Business entities
Sole Proprietor:
 Not a separate legal entity
 No perpetual succession
 Fast and easy to create – usually no documentation required
 Owner pays tax om business income – can pay tax in terms of micro business tax
dispensation
 Ownership and management usually performed by same person
 Cannot employ owner of business within the business
o If a owner passes away interstate = The business will be dissolved.
Partnership:
 No separate legal entity – anomalies: insolvency, partner pension fund membership and
legal proceedings.
o Partners can be employed by business in certain instances
 No perpetual succession
 At least 2 (max 10) partners as well as partnership agreement are required;
o there must be profit objective, each partner must contribute and business is run for
benefit of all partners.
 All partners are jointly and severally liable for all business debts – unless it’s
extraordinary/limited partnership such as en commandite partnership with limited partners
 A partner is allowed to contribute to the pension fund of the partnership like any other
employee.
 CGT – Para 9.2.2 Comprehensive Guide to CGT:
o A disposal occurs only when a partner’s fractional interest in an asset of the
partnership is diminished (when partnership dissolves due to partner
joining/leaving).
Partnership CGT example:
 Mike, Daisy and Donald commence business in partnership.
 They each inject R200 000 in cash into the partnership bank account which is later used to
purchase a warehouse at a cost of R600 000. Five years later the land is worth
 R900 000, and the partners decide to admit Minnie as an equal partner for a consideration
of R225 000 (one quarter of R900 000). Mike, Daisy and Donald each receive R75 000 of the
amount paid by Minnie (R225 000 ÷3).
Companies:
 Companies Act 1 May 2011 (no new CC)
 Separate legal entity – but corporate veil can be lifted!
 Perpetual succession
 Profit/non-profit companies
 Public, private, State Owned and personal liability (directors/shareholders personally liable).
 MOI – special resolution approval
 Shareholders agreement
 Authorized and issued share capital
 Shareholder rights
 Ordinary and preference shares
 Board can decide to issue shares for adequate consideration
 Company tax rate is 28%, dividend tax is 20%
o Cannot be a member of a CC.
 A director appointed in terms of MOI can act on behalf of a company.
Shareholders
Company Board
(executive and non
executive directors)
Employees
Assets
Liabilities
Company executive
management:
executive directors
Tax
Company Share Buyback:
 Solvency and liquidity requirements need to be met where a company plans the purchase its
own shares (Companies Act sections 46 and 48)
o - these requirements need to be met immediately after the repurchase has been
completed
 Repurchased shares must on repurchase be restored by the company to the status of
authorized shares that have not been issued
 Reasons for a private company share buyback:
o allow for an employee share schemes
o retention of family control
o allow executor of the estate of deceased shareholder to sell shares to the company
(where no buy-and-sell agreement)
o buying out an undesirable minor shareholder.
Close corporation:
 Separate legal person
 The 2008 Companies Act stipulates that from 1 May 2011, no new CC’s may be created or
companies converted to a CC, but existing CC’s will be allowed to continue indefinitely
 Benefit from perpetual succession
 Limited to 10 natural person members


Advantages
o CC Act less complex than Companies Act, and there are fewer rules which need to be
observed
o Great deal of flexibility in the CC Act, and a CC can always convert to a Co if the need
arises
o CC benefit from perpetual succession
o CC’s have the capacity and powers of a natural person, and therefore its business
activities are not restricted by its constitution
o There are no directors, and, therefore, no complex rules protecting members from
the actions of directors
o The limitation on size of business only pertains to the number (max 10) and nature
(natural persons) of members
Disadvantages
o CC Act may be seen as too simple
o PG 1083-1084
o CC cannot hold interest in another CC.
Example:
Monica, Phoebe and Rachel are the three members in a business called Central Perk CC. The
business is a close corporation which operates franchised coffee shops across the Western Cape and
is managed by the owners. The membership interests are owned as follows:
Monica
40% (valued at R4 000 000)
Phoebe
35% (valued at R3 500 000)
Rachel
25% (valued at R2 500 000)
Total
100%
The members are considering converting the close corporation to a company, as Monica would like
to transfer ownership of her business interest to a trust to limit any growth in her personal estate.
1.1: Advise the members on the structural and income tax implications of converting the business
from a close corporation to a company, including an explanation of aspects that would remain the
same and aspects that would result in changes to the business.
 Most of the provisions of the Companies Act are already applicable to close corporations.
 A close corporation and a company are both separate legal entities.
 The income tax implications for a close corporation and a company are the same.
 The company would be able to have more than 10 owners, whereas the members of a CC
may not exceed 10, but this does not seem to be a requirement of the 3 business owners


The owners would not be able to sell the close corporation to company, but a company can
be sold to another company as a holding company.
The business does not have to convert to a company for Monica to transfer her shares to a
trust as a CC membership can also be owned by a trust, provided certain requirements are
met.
1.2: Assume that the business owners have converted the business to a company and that Monica’s
shares are now held in trust. Ross is from a professional trust company and is acting as trustee. The
trust deed determines that the trust will continue as is in the event of Monica’s death, for the
benefit of her children. The shareholders have asked for your assistance and advice on implementing
a buy and sell agreement funded by life policies.
Describe how the buy and sell cover should be structured to ensure there is sufficient provision for
any surviving business owners to buy a deceased owner’s interest in the same ratio as the current
ownership ratio. Include a motivation for the structure you recommend and show all calculations.
Private vs. public company:
 Separate legal entity
 They can register for VAT
 Perpetual succession is possible.
Dividends VS Salary case study:
Len is the only shareholder of ABC (Pty) Ltd, a company that provides education services. During the
last financial year, the business income (profit or taxable income) of ABC (Pty) Ltd amounted to R850
000. In the past Len has not drawn a salary from the business, but has always taken all his income
from the business in the form of dividends. He has asked that you explain to him what the tax
implications would have been (for the tax year ending Feb 2020) had he taken the full income in the
form of a salary from the business compared to taking half the income as a salary and the other half
as company dividends. You can disregard any tax deduction Len may have against his personal
taxable income.
A) Salary only – No company tax
Len will pay personal income tax on the R850 000 salary: R229 089+(67800) *0,41 = 256 887 –
15 714 = R241 173 (after annual rebate)
B) Half salary/half dividend:
Company tax: 28% on R425 000 = R119 000
Plus DWT at 20% R61 200 (R306 000 x 20%)
Len’s personal income tax on R425 000 salary:
= 70 532 + (425000-337800)*0,31 = 97564 – 15714 = 81 850 (after annual rebate)
Total tax: R81 850 + R61 200 + R119 000 = R262 050
Business Trust:
 Trusts (other than special trusts) pay tax at a flat rate of 45%
 If beneficiary has vested right to income, beneficiary is deemed to have accrued such
income.
 A business trust is not a separate legal entity and the trust assets are thus owned by the
trustees.
 Beneficiaries of a business trust have limited liability and are not exposed to the business
risks.
 Behind trust is where ownership of assets vests in beneficiaries, trustees only administer the
trust assets
 Ownership trust is where the founder transfers ownership of the assets to the trustees to be
held for the benefit of the beneficiaries
Founder
Trustees
Beneficiaries
Business entities and tax:
 Small business corporation (SBC) and turnover tax
 Small business disposal: CGT exemption
 Section 12J companies
Assets
Liabilities
Tax
Turnover Tax:
 Turnover tax is a simplified elective tax system for any businesses with a qualifying turnover
of not more than R1 million per year (micro business).
 The tax is based on the taxable turnover of the business: it is available to sole proprietors,
partnerships, close corporations, companies and co-operatives (but not trusts).
 Turnover tax replaces VAT, provisional tax, income tax, capital gains tax, STC and dividends
tax.
 Section 12E(4) of the Income Tax Act defines a qualifying micro business
Turnover (R)
Rate of tax (R)
0 - 335 000
0%
335 001 - 500 000
1% of each R1 above 335 000
500 001 - 750 000
1 650 + 2% of the amount above 500 000
750 001 and above
6 650 + 3% of the amount above 750 000
Small Business corporation tax (SBC):
 SB6 requirements:
o Corporate entity: Only close corporations, co-operatives, private companies and
personal liability companies currently qualify for the SBC regime.
o Natural shareholders: Shareholders of the SBC must be natural persons throughout
the year of assessment.
o Maximum of R20 million gross income: The SBC’s gross income for the year of
assessment may not exceed R20 million.
o Shareholders not to hold shares in other entities: Shareholders or members of an
SBC may not hold a share or interest in the equity of another company, close
corporation or co-operative, other than listed companies; collective investment
schemes; body corporates, share block companies and certain associations;
o Investment income and income from rendering of a personal service – 20% rule: Not
more than 20% of the total receipts and accruals of the SBC may collectively consist
of “investment income” and income from the rendering of a “personal service”. “.
o Exclusion of personal service providers: The SBC may not be a “personal service
provider”. A company is a personal service provider if a connected person in relation
to the company renders services on behalf of the company and the person would
otherwise have been regarded as an employee of the company’s client; or the client
exercises control or supervision over the manner in which the duties are performed
Taxable Income (R)
Rate of Tax (R)
1 – 87 300
0% of taxable income
87 301 – 365 000
7% of taxable income above 87 300
365 001 – 550 000
19 439 + 21% of taxable income above 365 000
550 001 and above
58 289 + 28% of the amount above 550 000
Small Business CGT exemption: R1 800 000
a) An active business asset of a small business owned by him as a sole proprietor; or
b) An interest in each of the active business assets of a business, which qualifies as a small
business, owned by a partnership, upon his/her withdrawal from that partnership to the
extent of his/her interest in that partnership; or
c) An entire direct interest in a company (which consists of at least 10% of the equity of that
company), to the extent that the interest relates to active business assets of the business,
which qualifies as a small business, of that company.
small business means a business of which the market value of all its assets, as at the date of the
disposal of the asset or interest…., does not exceed R10 million.
active business asset means
a) an asset which constitutes immovable property, to the extent that it is used for business
purposes;
b) an asset (other than immovable property) used or held wholly and exclusively for business
purposes, but excludes—
(i)
a financial instrument;
(ii)
an asset held in the course of carrying on a business mainly to derive any income
in the form of an annuity, rental income, a foreign exchange gain or royalty or
any income of a similar nature
Requirements:
At the time of disposal, he/she held the active business asset, interest in partnership, or interest in
company for a continuous period of at least 5 years prior to the disposal and was substantially
involved in the operations of that small business during that period and has attained the age of 55,
or the disposal is in consequence of ill health, other infirmity, superannuation or death.
 The sum of the amounts to be disregarded may not exceed R1.8 million during the person’s
lifetime.
Business Insurance:
Contingent liability:
 To secure an overdraft
o Policy often paid on the life of a director to cover an overdraft.
o Premiums paid by a company in respect of a contingent liability does not qualify for
tax deductions as it doesn’t cover the company against business operating losses.
 To cover a personal guarantee:
o Secure directors personal guarantee which they’ve pledged, so if they die it covers
those pledges i.e., owing to individuals.
 To cover a shareholder’s loan account
 To cover a mortgage bond
 To provide sinking fund or cash reserve.
o Create cash reserves to meet future contingencies by a policy on the life of a
director.
Deductions under section 11w
 Deduction in respect of fringe benefit policies:
o Can deduct if:
 Policy relates to the death/disability/illness of an employee/director of the
taxpayer and;
 Premium paid by employer/company is deemed a taxable benefit granted to
the employee/director
 Deduction in respect of keystone policies:
o Taxpayer is insured against any loss by reason of death/illness/disability of an
employee/director of taxpayer
o Policy is a risk policy with no cash value/surrender value
o Policy is not the property of any person other than the taxpayer at the time of the
payment of the premium
o In respect of the policy entered into:
 On/after 1st march 2012, the policy states that this paragraph applies in
respect of premiums payable under that policy or;
 Before 1st march 2012, it is stated in an addendum to the policy agreement
by no later than 31st august 2012 that this paragraph applies in respect of
premiums payable under the policy.
Exempt from income tax s10(1):
 Any amount received/accrued in respect of policy insurance where:
o Policy related to death/disability/illness of a current/former employee/director of
the policy holder and;
o No amount of premiums payable in respect of that person on or after 1st march
2012, is deductible from the income of that person for the purposes of determining
the taxable income derived by the person from carrying on any trade.
Buy and sell arrangement:
 Agreement between business owners (partners in a partnership, shareholders a company, or
members in the case of a close corporation) that when one dies, an action happens.
 A method of valuing each partner’s interest and an agreement on the price to be paid based
upon the valuation is subject to periodic view.
o To purchase the interest of a deceased business owner (partner, shareholder or
member) on the death of deceased person.
o The agreement places an obligation on the executor to sell the interest in the
business (out of the deceased estate).
o The business interest will be sold and purchased at market value at date of death;
o or at another price as agreed in the buy and sell agreement.
o The buy and sell agreement are usually funded by life insurance policies on the lives
of the business owners.
 The agreement should stipulate what happens to the remaining cover (if any) after the
death of a business owner and on dissolution of the business.
What happens without a buy and sell agreement should a business owner pass away?
 The surviving members of the CC (other owners) would need to give approval for the
interest in the business to be sold to any 3rd party (in terms of the CC Act).
 This would effectively provide the 1st option to purchase to other owners. They would
however need to be able to obtain funding to fund the purchase price should they choose to
exercise this option.
 Should they be unable to obtain funding or make a payment arrangement, the executor of
the deceased owner estate would need to find a 3rd party to purchase the interest from the
deceased estate, or transfer the business interest to the deceased owners’ heirs in terms of
her will.
Buy and sell agreement types:
 Insurable interest – the business owners must have the required amount of insurable
interest in each other’s lives at inception of the buy and sell policies
o Life cover term: whole life or term cover?
o Is a savings element required to be added to the cover?
o Only life cover or also disability cover: occupational, physical or frailty?
o And also, severe illness cover?
o Accidental death benefit
 Basic structure – not generally structured as an employer owned policy, thus no income tax
implications
 CGT implications: para 55 (1)(a) and 55(1)(c) of the 8th Schedule
 Alternative structure of policies
Estate duty on the proceeds of buy and sell policies:
 Sec3(3)(a)(iA) of the Estate Duty Act
 The policy will not be subject to estate duty if the following requirements are met:
o (i) the policy was taken out or acquired by a person:
 (a) who on the date of death of the deceased was a partner or held any
share or like interest in a company in which the deceased at the date of his
death held any share or like interest;
 (b) for the purpose of enabling the policyholder to acquire the whole or part
of the deceased’s interest in the partnership or like interest in the company
and any claim by the deceased against the company;
o (ii)no premium was paid or borne by the deceased.

