be
incorporated in any decision are the following:
The degree of schooling of the employee;
The amount of remuneration received;
The life expectation of the employee; and
The financial knowledge of the taxpayer to invest the lump
sum successfully.
The study was concluded with a brief discussion of benefit
funds with specific reference to medical schemes and benefit
schemes as well as the recommendations of the Katz Commission
(1994:91-93) on pension, provident and benefit funds.