If all previous statements for section 3(3)(a)(iA) fulfilled, can claim R1million exemption.
SARS Practice note: Trusts
It is accepted that the exclusion from
property/deemed property provided for in section
3(3)(a)(iA) applies also where the policy in question
is taken out or acquired by a trustee of a trust in his
capacity as such.
Please note that the ruling states that the exclusion
applies where the policy is taken out or acquired by a trustee of a trust, and not the other way
round. The ruling therefore, does not cover the situation where the natural person takes out a policy
on the life of the trustee.
If trustee B took out the policy on the life of trustee A, it can be said on the strength of the ruling
given as discussed above, that such policy was taken out by a “person”, however, all the other
requirements must be met to qualify for the exclusion. As it is a requirement in terms of section
3(3)(a)(iA) of the Act for the exclusion to apply, that the person who took out the policy (the trustee
of trust B), as well as the deceased (the person whose life has been insured –A as trustee of trust A)
must hold a share in the company as at date of death of the deceased, it is clear that in this case, A
(the deceased and trustee of trust A), does not hold a share in the company D as his share has been
transferred to his family trust and therefore the policy does not qualify for the exclusion. For the
same reason, B the trustee of trust B, also does not hold a share in company D.
The trustee does have insurable interest as he/she is a part of the buy and sell agreement at his
capacity.
Structuring of buy and sell cover:
Example 1: one life assured, multiple owners per policy
Sam, Melanie and Graham are the only 3 shareholders of a company valued at R3 000 000. They
would like to enter into a buy and sell agreement and acquire buy and sell policies, maintaining all
existing ownership ratios.
Sam
30%
Melanie
30%
Graham
40%
Example 2: Method using a single policy on multiple lives
A, B and C are the shareholders of ABC (Pty) Ltd. The total value of the shares in the company is
R1m. They own the following shareholding:
 A: 60%–value R600 000
 B: 25%–value R250 000
 C: 15%–value R150 000
They should structure the life insurance as follows:
Who is left?
A&C =60+15
Policy 1
A insures B for (60/75XR250000) =R200000
A insures C for (60/85xR150000) =R105882
Policy 2
B insures A for (25/40x600000) =R375000
B insures C for (25/85xR150000) =R44118
Policy 3
C insures A for (15/40xR600000) =R225000
C insures B for (15/75xR250000) =R50000
Case Study application:
Natasha, Erica and Jacques are 3 partners in a retail business. The business is valued at R3 000 000
and each partner owns an equal interest in the business.
Natasha has also made a R1 000 000 loan to the business. The three partners are in the process of
entering into a buy and sell agreement and need to decide whether to include the loan from
Natasha in the buy and sell agreement or whether to make provision for the repayment of this loan
by way of Credit Loan Account cover.
Draw up a table outlining the different implications of these two options (your answer needs to
include income tax, CGT and estate duty implications).
Example:
Assume that the business owners have converted the business to a company and that Monica’s
shares are now held in trust. Ross is from a professional trust company and is acting as trustee. The
trust deed determines that the trust will continue as is in the event of Monica’s death, for the
benefit of her children. The shareholders have asked for your assistance and advice on implementing
a buy and sell agreement funded by life policies.
Describe how the buy and sell cover should be structured to ensure there is sufficient provision for
any surviving business owners to buy a deceased owner’s interest in the same ratio as the current
ownership ratio. Include a motivation for the structure you recommend and show all calculations.
Monica
Phoebe
Rachel
Total



40% (valued at R4 000 000)
35% (valued at R3 500 000)
25% (valued at R2 500 000)
100%
Monica is no longer a business owner, as all her shares are owned by the trust. The buy and
sell structure would thus not include cover on Monica’s life, as her death would not result in
any ownership of shares needing to change hands.
Since the trust deed determines that the trust will continue unchanged in the event of
Monica’s death, it is unlikely the trustee (Ross) will sell the shares in the business in event of
Monica’s death or in the event of Ross’s death.
Should Ross pass away he will probably be replaced by a professional trustee. So no death
will require a change of ownership of the shares in trust.
Cover owner
 Monica’s trust: Ross (in his capacity as professional trustee)
o 40/75 of R2 500 000 on the life of Rachel 1 333 333
o 40/65 of R3 500 000 on the life of Phoebe 2 153 846
 Phoebe
o 35/75 of R2 500 000 on Rachel’s life 1 166 667
 Rachel
o 25/65 of R3 500 000 on Phoebe’s life 1 346 154
Business valuation methods:

Intrinsic Value method: Where the business value is mainly in its assets e.g., property and
investment companies.
o Calculation: Assets at market value (long term and current) less all liabilities (long
term and current) x ownership interest % of each owner

Earning yield method: Business value contained mainly in earning potential such as services
or trading businesses.
o Calculation: expected earnings after tax capitalised at fair rate of return applicable
to the business

Super profits method: Business value contained in assets as well as earning potential.
o Calculation: super profits capitalised over 5 years (at low-risk rate) plus net asset
value.

Dividend yield won’t be tested…
Super profits example:
Example based on the super profit method of valuation, The total value of the assets employed in
ABC (Pty) Ltd, is R10mil. The tot al liabilities for the company are R4million and the net value of the
assets after liability deductions is R6mill.
The total expected after tax annual income for the company for the next five years is R2.5mil.
The fair rate of return is 15% (low risk rate).
The projected income from the net value of the assets is:
R6 000 000 x 15% = 900 000
The super profit per year is:
= R1 600 000 (2500000-900000)
PV of the super profit discounted over a period of 5 years is calculated at 15% p.a.
End mode
1 600 000 PMT
5N
15 I/YR
PV = 5 363 448
Therefore, the total value of the business is = Net assets + goodwill
= 6 000 000 + 5 363 448 = R11 363 448
The earnings yield method example:
Example:
Joe is the owner of JPS Property Letting and Management. They own a number of units in a complex
that they rent out and they are also responsible for the management of a number of complexes in
the area. The owner of a national property management group is interested in buying Joe’s
business.
Most appropriate business valuation method: Intrinsic value method.
Business/Company Owned Policies:
Life policy (PWE risk?
 Life assured = employee
 Tax on proceeds?
o Definition of gross income (M+D)
o Sec (ai) gG + gH
 Premiums tax
o Sec 11(w)(i)
o Sec 11(w)(ii)
 Owner: business/employer

Section 11(w) of the Income Tax Act as from 1 March 2012
 Section 11(w) provides for a deduction in respect of expenditure incurred by a taxpayer
(business/employer) in respect of premiums payable under an insurance policy of which
the taxpayer is the policyholder. It allows for deductions in respect of two categories of
policy [section 11(w)(i) and section 11(w)(ii)].
 These policies are generally referred to as to these as:
o “Fringe benefit” policies, and
o “Key person” or “company owned” policies.
 The following expenses are deductible under section 11(W)(i);
o (Policy on employee life cover, deemed to be a taxable benefit)
o expenditure incurred by a taxpayer in respect of any premiums payable under a
policy of insurance (other than a policy of insurance that relates to the death,
disablement or illness of an employee or director of the taxpayer arising solely
out of and in the course of employment of such employee or director) of which
the taxpayer is the policyholder, where:
 (i)(aa)the policy relates to the death, disablement or illness of an
employee or director of the taxpayer; and
 (bb) the amount of expenditure incurred by the taxpayer in respect of the
premiums payable under the policy is deemed to be a taxable benefit
granted to an employee or director of the taxpayer in terms of
paragraph 2(k)of the Seventh Schedule;
 (Employer can deduct premiums payable)
Example: Section 11(w)(i) Fringe benefit
Widgets (Pty) Ltd is the policyholder of an life policy on the life of Eric, an employee. The premium
that was paid by the company is R4 800 for the 2021 year of assessment.
It is not required that the policy must be a pure risk policy in order for the premium to be deductible
under sec 11(w)(i). It can be a pure risk policy, an endowment policy with a cash and surrender
value, or a combination of the two.
 An amount of R4 800 is included in Eric’s gross income as a fringe benefit (he will get
proceeds in the event of death).
 Eric is not allowed to deduct the premium so that he is effectively taxed on the R4 800.
Section 23(r) prohibits the deduction thereof.
 Widgets (Pty)Ltd can deduct the premium [s11(w)(i)]
Section 11(w)(ii) Key person/ Company policies
The deduction allowed under section 11(w)(ii) applies in cases where the premium is not included in
the gross income of the employee or director.
The following requirements must be met:
 taxpayer is insured against any loss by reason of the death, disablement or illness of an
employee or director of the taxpayer;
 the policy is a risk policy with no cash or surrender value;
 policy is not owned by a person other than the taxpayer at the time of payment of the
premium; and
 respect of a policy entered into:
o on or after 1 March 2012 the policy agreement states that this paragraph applies in
respect of premiums payable under that policy;
 Can be deductible
o before 1 March 2012 the policy agreement states that this paragraph applies in
respect of premiums payable under that policy
 Can be deductible with addendum added.
Applicable in respect of premiums paid on or after 1 March 2012
Since a company is a separate legal entity, it can be party to a buy and sell agreement in relation to
its own shares.
Where a key person policy does not qualify for any estate duty exemption the policy proceeds less
premiums +6% compound interest will be a deemed asset in the deceased estate of the life assured
for purposes of estate duty.
Example Section 11(w)(ii):
Business contingency:
John is a director of Orange (Pty) Ltd and has provided security in his personal capacity for the
repayment of a loan that the company obtained from the bank. In return Orange (Pty) Ltd has
insured the life of John for an amount of R1 000 000.
The purpose of the policy is to enable the company to repay the outstanding bank loan in the event
of John’s death, to prevent the security being called up by the bank. The policy was taken out on 1
July 2011. The company pays the premium of R1 000 per month and owns the policy.
The policy is a pure risk policy with no cash value or surrender value. The policyholder stated in an
addendum to the agreement that section 11(w)(ii) is to apply. This was done before 31 August 2012.
Is the premium deductible in 2021 tax year?
A checklist of the stated four requirements shows that the premium is not deductible under section
11(w)(ii).
Requirements
• Insured against loss – no (not a loss to the company, since business doesn’t lose anything)
• Risk policy with no cash or surrender value - yes
• Policy owned by taxpayer - yes
• Statement in addendum - yes
All the requirements must be met before the premium is tax deductible. In this case the company is
not insured against a loss but merely to repay a loan (capital).
Section 11(a)(ii) of the income tax act:
In order for the premiums to be tax deductible the policy (which was taken out after 1 March 2012)
would need to meet the following requirements contained in sec 11(a)(ii) of the Income Tax Act:
Reference to 1 March 2012 date required it must be a long-term insurance policy owned by the
company, the company must be insured against the loss by reason of death of Atoll, it must be a
pure risk policy, the company must own the policy at time of payment of the premium and the policy
contract must contain an addendum that sec 11(a)(ii) is applicable to the policy.
Fringe benefits
Paragraph 2 of Seventh Schedule
For the purposes of this Schedule and of paragraph (i) of the definition of “gross income” in section 1
of this Act, a taxable benefit shall be deemed to have been granted by an employer to his employee
in respect of the employee’s employment with the employer, if as a benefit or advantage of or by
virtue of such employment or as a reward for services rendered or to be rendered by the employee to
the employer (k)the employer has made any payment to any insurer under an insurance policy directly or
indirectly for the benefit of the employee or his or her spouse, child, dependant or nominee:
Provided that this paragraph shall not apply in respect of an insurance policy that relates to
an event arising solely out of and in the course of employment of the employee.
 (l)the employer has made any contribution for the benefit of any employee to a pension
fund, provident fund or retirement annuity fund.
The cash equivalent of this taxable benefit is determined in terms of paragraph 12C of the Seventh
Schedule.
Taxation of the proceeds of business owned policies:
Since 1 March 2012 there are two provisions in terms of which company-owned policy proceeds are
included in gross income: in terms of paragraphs (d) and (m) of the definition of “gross income”.
These two provisions include the “policy proceeds” in gross income irrespective of whether the
premiums ranked for tax deduction or not.
Exemptions under section 10 determine whether policy proceeds tax-free in particular
circumstances.
Since 2012 it is no longer the position that the policy proceeds are only included in gross income if
the premium ranked for tax deduction.
Paragraph (d) of the definition of “gross income” is applicable where the policy benefits are
received by or accrues to the employee/director or a dependant or nominee of that
employee/director.
Any amount (other than an amount contemplated in paragraph(a)) including a voluntary award
received or accrued:
• respect of the relinquishment, termination, loss, repudiation, cancellation or variation of
any office or employment (or right to be appointed) to any office or employment;
• by or to a person, or dependant or nominee of the person, directly or indirectly in respect
of proceeds from a policy of insurance where the person is or was an employee or director
of the policyholder; or
• by or to a person, or dependant or nominee of the person, in respect of any policy of
insurance (other than a risk policy with no cash value or surrender value) that has been
ceded to
o (aa) the person
o (bb) a dependant or nominee of the person
By the employer or former employer of the person; or the company of which the person was a
director
Any amount which becomes payable in consequence of the death of the person is deemed to have
accrued to the person immediately prior to his or her death. (Included in employee’s tax income)
Any amount that is received by or accrues to a dependant or nominee of the employee/director of a
person is deemed to be received by or accrued to that person. It accrues to the deceased person
(employee taxpayer)
Section 23(p) of the income tax act:
If a company/employer cedes a policy to a director/employee, the company/employer cannot
deduct the value of the policy so ceded. On cession of the policy, no amount is included in the
employer’s gross income. Section 23(p) prohibits the deduction by stating that the following may not
be deducted.
o (p) the value in respect of any occasion of a policy of insurance by a taxpayer to
o (i) any:
 Employee (former employee)
 Director (former director)
 Dependent or nominee of the employee (or former employee) or director
(or former director),
 Of the taxpayer or;
o (ii) any pension fund, pension preservation fund, provident fund, provident
preservation fund or retirement annuity fund for the benefit of any (aa) employee (former employee)
 (bb) director (former director)
 (cc) dependent or nominee of the employee (former employee) or director
(former director)
 Of the taxpayer.
A sinking fund policy is suitable for Preferred compensation business insurance need.
Balance sheet example:
Paragraph (m) of the definition of gross income:
With effect from 1 March 2012 paragraph (m) was replaced with the following:
Special inclusion in gross income
o “(m) any amount received or accrued in respect of a policy of insurance of which the
taxpayer is the policyholder, where the policy relates to the death, disablement or illness
of an employee or director (or former employee or director) of the taxpayer, including by
way of any loan or advance; Provided that any amount so received or accrued shall be
reduced by the amount of any such loan or advance which is or has been included in the
taxpayer’s gross income;”
Exemptions: Section 10(1)(gG)
any amount received by or accrued to a person as contemplated in subparagraph (ii)or(iii) of
paragraph (d)of the definition of “gross income”—
o (i) in the case of a policy that is a risk policy with no cash value or surrender value, if the
amount of premiums paid in respect of that policy by the employer of the person has been
deemed to be a taxable benefit of the person in terms of the Seventh Schedule since the
later of—
o (aa)the date on which the employer or company contemplated in those
subparagraphs became the policyholder of that policy; or
o (bb) 1 March 2012;
o (ii) in the case of any other policy, if an amount equal to the aggregate of the amount of any
premiums has been included in the income of the person as a taxable benefit in terms of the
Seventh Schedule since the date on which the policy was entered into;
If pure risk policy, paid out in result of my death, deemed to be a taxable fringe benefit, paid out
after 1 march 2012, then exempt from tax and can claim deductions.
Section 10(1)(gH) exempts:
Keyholder policy Section 11w(2)(m).
any amount received or accrued in respect of a policy of insurance where:
 (i) the policy relates to death, disablement or illness of an employee or director, or former
employee or director, of the person that is the policyholder; and
 (ii) no amount of premiums payable in respect of that policy on or after 1 March 2012 is
deductible from the income of that person for the purposes of determining the taxable
income derived by the person from carrying on any trade;
 (If addendum is in, and premium isn’t deductible, exemption is available.)
Section 10(1)(gI) exempts: (not too important)
Any amount received or accrued in respect of a policy of insurance relating to the death,
disablement, illness or unemployment of any person who is insured in terms of that policy of
insurance, including the policyholder or an employee of the policyholder in respect of that policy of
insurance to the extent to which the benefits in terms of that policy are paid as a result of death,
disablement, illness or unemployment other than any policy of which the benefits are paid or
payable by a retirement fund;
There are three requirements that must be met in order for a life insurance policy to be deemed to
be property in the estate of a deceased person. They are:
 The policy must be on the life of the deceased
 The policy must be a “domestic policy” and,
 There must be an amount due and recoverable under the policy in the event of the
death of the deceased.
Example: Employer owned policy implications
Ann is employed by Eagle Services (Pty)Ltd. She earns a salary of R45 000 per month. Her employer
took out a life policy on her life 1 March 2016 and pays a premium of R800 per month. The policy
will pay an amount of R700 000 to Ann’s dependants in the event of her death.
• What are the tax implications in respect of the premium?
• Will be deductible as long as premium is fringe benefit in Annes income
• What are the tax implications to Ann with regard to the premiums paid by her employer
during the 2019 year of assessment?
• Fringe benefit
• What will Ann’s tax position be for the 2020 year of assessment if the policy is an “income
protection” policy?
• Proceeds will be tax free (Sec (10) (1g))
• If Anne dies on 1 April 2020 and an amount of R700 000 will be paid to her surviving
husband. What are the tax implications in respect of the policy proceeds:
• the employee (Ann);
• Income tax purposes, deemed to be accrued to her the day before she dies.
Full q deduction for estate duty purposes.
• the employee’s beneficiary?
• No tax deductions,
Key Person Assurance:
• Policy owned by employer/business on the life of employee to compensate for negative
financial impact on business in event of death disability or severe illness of the key
employee.
• Valuation of key person: 5 times multiple of salary or replacement years multiplied by profit
loss impact or detailed itemizing of cost of loss and replacement of key employee.
• If the policy will only attract income tax the amount needed by the company on the death
of the key person must simply be divided by 0,72 as only 72% of the policy proceeds will
remain after income tax (based on a company tax rate of 28%).
• If the company is also a family company and estate duty will be levied on the proceeds sec
4(p) of Estate Duty is applicable and calculation needs to be done to take this into account.
Key person policy: Estate duty
• Section 3(3)(a)(ii) Policy proceeds excluded from deemed property provided that:
• (i) the policy was not affected by of at the instance of the deceased; and
• (ii) no premium was paid or borne by the deceased; and
• (iii) no amount due or recoverable under the policy has been or will be paid into the
estate of the deceased; and
• Policy proceeds will be paid into company, and applied to cover the loss.
• (iv) no amount has been or will be paid to or utilized for the benefit of any relative of
the deceased; or any person who was wholly of partially dependent on the
deceased; or any company which was at any time a family company in relation to
the deceased.
• Family-owned business employee to the third degree of the owner (parents, siblings,
spouse of siblings).
• For purposes of estate duty, Discretionary interest in a trust will be excluded as an
asset or deemed asset from the estate of a business owner.
Debit and credit loan account cover: (be aware of)
• Debit loan – loan made by the company to a shareholder/director
• Shareholder/director acquires life cover to be able to repay the loan without any
estate liquidity problems in event of death.
• When shareholder dies, company repays loan.
•
Credit loan –loan made by shareholder/director to company
• Company acquires life cover on the life of the shareholder/director OR include it in
Buy and sell agreement.
• Life cover will be subject to estate duty as requirements of section 3(3)(a)(ii), but
buy and sell policy could be excluded for purposes of estate duty.
• Not a loss, repaying loan. (3)(3)(a)(ii) will not apply.
Business contingency plan: Structure
SARS has indicated that this structure is highly unlikely to meet the requirements of sec 3(3)(a)(ii) of
the Estate Duty Act. Policy proceeds will thus be included as deemed property in the estate of the
deceased for purposes of estate duty.
Preferred compensation:
• This is not an employer owned policy structure
• The structure is aimed at retaining services of valued employee, preventing resignation
• It entails a salary increase for employee, security cession for agreed term to secure against
resignation. Cession cancelled at end of the term. Employee pays income tax on salary
increase; proceeds are tax free. Employer can deduct increased salary for income tax
purposes.
• An agreement between the employer and the employee is a requirement.
• A sinking fund policy is suitable for preferred compensation.
Where an employee breaches a preferred compensation agreement by resigning, the employer will
call up the security cession and take ownership of the policy. The policy becomes a second-hand
policy and subject to CGT.
Deferred compensation plans are no longer viable due to The Income Tax Act amendment in 2012
removing the income tax benefits.
Example:
Where an employee breaches a preferred compensation agreement by resigning, the employer will
call up the security cession and take ownership of the policy. The policy becomes a second-hand
policy and subject to CGT.
The proceeds of a preferred compensation policy will be exempt from estate duty if the proceeds of
a preferred compensation policy cannot qualify for an estate duty exemption
Restraint of trade, corporate governance. (Case study application of
theory)
Section 4(p) Estate duty Act:
 Sec 4(p) is aimed at allowing a deduction against the dutiable estate to prevent the levying
of double duty where the value of the business interest is increased due to the inclusion of
the life policy proceeds, and the same life policy proceeds are also deemed property in the
estate of the life assured business owner.
Example
If Mandisa is part owner and also a key employee at her family’s company; and key employee cover
is taken out on her life by the family company:
• Due to the company being a family company, the requirements of sec 3(3)(a)(ii) would not
be met and the policy proceeds will not be exempt from estate duty. The policy will thus be
deemed property in Mandisa’s deceased estate.
•
The policy proceeds when paid to the company after Mandisa’s death will also increase the
value of her interest (shares) in the business, thus effectively increasing the dutiable value of
her estate twice. Section 4(p) allows for this double impact to be reversed.
Calculation example:
Formula:
Divide cover requirement by the following:
100-((100-%membership interest) x estate duty rate
100
Used for calculating cover required for Section4(p)
Assuming Mandisa owned a 60% interest in the business (assume an estate duty rate of 20%) and
the original cover requirement is R500 000 (net proceeds needed, in key person cover):
= 100 – ((100-60) X 20%)
100
= 100 – 8
100
= 92%
Thus R500 000/0.92
Increased cover requirement: R543 478.26
R543 478.26 paid out, as a result of her debt, included in her estate as deemed property.
Restraint of trade:
 Purpose of a restraint of trade agreement is for the employer company to protect itself
against the employee resigning and competing with the employer company.
 A restraint of trade is an agreement in terms of which the employer pays a negotiated
amount to the employee and in return the employee undertakes not to operate a competing
business for a certain period of within a certain geographical area in the event of
resignation.
 Any restraint of trade payment paid by an employer to an employee (natural person) in
terms of a restraint of trade agreement will be tax deductible for the employer. The
deduction needs to be made over the term of the agreement or 3 years, whichever is longer.
 Restraint of trade payments received by an employee (natural person) will be included in his
taxable income.
Deferred compensation: common before 1 march 2012 (tax benefits fell away, and it became bad),
defer some salary for retirement later on.
Corporate governance:
 King Code of Corporate Practices and Conduct - King IV (page 1086)
o Applicability:
 King IV is not legislation – adherence is voluntary
 JSE required all listed companies to adhere to King IV
 Companies Act
 Trust Property Control Act
 Labor legislation
 Common law (Roman Dutch law, case law)
Super profit case study:
Super profit business valuation
• Net asset value of the business (intrinsic value) = R6 000 000
• Expected after tax income over the next 5 years – R2 500 000 per year
• Fair rate of return = 15% (low/medium risk investment), which would generate income of
R900 000 on a capital investment of R6 000 000.
THUS, the super profit is R2 500 000 (potential return from business) less R900 000 (interest from
bank)
• = R1 600 000
Which is then discounted from an annual PMT over 5 years to a PV at 15%
• = R5 363 456
END
PMT = 1600000
N=5
I/YR = 15%
PV = R5 363 448.16
Final step: net asset value PLUS discounted super profits value (goodwill value) = total business
value:
• =R6 000 000 + R5 363 456 = R11 363 456
Buy and sell case study:
Bob and Joe were the only two partners in Eastern Imports. Bob had a 60% and Joe a 40% interest in
the business. They have entered into a buy-and-sell agreement in terms of which Bob’s life was
insured by Joe for R600 000 and Joe’s life was insured by Bob for R400 000. The partnership has
recently been dissolved and Bob has retained ownership of the policy on Joe’s life and vice versa.
Bob wants to know what the estate duty position will be should his ex-partner Joe die and an
amount of R400 000 be paid to him in terms of the policy on Joe’s life.
Section 33a1a (buy and sell agreement at inception of policy) = must be co-owners of a business at
date of death… not apply… policy proceeds will be deemed property in estate… pay estate duties
First Name policy, Buy and sell policy, Pure risk policy is excluded from CGT
Preferred compensation case study:
XYZ cc and Peter have entered into a preferred compensation agreement. In terms of the agreement
Peter will receive a monthly increase of R1 000. His current annual taxable income (before the
increase) is R400 000. Calculate the premiums on the preferred compensation policy and advise
Peter of the estate duty and CGT consequences in the event of his death during the term of the
preferred compensation agreement
Monthly salary increases R1 000
Annual taxable income R400 000
Marginal rate of 31%
Premium = 1000*31% = R690
Will be estate duty
CGT disregarded; first name policy paid to beneficiary
Financial Statements
Objective of financial statements:
 provide users with useful information about the financial performance, financial position
and changes in the financial position, so they can make economic decisions
o Understandable
o Reliable
o Relevant
o Comparable
Stakeholders of an entity:
Management
vs
 Internal users
 Reports are for internal use,
specific to organization’s needs
 Forward looking
Financial accounting



External users
Reports are highly regulated
(timing, info)
Backward looking
Assumptions when preparing accounting information:
 Economic entity
 Time period
 Monetary unit
 Going concern
o Continue into the foreseeable future, if otherwise = disclose
 Accrual principle
o Financial transactions are recorded when they occur, not when cash inflow/outflow.
Differential reporting:
 Companies must produce fairly the state of affairs of financial statements in a manner/form
that satisfies prescribed financial reporting standards, but these prescribed standards may
vary for different company categories. I.e., differential reporting.
Types of entities:
 Sole owner
Personal liability of owners
 Partnership
 Close corporation
 Company:
Limited liability of owners
o private versus public
Types of reporting regulations in SA:
 Companies Act
 Close corporation Act
 JSE Listings Requirements
 Income Tax Act Etc.
The annual report
 Annual report --- Integrated report (IR)
 Consolidated reporting = group --- Separate company reporting
 IFRS (companies that compile general purpose financial statements --- US GAAP
Income statement
 Is the entity profitable?
 Statement of comprehensive income






Expense:
o Decreases in resources resulting from the sale of goods or services
Revenue:
o Increases in resources resulting from the sale of goods or services
o Sales + other items
Turnover
o More closely related to sales figure
Asset: economic resource resulting from a prior transaction and will provide future
economic benefits
Liability: obligation resulting from a past transaction and will require sacrifice of economic
resources at some future date
Equity = Assets – Liabilities
o
Own - Owe
Statement of changes in equity (not too important):
 Represents owner’s claim on the business
 Contributed capital, retained earnings, reserves
Statement of cash flows:
 Differs from accrual principle (similar to a bank statement)
Additional information:
 Notes to the financial statements
 Independent auditor’s report
 Director’s report
 Management discussion and analysis
Introductory examples of financial statements:
Integrated sustainable reporting:
 Social reports: details on employment practices (health and safety) as well as contributions
or activities aimed at society at large (donations to charity).
 Environmental reports: details on the effect of business’s/company’s activities on the
environment.
 Value added statements: give information on what value has been created by the business,
and how varies parties assisted in creating the value shared therein.
The accounting equation:
A
– L =
E
Own – Owe = Owner’s portion
A = L + E + (Income – Expense)
From transaction to annual report:
Income statement for the reporting period ending:
Sales
less: COS
Less: other operating expenses
Profit before interest and tax
Interest paid
Profit before tax
Taxation paid
Profit for the year
When compiling a CF’s:
All sales for cash?
All COS items already paid in cash?
All operating expenses already paid in cash?
All interest relating to this reporting period already
paid in cash?
All tax relating to this reporting period already
paid in cash?
(CF) Cash Flow components:
Cash flow statement for the year…
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Change in cash flow
Cash flow beginning of the year
Cash flow end of the year
X
X
X
X
X
X
Cash flow transaction categories:
 Operating
o Cash effect of profit for the year, also taking into account the dividend payment
 (From Retained earnings)
 Investing
o Investment in and sale of long-term assets
 Financing
o Finance obtained/ repaid via long-term liabilities and share capital
Transaction example:
Balance Sheet
Assets = Liabilities + Equity
10 000
10 000
2 800
-2 000
2 100
-1 500
-8 000
8 000
9 000
9 000
-700
2 100
-2 100
-9 000
-9 000
-500
-1 500
-1 500
200
8 700
0 8 700
Income Statement
Income
Expense
2 800
Cash flow statement
CFO
CFI
CFF
10 000
2 800
-2 000
2 100
-1 500
-8 000
-700
-500
4 900
-700
2 100
-9 000
-500
-1 500
-4 700
-14 800
0 10 000
Openinge cash balance
20 000
Cash flow for the year
-4 800
CFO
-14 800
CFI
0
CFF
10 000
Closing cash balance
15 200
Ratio analysis:
Limitations of ratio analysis:
 Ratio in isolation not valuable
o To be used in combination and compared over several years
 If company is diversified into different industries
o Cannot be measured against one set of industry averages
 If company wants excellent performance
o Cannot compare to industry averages, but to industry leaders
 Differences in accounting policies applied
 Year-ends and seasonality differ
 Inflation
 Different definitions
o Apply same definition consistently over period
Format of comparisons:
 Trends on a line-for-line basis over time
o Horizontal
 Study of percentage changes from year-to-year
 Compare 2 years » (β2 – β1)/β1
 Multiple years » CAGR calculated
o
Vertical (or component percentages)
 Shows relationship of a financial statement item to its base
 No Rand amount: only %.
o Vertical analysis % = line item ÷ base
 For I/S: total revenue is the base (=100)
 For B/S: total assets are the base (=100)
 = Called common-size income statement or balance sheet
 Viewed as best format for benchmarking
Relationship between 2 different amounts → Ratio analysis
o
Types of ratios:
 Liquidity ratios
 Solvability (gearing or leverage or debt) ratios
 Activity or turnover ratios
 Profitability ratios
 Market ratios
 Cash flow ratios
 Value-added ratios
Liquidity:
 Current ratio
o Current assets ÷ current liabilities = x times
 Quick ratio (Acid test)
o (Current assets – Inventories) ÷ current liabilities = x times
Solvency (solvability)
 Debt to equity ratio
o Total liabilities ÷ Shareholders’ equity= x:1
 Debt to total assets
o Total debt ÷ Total assets = x:1


Benefit of using debt
o Interest tax deductible; cost of debt therefore: interest x after tax retention rate
o Return on money invested should be > cost of debt
Risk of using debt
o Interest cover
o BUT better to look at CFS: Was CFO positive before and after interest paid in cash?
Retirement planning products and introduction
Four different types of clients:
 Person before retirement
o Retirement Annuity, Pension, Provident, Preservation Fund
 Person who withdraws before retirement
o Withdrawal Benefits (cash lump sum and/or transfer to approved fund)
 Person at retirement or death
o Lump Sum, Annuity Income for beneficiaries/ dependents
 Person receiving annuity after retirement
o Conventional Annuity/ Living Annuity
Retirement vehicles:
 Pension fund
 Provident Fund
 Retirement Annuity Fund
 Pension Preservation Fund
 Provident Preservation Fund
Pension funds:
 A natural person may only belong to a pension fund if such person is a person is employed
by an employer (i.e., if the person is an employee).
 A partner in a partnership is regarded as an employee of the partnership, and may thus be a
member of a pension fund;
 All employees of a class or classes (compelled membership for example could only relate to
employees 65 or younger or employees practicing specified occupations) specified in the
fund rules will be compelled to become members of a pension fund that exists at the time of
commencement of their employment. If there is no fund in place at time of commencement
of employment, and such a fund is established at a later stage they may elect to become
members of such fund at any stage.
o
The previous requirement that such election had to be made within 12 months after
the fund was established has been abolished from 1 March 2018.
Provident funds:
 A natural person may only belong to a provident fund if such person is a person is employed
by an employer (i.e., if the person is an employee).
 A partner in a partnership is regarded as an employee of the partnership, and may be a
member of a provident fund.
 All employees of a class or classes (compelled membership for example could only relate to
employees 65 or younger or employees practicing specified occupations) specified in the
fund rules will be compelled to become members of a provident fund that exists at the time
of commencement of their employment. If there is no fund in place at time of
commencement of employment, and such a fund is established at a later stage they may
elect to become members of such fund at any stage.
o The previous requirement that such election had to be made within 12 months after
the fund was established has been abolished from 1 March 2018.
Retirement Annuity funds:
 Only a natural person may be a member of a Retirement Annuity Fund.
 A member of a retirement annuity fund however does not need to qualify as an employee,
as opposed to pension and provident funds where an employment relationship is a
requirement.
o i.e., any natural person may be a member of a retirement annuity fund.
Pension preservation funds:
 Employers previously had to apply to participate and potential members had to be members
of employer’s fund. The Definitions in Income Tax Act – 2008 changed this requirement,
where “preservation fund will be untied from the employment relationship”. Employee can
choose own preservation fund.
 Employment during membership is thus not a requirement, but membership is limited to:
o Former members of a pension fund or provident fund whose membership of that
fund has terminated due to—
 Resignation, retrenchment or dismissal from employment and where
member elected to have a lump sum benefit that is payable as a result of
this termination transferred to that fund;
 The winding up or partial winding up of that fund, if the member elects or is
required in terms of the rules to transfer to this fund; or
 A transfer of business from one employer to another in terms of the Labor
Relations Act, and the employment of the employee with the existing
employer is transferred to the new employer, if the member elects or is
required in terms of the rules of the pension fund to transfer to the
preservation fund.
o Former members of any other pension preservation fund or a provident
preservation fund—
 If that fund was wound up or partially wound up; or
 if an existing member of a pension/provident preservation fund elects to
transfer the benefit to another pension preservation fund;
o Former members of a pension fund, pension preservation fund, provident fund or
provident preservation fund or nominees or dependants of such former members
o
o
where an “unclaimed benefit” as defined in the Pension Funds Act is due or payable
by the fund; or
Ex-spouses of members of a pension fund, pension preservation fund, provident
fund or provident preservation fund who have elected to transfer to fund amounts
awarded to such ex-spouses in terms of any court order contemplated in section
7 (8) of the Divorce Act.
Former members of a pension fund or provident fund who elected to have a lump
sum benefit transferred to a pension preservation fund on or after reaching
retirement age (but before retiring from such pension or provident fund).
Provident preservation funds:
 Employers previously had to apply to participate and potential members had to be members
of employer’s fund. The Definitions in Income Tax Act – 2008 changed this requirement,
where “preservation fund will be untied from the employment relationship”. Employee can
choose own preservation fund.
 Employment during membership is thus not a requirement, but membership is limited to:
o Former members of a pension fund, pension preservation fund, provident fund or
provident preservation fund whose membership of that fund has terminated due
to—
 Resignation, retrenchment or dismissal from employment and where
member elected to have a lump sum benefit that is payable as a result of
this termination transferred to that fund;
 The winding up or partial winding up of that fund, if the member elects or is
required in terms of the rules to transfer to this fund; or
 A transfer of business from one employer to another in terms of the Labor
Relations Act, and the employment of the employee with the existing
employer is transferred to the new employer, if the member elects or is
required in terms of the rules of the pension fund to transfer to the
preservation fund.
o Former members of any other pension fund, pension preservation fund, provident
fund or provident preservation fund—
 If that fund was wound up or partially wound up; or
 if an existing member of a pension/provident preservation fund elects to
transfer the benefit to another provident preservation fund;
o Former members of a pension fund, pension preservation fund, provident fund or
provident preservation fund or nominees or dependents of such former members
where an “unclaimed benefit” as defined in the Pension Funds Act is due or payable
by the fund; or
o Ex-spouses of members of a pension fund, pension preservation fund, provident
fund or provident preservation fund who have elected to transfer to fund amounts
awarded to such ex-spouses in terms of any court order contemplated in section 7
(8) of the Divorce Act.
o Former members of a pension fund or provident fund who elected to have a lump
sum benefit transferred to a provident preservation fund on or after reaching
retirement age (but before retiring from such provident fund).
Withdrawal:
 Withdrawal refers to withdrawing the fund value (lump sum) from a pension, provident,
retirement annuity, pension preservation or provident preservation fund before retirement
or death.



Pension & Provident Funds: on resignation/dismissal/retrenchment from employment (and
thus resignation from pension/provident fund) or where fund is wound up.
Pension & Provident Funds: What about where a business concern is sold and we are dealing
with a section 197 transfer from one employer to another – will member (employee) be able
to withdraw from retirement fund?
o According to the pension fund rules “no member may terminate his membership of
the Fund while he remains in service…”
Retirement Annuity Fund: Where the member’s interest in the fund is less than an amount
determined by the Minister of Finance in the Government Gazette: this amount is currently
R15 000. NB the amount of R15 000 is calculated per fund, i.e., not per retirement annuity
contract (policy) or per insurer.
o Example 1: Mr. X has 2 retirement annuity policies within the ABC retirement
annuity fund of XYZ Insurance Company: policy 1 has a fund value of R 11 000 and
policy 2 has a fund value of R5 000. As the collective value of the 2 policies (R16 000)
exceeds R 15 000, Mr. X will not be able to withdraw the amount of R16 000 from
the fund.
o Example 2: Mr. Y has 2 retirement annuity policies with the XYZ Insurance Company.
The XYZ Insurance Company administers more than one retirement annuity fund.
Policy 1 has a fund value of R 16 000 and it falls within the ABC retirement annuity
fund and policy 2 has a fund value of R5 000, but it falls within the DEF retirement
annuity fund. As the 2 policies are held in 2 different funds, we will look at the
respective values in each fund: the policy in the ABC retirement annuity fund
exceeds R 15 000 and Mr. Y will thus not be able to withdraw it, but the policy in the
DEF retirement annuity fund does not exceed R 15 000 and Mr. Y will thus be able to
withdraw it.
o
o
o
o
Where the member (amended from 1 March 2021 – latest changes are discussed
here):
 Emigrates from South Africa and the emigration is recognized by the South
African Reserve Bank (formal emigration) if the application for recognition of
emigration was received by 28 February 2021 and approved by 28 February
2022; or
 Has not been a South African resident for an uninterrupted period of 3 years
on or after 1 March 2021; or
 Departs from the Republic on expiry of a work visa, or a visitor’s visa.
Formal emigration differs from “ceasing to be a resident” – residence from an
income tax perspective depends on:
 Where a person ordinarily resides; or
 If a person does not ordinarily reside in South Africa, the physical presence
test is used to see if the person is still a “resident” in South Africa for tax
purposes; but
 A person will not be regarded to be a South African resident if a Double
Taxation Agreement entered into with another Country, provides that the
person is regarded to be a resident of such other country.
NB: Where a commutation of the interest in a Retirement Annuity Fund is sought
based on emigration, SARS does not allow such commutation where the member
emigrates to one of the Common Monetary Area (CMA) countries: Namibia, Lesotho
and Swaziland.
NB: SARS has now confirmed that where a commutation of the interest in a
Retirement Annuity Fund is sought based on the member having ceased to be a
resident for a continuous period of 3 years, such commutation will be allowed where
the member ceases to be a South African resident and then becomes a resident of
one of the Common Monetary Area (CMA) countries: Namibia, Lesotho and
Swaziland.

Pension preservation fund and provident preservation fund:
o Where a member has transferred funds to a pension preservation fund or a
provident preservation fund (e.g., on resignation from employment), one
withdrawal (the member may withdraw the full benefit or less depending on his/her
wishes) is allowed from such preservation fund before retirement.
o
Divorce award payments made i.t.o. section 37D of the Pension Funds Act will not
prevent transfers to a preservation fund and will not affect the 1 withdrawal option
available to members of preservation funds.
o
Members may now also access benefits if such member:
 Emigrates from South Africa and the emigration is recognized by the South
African Reserve Bank (formal emigration) if the application for recognition of
emigration was received by 28 February 2021 and approved by 28 February
2022; or
 Has not been a South African resident for an uninterrupted period of 3 years
on or after 1 March 2021; or
 Departs from the Republic on expiry of a work visa, or a visitor’s visa.
o
However specific rules with regards to a transfer from the Government Employees
Pension Fund (GEPF) to another fund.
Rule 14.4.1 of the Rules of the GEPF provides as follows:
 “Such transfer shall be made subject to the rules of the approved retirement
fund specifying that, with reference to the transfer benefit, any subsequent
lump sum benefit payable by that fund or any successor fund to the member
and/or his beneficiaries shall be limited to one third of the said transfer
benefit, with interest. The balance of the member's transfer benefit with
interest, after deduction of any lump sum payment referred to above, shall
be applied for the purchase of an annuity, albeit immediately or upon the
member's ultimate retirement. “
o
o
The following is thus important where a transfer benefit is transferred from the
GEPF to a pension preservation fund:
 The full benefit has to be transferred to the pension preservation fund, i.e.,
the member will not be allowed to take a portion in cash and transfer the
balance to the pension preservation fund.
 If the member elects to take a withdrawal before retirement, such
withdrawal will be limited to one third of the fund value, and if the member
takes the full one third as a withdrawal, the member will not be allowed a
further lump sum on retirement – the member will have to annuities the full
amount on retirement. In practice it would however appear that there are
funds that apply this rule differently.
Transfers between funds on withdrawal:
 The following transfers are allowed to take place tax-free where the member has not
reached normal retirement age in the fund that is being transferred from (so-called
approved transfers) – amended from 1 March 2021:


In the case of a pension or provident fund, a transfer to another fund prior to the member
reaching normal retirement age, is only allowed when the member resigns from
employment or is dismissed or retrenched.
In the case of a retirement annuity fund, pension preservation or provident preservation
fund transfers prior to the member reaching normal retirement age, are generally speaking
allowed at any time.
The definition of a retirement annuity fund currently contains the following provision:
 “Save for the transfer of any member’s total interest in any approved retirement annuity
fund into another approved retirement annuity fund; no member’s rights to benefits shall be
capable of surrender, commutation or assignment or of being pledged as security for any
loan;”
o The above definition in effect thus provides that where a member has more than
one retirement annuity contract (policy) in a retirement annuity fund, the member
cannot transfer a single contract in the transferring RA. The member will thus have
to transfer the total interest.
 E.g., if the member has 2 annuity contracts/policies in Fund A, and wishes to
make a transfer to fund B, both contracts will have to be transferred as the
member will not be allowed to only transfer one contract.


Where an amount is transferred into a pension preservation fund from a pension or another
pension preservation fund it may not be transferred in such a way that it is split between
more than one pension preservation fund.
Where an amount is transferred from a pension preservation fund such amount may only be
transferred to:
o one pension fund;
o one pension preservation fund;
o one retirement annuity fund;
o a combination of one pension preservation fund and one retirement annuity fund;
o a combination of one pension fund and one pension preservation fund and; or
o a combination of one pension fund and one retirement annuity fund.
When is a member of a fund allowed to retire:
i.
A member of any fund (pension, provident, retirement annuity, pension preservation and
provident preservation fund) may retire on becoming “permanently incapable of carrying on
his or her occupation due to sickness, accident, injury or incapacity through infirmity of mind
or body”.
ii.
iii.
If not as a result of a situation contemplated in i. above, in the case of a pension or provident
fund, the date on which the member becomes entitled to retire form employment (NB –
bear in mind that where we are dealing with a provident fund, and a member has not
reached age 55 or is not “disabled” as per i. above, any lump sum received by such member
will be taxed as a “withdrawal benefit”, irrespective of the fund rules, unless the
Commissioner on application directs otherwise – Par 4(3) of the 2nd Schedule to the Income
Tax Act). Income Tax Act amended from 1 March 2015: before this date a lump sum was
deemed to accrue to the member at the earliest of the happening of certain events,
including retirement, i.e. at normal retirement age. The effect of this was that a member of a
pension/provident fund was compelled to retire from such a fund upon reaching normal
retirement age. The deeming provision with regards to retirement was removed – the
practical effect is now that the member can “preserve” his benefit in the pension/provident
fund until he elects to retire from the fund, if the fund rules allow for this.
If not as a result of a situation contemplated in i. above, in the case of a retirement annuity,
pension preservation or provident preservation fund, the date on which the member
reaches the age of 55. Member is not compelled by the Income Tax Act to retire at age 55
though – no maximum age provided at which member must retire (one must however
always check the rules of the fund and the provisions or the provisions of the specific
contract to establish whether the client will be obliged to retire or not).
Benefits of a member on retirement:
 Pension, retirement annuity and pension preservation fund: the member will only be
allowed to take one third as a lump sum and the balance (2 thirds) will have to be used to
purchase a compulsory annuity, unless the total value of the member’s retirement interest
in the fund is R247 500 or less (before 1 March 2016 this amount was R75 000). NB the
amount of R247 500 is calculated per fund, i.e., not per retirement annuity contract (policy)
or per insurer.
o NB: Where an amount is transferred from a provident or provident preservation
fund to a pension fund, retirement annuity fund or a pension preservation fund after
1 March 2021, such transfer may be fully “vested” contain a “vested” portion that
may be taken as a lump sum on eventual retirement. This will be dealt with later in
the lecture on “annuitization of provident funds”.
o Example 1:
 Mr. A retires from the ABC pension fund on 31 August 2021. His retirement
interest in the fund is R200 000.
 Result: He will be able to commuted the full R200 000 as a lump sum.
o Example 2:
 Mr. B retires from the DEF retirement annuity fund on 30 June 2021. He has
2 RA policies in this fund: Policy 1 has a fund value of R150 000 and Policy 2
a fund value of R130 000.
 Result: As the collective value of the 2 policies in the fund is R280 000 and
thus exceeds R247 500, Mr. B will not be able to commute any of the
policies as a lump sum on retirement.

Provident and provident preservation fund: Effective from 1 March 2021, Provident Funds
and Provident Preservation Funds are subject to the compulsory annuitisation regime – the
rules and provisions in respect of this issue will be dealt with in a later lecture specifically
dealing with the annuitisation of provident funds.
o Prior to 1 March 2021, a member could take the whole retirement interest as a lump
sum on retirement (there is of course nothing prohibiting the member to take a
smaller portion as a lump sum, or to take no portion as a lump sum and use the
balance to purchase a compulsory annuity if the fund rules provide for it).
Example:
In respect of provident and provident preservation fund members, the administration system will
maintain two accounts for each member from 1 March 2021. The vested portion will contain the
member share as at the end of February 2021 plus the investment return thereon going forward.
The non-vested portion will only contain the contributions made from 1 March 2021 onwards and
the returns thereon. It is therefore now possible for a member to transfer from a provident fund to a
pension fund but the benefits transferred will be transferred and maintained in the same type of
account in the pension fund.
Other options for members of a pension or provident fund upon reaching retirement age:
 If the pension fund or provident fund has a “preservation” option in terms of the rule of
such pension/provident fund, the member may elect to postpone his/her retirement, but
would not be able to make further contributions to the fund after retirement date.
 Member of pension or provident fund who reached retirement age and does not wish to
retire from such fund, has the option to transfer the benefit in such a pension or provident
fund to a retirement annuity fund upon reaching retirement age. Such a transfer is done
tax-free. Member can then also proceed to make further contributions to the retirement
annuity fund if he/she wishes to do so. This is dependent on the rules of the
pension/provident fund allowing for such a transfer.
 Member of pension fund who reached retirement age and does not wish to retire from such
fund, has the option to transfer the benefit in such pension fund to pension preservation or
provident preservation fund upon reaching retirement age. Such a transfer is done tax-free.
The member will however not be allowed to make the one withdrawal prior to retirement if
this option is exercised. This is dependent on the rules of the pension fund allowing for such
a transfer.
 Member of provident fund who reached retirement age and does not wish to retire from
such fund, has the option to transfer the benefit in such a provident fund to pension
preservation or provident preservation fund upon reaching retirement age. Such a transfer
is done tax-free. The member will however not be allowed to make the one withdrawal prior
to retirement if this option is exercised. This is dependent on the rules of the provident fund
allowing for such a transfer.


2021 Taxation Laws Amendment Act: Member of pension preservation or provident
preservation fund also has the option to transfer the benefit in such a pension preservation
or provident preservation fund to another pension preservation or provident preservation
fund upon reaching retirement age. Such a transfer is done tax-free.
From the 2021 Taxation Laws Amendment Act it now appears that SARS/ National Treasury
is starting to draw a definite line between transfers before reaching normal retirement age
and transfers on/after reaching normal retirement age in respect of transfers form all funds.
It would thus seem that SARS would for example not allow the following transfers where the
member has reached normal retirement age:
o Retirement Annuity Fund to Retirement Annuity Fund
o Pension Preservation/Provident Preservation Fund to Retirement Annuity Fund
Death before retirement – Benefits of a member on death:
 Pension, provident, retirement annuity, pension preservation and provident preservation
funds:
o

Dependents and/or nominees (beneficiaries) may take the whole amount as a lump
sum, but could also take a smaller lump sum, or no lump sum and use the balance to
purchase an annuity with. NB – also subject to rules of fund.
o Benefits will include fund value, but may also include “approved group life benefits”:
the term “approved group life benefits” essentially refers to group life insurance on
the life of the member provided within the pension or provident fund, as opposed to
lose standing group life cover provided by the employer through an insurer, but not
through the pension or provident fund.
Distribution of death benefits of all the above funds are subject to the provisions of Sec 37C
of the Pension Fund Act, which effectively required the following from the trustees of the
fund:
o If the member is survived by dependents only: Within a period of 12 months of the
death of the member, the benefits must be paid to some or all of such dependents
in proportions as may be deemed equitable by the board of the fund.
o If the said board does not become aware or cannot trace any such dependent within
the 12-month period and the member has nominated a nominee (who is not a
dependent) in writing:
 The benefit must be paid to such nominee (beneficiary), but
 If the debts of the estate of the deceased member is more than the assets of
the estate, an amount equal to such shortfall must be paid into the estate,
and the balance, if any, to the nominee.
o If the member is survived by both dependents and nominees: The benefit must be
paid to such dependents and nominees in such proportions as the board deems
equitable.
 This provision is applicable to nominations made on or after 30 June 1989.
o If the fund does not become aware or cannot trace any dependent of the member
within 12-month period and the member has not nominated any nominee: the
benefit must be paid to the estate of the member.
Dependent is defined in the Pension Funds Act as:
 A person in respect of whom the member is legally liable for maintenance;
 A person in respect of whom the member is not legally liable for maintenance, if such
person—
o was, in the opinion of the board, upon the death of the member in fact dependent
on the member for maintenance;
o is the spouse of the member;
o is a child of the member, including a posthumous child, an adopted child and a child
born out of wedlock.
 A person in respect of whom the member would have become legally liable for
maintenance, had the member not died.
Insolvency:
 Section 37A – Pension Funds Act: No benefit provided under a pension fund may be:
o Reduced
o Transferred
o Ceded
o Pledged or hypothecated
o Attached under a judgment or order of court
o Not more than R3 000 pa to be taken into account for section 65 determination of
judgment into debtor’s financial position.
o
Not protected in respect of amounts owing under the Income Tax Act and the
Maintenance Act. Maintenance deducted will be taxed at marginal rates in hands of
member and not as a lump sum see Sec 7(11) of Income Tax Act read with SARS
Interpretation Note 89 dated 1 March 2016.

Section 37B - Pension Funds Act:
o If the estate, of the any person who is entitled to a benefit payable in terms the
rules of a pension, provident fund or RA, is sequestrated, such benefit is deemed not
to be part of the assets of the insolvent estate.
o This is however subject to the provisions of Sec 37A & Sec 37D.

Section 37C – After 1 Nov 2008 (Death Benefits)
o Financial Services Laws General Amendment Act amended s37C
o Benefits upon death of member may now be paid in following manner:
 Directly to a dependent or nominee;
 Payment to a trust, if nominated by a member, major beneficiary or
guardian of a beneficiary;
 Payment to a beneficiary fund
o After 1 Nov 2008, the trustees of a retirement fund may no longer pay to a trust of
their own accord.
o
o
o

What is a “Beneficiary fund”:
 “Any association of persons or business carried on under a scheme or
arrangement established with the object of receiving, administering,
investing and paying benefits, referred to in section 37C on behalf of
beneficiaries, payable on the death of more than one member of one or
more pension funds”
The Beneficiary Fund needs to be registered into the Financial Services Laws General
Amendment Act.
Income payable to beneficiaries of a Beneficiary Fund is not taxable – exempt in
terms of Sec 10(gE) of Income Tax Act (As per the Taxation Laws Amendment Act
2009).
Section 37D: A retirement fund may deduct the following from the fund value before
payment:
o A loan granted to a member in respect of immovable property in certain
circumstances;
o Any amount due by a member to his employer i.r.io. Damage caused to employer
through theft, dishonesty, fraud, misconduct where member has admitted liability in
writing or judgment has been obtained in a court.
o Any amount which the fund has paid in respect of member’s subscription to a
Medical Aid or premium to a long-term insurer.
o Payments in terms of divorce order.
o Maintenance order.
o Employees’ tax required to be deducted or withheld in terms of the Fourth Schedule
to the Income Tax Act.
Compulsory Annuities:
 Compulsory annuities are purchased with funds from pension, provident, retirement
annuity, pension preservation or provident preservation funds and include:
o
o





Conventional/traditional annuities: guaranteed income.
Living annuities: subject to investment performance of underlying assets, amount of
drawdown taken by annuitant.
Voluntary annuities are purchased with voluntary (non-retirement fund) funds.
Annuity consideration may be determined with reference to the net investment amount,
less costs. Thus, where R100 000 was invested and costs were 5,5%, the annuity will be
calculated on the net amount of R94 500.
A compulsory (living or conventional/guaranteed) annuity can be provided in one of three
ways, i.e., the annuity can be:
o paid directly by the retirement fund to the member (i.e., paid directly from the
retirement fund’s coffers – fund owned annuity), or
o purchased from a South African registered insurer in the name of the fund (i.e., a
fund-owned annuity purchased form a long-term insurer), or
o purchased by the retirement fund from a South African registered in the name of
the retiring member (member owned annuity purchased from a long-term insurer).
The 2021 Taxation Laws Amendment Act:
o on retirement a member may purchase any one or a combination of the above type
of annuities, but where more than one annuity is purchased on retirement, each
annuity must be purchased with consideration of at least R165 000 (practically –
maximum number of annuities that could be purchased is four: SARS tax directive
systems only have four fields for inserting annuities purchased by retiree upon
retirement).
General Note 18 was repealed on 26 February 2021 and replaced by Binding General Ruling
58 (BGR 58, dated 4 November 2021). The only significant change: BGR 58 makes the
method of payment of annuity regime (in first bullet above) more flexible.
Compulsory annuities – Conventional/Traditional Annuities
 Single Life – only on the life of the annuitant. Payment will cease when annuitant dies.
 Guaranteed Term – Guaranteed to pay for a certain term from inception, even if annuitant
dies before the time (annuity will pay for the remained of the period).
 Escalation – annuity will escalate from year to year on percentage selected by annuitant.
 Joint and Survivorship – annuity pays till death of annuitant where after the full annuity or a
portion thereof is paid till the death of another person (usually the spouse of the deceased).
 Capital Preservation – when the annuitant dies, an amount equal to the capital invested in
the annuity pays out.
o This is essentially funded through a life policy taken out on life of annuitant.
Proceeds of life policy pays out income tax free.
Strengths

Income Guaranteed for Life

Investment Market Risk

No Longevity Risk
Weakness
 Generally, no upside market potential
 Death Benefits Limited (Joint Life,
Guaranteed Term, CPO)
Opportunities
 With-Profit/Bonus Escalation
o Option provides exposure to
upside of investment markets
with no downside risks
Threats
 Living Annuities
 Initial and ongoing Advice Fees on
Living Annuities but only Initial Advice
Fees on Traditional Annuities.

Composite Annuities

Improving Life Expectancies influence
annuity rates
Regulation 28:
 In the second draft of the proposed changes to regulation 28 submitted for comment on 31
October 2021, National Treasury proposes that the decision to invest in any asset class,
including infrastructure, remains that of the board of trustees of retirement funds.
Compulsory annuities – Living annuities
 Living annuities are compulsory annuities available to retiring members of Pension, RA,
Provident and Preservation funds (where the rules of the fund allow for this). It is by design
intended to last for the remainder of the annuitant’s life.
 It is regulated by two practice notes BGR58 and GN290. As well as the ASISA Standard on
living annuities and the definition of living annuities in the Income Tax Act.
 BGR 58 provides for the purchase of annuities by funds on behalf of retiring members. It
provides that the annuity must be compulsory, non-commutable and payable for the
lifetime of the retiring member.
 Living annuities are only subject to Regulation 28 if it is a fund owned living annuity (owned
by retirement fund) – not applicable to member owned.

Defined in Income Tax Act – definition essentially provides as follows:
o Living annuity is a right of a member / former member of a pension, provident,
o preservation fund or a RA, or his dependent/nominee, to an annuity purchased from
a living annuity provider at retirement/death in respect of which –
o The value of the Living annuity is determined by reference to the value of the assets
which are specified in the annuity agreement and held for these purposes;
o The annuity is determined in accordance with a method/formula prescribed by the
Minister;
o The value of assets may be paid in a lump sum if at any time less than amount
prescribed by Minister;
o The amount of the Living Annuity is not guaranteed by the provider;
o On the death of the member, the value of the assets may be paid to the dependent
or nominee as an annuity or a lump sum, and in the absence of a nominee
(beneficiary) it must be paid to the estate of deceased annuitant as a lump sum.

The salient provisions which dictate how living annuities may be paid are:
o Income levels of minimum 2.5% and maximum 17.5% on annual capital value
o Income levels of minimum 5% and maximum 20% if living annuity concluded before
21 Feb 2007, provided that these %’s may be adjusted to the 2.5% - 17.5% levels if
annuitant agrees.
o Must at all times produce a life annuity
o Annuity benefits must be renewed on annual basis (on anniversary date). The
revised fund value must be used to calculate minimum and maximum levels of
income payable. Thus – only on anniversary date annuitant can decide to adjust the
drawdown rate (between 2.5% and 17.5%, or 5% and 20%).

Where living annuity contracts are transferred from one insurer to another in terms of
Prudential Communication 1 of 2021, or from a retirement fund to an insurer in terms of
section 14 of the Pension Funds Act:
o The frequency of payment may not be changed;
o


The annuity may not be split so that more than one annuity is payable subsequent
to the transfer.
Living annuity may be commuted as a lump sum if the value of the underlying assets of the
living annuity falls below R125 000 irrespective of whether a portion of the retirement
interest was commuted as a lump sum when the living annuity was purchased or not. Where
living annuity is commuted by an annuitant as a lump sum it will be taxed in hands of the
annuitant terms of the retirement table applicable to lump sums.
Living annuity may also be commuted as a lump sum when the annuitant dies (see
discussion below). Where the annuitant dies and the beneficiary decides to commute the
living annuity as a lump sum, it will be taxed in the hands of the deceased in terms of the
retirement table applicable to lump sums.
o Where a trust is the holder of a living annuity, such living annuity may also be
commuted in anticipation of termination of the trust (see discussion below) – 2020
Taxation Laws Amendment Act. Where living annuity is commuted by a trust as a
lump sum it will be taxed in hands of the trust terms of the retirement table
applicable to lump sums.
Living annuities providers:
o A bank;
o A collective investment scheme;
o A long-term insurer;
o A pension fund organisation;
o The national sphere of government
 The above confirms that a living annuity qualifies as an annuity and is thus taxable (part of
gross income) as the references to annuity includes living annuity. In response to the SARS v
Higgo Case (Cape High Court 2006) where a Living Annuity was viewed as capital and not
taxable.
ASISA Code on living annuities:
 Provides industry standards to make sure living annuities are marketed and administered
responsibly.
 Minimum disclosures at point of sale (explaining LA’s).
 Disclosure that LAs are not transferable and convertible.
 Member offices must communicate on annual basis the appropriate drawdown level as
determined in the code.
Compulsory Annuities – Living Annuities example:
 Male aged 57
 An investment amount of R100 000
 Gross return 10%
 Annuity to be calculated on R94 500
Living Annuities important aspects:
 PURCHASING MORE THAN ONE LIVING ANNUITY WITH RETIREMENT INTEREST ON
RETIREMENT:
o GN 19 dealing with the conditions that need to be met to purchase more than one
living annuity on death has been withdrawn and not replaced. Possible effect of this
is that person retiring may purchase multiple small living annuities each with a value
below R75 000 (where no lump sum was elected on retirement) or below R50 000
(where a lump sum was elected on retirement) in order to be able to commute living
annuities.
o Situation appears to differ on retirement (where there is no limit on the amount of
living annuities to be purchased) as opposed to the transfer of an existing living
annuity. On transfer of a living annuity from one insurer to another or from a
retirement fund to an insurer, annuity may not be split so that more than one
annuity is payable after such transfer – See GN290.
 ARE LIVING ANNUITES SUBJECT TO REG 28 (investment regulations of retirement funds):
o Where we are dealing with a member owned annuity it is not, as it is not owned by a
retirement fund (and the provisions of the Pension Funds Act is thus not applicable).
Although the ASISA Standard on Living Annuities encourage investment in line with
Reg. 28, it is not compulsory; but
o Where we are dealing with a fund owned annuity it is subject to Reg. 28, as it is
owned by a retirement fund (and the provisions of the Pension Funds Act is thus
applicable).
o Study ASISA Standard on Living Annuities
 LIVING ANNUITIES AND DIVORCE OF ANNUITANT:
o Dealt with later on.
 WHAT HAPPENS ON DEATH OF ANNUITANT OR TERMINATION OF A TRUST?
o A beneficiary may be nominated to receive the benefits on the death of the
annuitant. If no beneficiary is nominated, the benefits will be paid to the estate of

the deceased annuitant as a lump sum. As from 1 March 2012, the nominated
beneficiary can take the benefits in the form of a lump sum, an annuity (“living
annuity”) or a combination of the two.
o Is Sec 37C (prescribing the distribution of the benefit between
beneficiaries/dependents applicable: only if it is a fund owned living annuity
(annuity owned by a retirement fund). If it is a member owned living annuity Sec 37C
will not be applicable – nominated beneficiary will be paid irrespective whether
there are (other) dependents.
o Nomination of beneficiaries via will of deceased annuitant: If the deceased
“nominates” a person(s) as a nominee/beneficiary in his/her will (i.e. instead of
doing it on a beneficiary nomination form), does this constitute a valid “nominee”,
i.e. would this person(s) be able to choose to receive the amount as a lump sum,
annuity or combination of lump sum and annuity. Non-binding private opinion of
SARS: a person appointed as a nominee in a will does not constitute a valid
“nominee” in this regard, and the amount will have to be paid as a lump sum to the
estate (thus potentially triggering tax on lump sum). However, if the annuitant
nominates the estate (i.e., via the executor) as the nominee on a beneficiary
nomination form, this will constitute a valid “nominee” and the executor will then
be able to choose between an annuity, or a lump sum or a combination of both. NB:
the product (rules) will have to make provision for the nomination of the estate
(executor). Safer to rather make use of beneficiary nomination form.
o Nomination of a trust as beneficiary of a living annuity: SARS has indicated that this
will be a valid beneficiary nomination if the beneficiaries of the trust are all natural
persons. SARS have further indicated that the beneficiaries may be taxed on the
annuity income (instead of the trust which will be taxed at a flat rate of 45%), if the
trust registers for PAYE (i.e., as an “employer”) and the trust provides a tax
clearance certificate to the administrator of the living annuity, on an annual basis, as
proof that the trust submitted the required returns and all taxes have been paid.
 NB: If trust is nominated, the living annuity may now be commuted as a
lump sum if the trust is in the process of being terminated (changed via
2020 Taxation laws Amendment Act).
o NB: Always check whether the product allows for a trust to be nominated as a
beneficiary, and if the product allows for same (e.g., product may provide that a
trust may be nominated as a beneficiary on a living annuity, but that the benefit
must be paid as a lump sum to the trust, which may result in tax on the lump sum
being payable).
WHAT ABOUT THE INCOME TAX IMPLICATIONS ON DEATH OF ANNUITANT?
o If the beneficiary opts to receive an annuity (income – the beneficiary) will be taxed
on income at marginal rate (normal income).
o If the beneficiary receives a lump sum – is deemed to have accrued to the annuitant
immediately prior to death, therefore taxed with other retirement lump sum
benefits (i.e., remember aggregation) in the hands of the deceased in terms of the
lump sum tax table applicable to death.
Strengths
 Income flexibility
 Transparency
 Investment choice
 Bequest control
Weakness
 Income not Guaranteed
 Investment Market Risks
 No Longevity Protection
 Conservative portfolios
Opportunities
Threats




Guaranteed Funds in LA
LA with longevity protection
Composite Annuities
Hybrid Annuities



Legislation
Decreasing Expectations of Real
Returns on Growth Assets
Improving Life Expectancies
Who should purchase living annuities? Clients who:
 want to be able to alter the income that they draw annually.
 are prepared to take the risk that poor market performance will negatively impact on future
income from their investment.
 want to draw a variable income from their retirement funds, with any remaining fund
benefits going to their beneficiaries on death.
 are prepared to take the risk that their retirement capital may reduce, and therefore their
income may be insufficient, especially if they draw too much income early on.
 wish to have the ability to change the investments funds they hold.
 have reason to believe that their life expectancy will be short due to poor health or
immediate family history.
Non-retirement savings vehicle – Tax free savings account
 An annual amount of R36 000 (previously R33 000 - limit increased from 1
 March 2020), subject to a lifetime limit of R500 000 may be contributed to the
 new savings vehicle and the returns & proceeds will be tax-free (i.e., the limit is
 on the contributions and not the investment value).
 May be interest-bearing and non-interest-bearing investment.
 Return on above investments will be exempt from income and dividends tax.
 In determining the aggregate capital gain or capital loss of a person, any capital gain or
capital loss in respect of the disposal of tax-free investments must not be taken into
account.
 Where a taxpayer contributes in excess of the prevailing annual and lifetime contribution
limit in any year, a penalty of 40 per cent on the amount of the excess contribution will be
levied by SARS on the individual.
 Introduction of tax-free investments had no effect on interest exemptions in Income Tax Act
and National Treasury has indicated that the interest exemption will not be removed, but
that it will also not be increased, thus eroding its effect over time as a result of inflation.
 Growth, including dividends and income reinvested not taken into account as contributions.
 No exemption in Estate Duty Act or any other Act with regards to estate duty
 The returns earned by the taxpayer from tax free savings accounts prior to death =
“property” as defined in the Estate Duty Act.
 Returns earned by estate after date of death = not “property” in estate.
 However, amounts within tax free investments cannot be transferred to beneficiary’s taxfree investments. Any transfer of tax-free investments from one individual (or his estate) to
another will be deemed to be a contribution and subject to the annual and lifetime
contribution limits of the recipient.
Regulation 28
"A fund has a fiduciary duty to act in the interests of members whose benefits depend on the
responsible management of fund assets. This duty supports the adoption of a responsible
investment approach to deploying capital into markets that will earn adequate risk adjustment
returns suitable for the fund's specific member profile, liquidity needs and liabilities. Prudent
investing should give appropriate consideration to any factor which may materially affect the
sustainable long-term performance of a fund's assets, including factors of an environmental, social
and governance character. This concept applies across all assets and categories of assets and should
promote the interests of a fund in a stable and transparent environment."
Investment requirements:
 Section 19: Investment restrictions
 Regulation 28: The asset distribution requirements are set out in Table 1
o (the fair value of the assets may not exceed the specified percentages of the total
fair value of the total assets of the fund)
Benefit events:
 Withdrawal
 Death
 Retirement
 Disability
 Fund termination
 Unclaimed benefit
Minimum benefit regime:
 All member contributions (less some costs)
 All employer contributions - less
o administration costs
o fund management expenses (contingency reserve levy)
o any insured death and disability insurance (if applicable).
 Any benefits transferred from a previous fund;
 The investment returns (fund growth) earned thereon.

What can be deducted:
o Tax payable on any lump sum benefit
 The fund must obtain a tax directive from SARS and deduct the amount of
tax (if any)
o housing loans
o divorce orders
o maintenance orders
o losses suffered by the employer as a result of your theft, fraud, dishonesty or
(dishonest) misconduct
o arrear taxes
Options on withdrawal:
 Leave your benefit in the fund, as a paid-up benefit
o All or nothing
 Paid into your bank account as a cash lump sum
 Transfer your benefit to another retirement fund
 Part lump sum and part transfer
o New employer – some in cash and transfer the rest
o Preservation fund – some in cash and transfer the rest
Counselling service:
 retirement benefits counselling means the disclosure and explanation, in a clear and
understandable language, including risks, costs and charges, of:
o
o
the terms of the fund’s annuity strategy (not less than three months before their
normal retirement age) ;
before any withdrawal benefit is paid to them or any transfer is made
Options on withdrawal – and tax:
 The tax implications no longer follow automatically on date of withdrawal
 Only when the member makes an election

What if you do not make a election? (Regulation 28)
o Member credit to be treated as “paid-up” on withdrawal until the member instructs
the fund to either pay out or transfer the benefit due to him.
o The fund must give the member a paid-up membership certificate within 2 calendar
months of becoming aware that the member is no longer employed by the
participating employer.
o In addition, must automatically accept transfer of members’ balances from other
retirement funds to ensure members’ retirement savings follow them from
employer to employer.
New generation paid up benefit – when you withdraw from the fund:
 You can leave your money in the fund
o where it will grow tax free
o no additional costs or commissions
 You can take in cash at any time
 Retire from fund at or after normal retirement age (NRA) at any time you like
Health care:
Open enrolment: Types of schemes
 Open/commercial schemes
o Anyone can join
 Restricted membership schemes
o Only allow certain individuals to join (e.g., within company)
Protection:
 Waiting periods
o 3-month general waiting period
 a period in which a beneficiary is not entitled to claim any benefit
o 12-month condition specific waiting period
 a period during which a beneficiary is not entitled to claim benefits in
respect of a condition for which medical advice, diagnosis, care or treatment
was recommended or received within the twelve-month period ending on
the date on which an application for membership was made
o
o
o

If a member voluntarily resigns from his employment and as a result membership of
a restricted medical scheme is terminated, an open medical scheme to which he
applies within 90 days cannot impose any waiting periods other than any unexpired
waiting periods imposed by the previous scheme.
If a member voluntarily resigns from his employment and as a result membership of
a restricted medical scheme is terminated, an open medical scheme to which he
applies within 90 days cannot impose any waiting periods other than any unexpired
waiting periods imposed by the previous scheme.
If a scheme imposes waiting periods on a member, these are not applicable to all of
his dependents.
Late joiner penalties
Membership to a medical scheme registered outside of South Africa does not qualify for creditable
coverage provided such scheme is similar to our South African schemes.
Other:




Waiting periods & LJP’s have to be applied individually
What is the date of application?
Letter of acceptance
Joining during a benefit year


If a medical scheme is not attracting members that are younger than the average age profile
of a scheme, it means that the healthcare expenses of the scheme are likely to rise.
A medical scheme can impose a 12-month condition specific and a 3-month general waiting
period on a child dependent born during membership of the scheme if the member does not
register the dependent within 90 days
Termination of membership/registration:
 Failure to pay fees
 Failure to repay debt
 Fraudulent claims
 Committing a fraudulent act
 Non-disclosure of material information
o Need to disclose medical advice, diagnosis, care or treatment recommended or
received in the 12-month period before application is made.
 What about prior to the 12-month period?
 And between application and commencement of membership?
o
Why is not disclosing medical information material?
 Because it affects a schemes ability to assess its exposure to risk and to
determine the benefits it offers and the contribution rates it charge.
Application form statement:
 “Should this Application contain any false statement or fail to disclose any material
information, the Scheme may, at its sole and absolute discretion, elect to regard my
membership of the Scheme void ab initio, as if it never happened.”
 “I understand that the consequence of this election on the part of the Scheme will be that I
will be obliged to immediately repay to the Scheme all benefits received by or on behalf of
me and that all or part of the contributions paid by me to the Scheme may be retained by the
Scheme to offset any costs which the Scheme has incurred on my behalf.”
Consequences:
 Potential financial hardship
 No cover for the period from which “joined” the scheme
 May affect waiting periods and LJP’s
Waiting periods:
 Is the application within or outside 90 days?
 What is the reason for the change/application?
Late Joiner penalties apply if:
 joins a scheme as member or dependent after 31 March 2001;
 is 35 years of age or older;
 does not have sufficient years of creditable medical scheme cover as member and/or
dependent; and
 Had a break > 3 months as beneficiary after 31 March 2001.
Late Joiner penalties:
 Penalty bands:
o 1–4 years ...............…............. 0,05 × contribution
o 5–14 years ...........…............... 0,25 × contribution
o 15–24 years .......….... ….…...... 0,5 × contribution
o 25+ years..........…................... 0,75 × contribution

A = B minus (35 + C)
o A = number of years in table
o B = age of late joiner
o C = years of creditable coverage
Creditable coverage:
 Beneficiary of a medical scheme;
 Beneficiary of an exempt medical scheme;
 Beneficiary of the South African National Defense Force; or
 Beneficiary of the Permanent Force Continuation Fund;
 but excluding any period of coverage as a dependent under the age of 21 years.
Community rating:
 What is the general funding principal underlying insurance products?
o Community rating means that the healthier beneficiaries on a benefit option
subsidize the less healthy beneficiaries on the option.
o Premiums are risk rated based on the profile of the applicant
o Medical scheme contributions, however, are not allowed to be risk rated
 Can load or discount members' contributions in a way.

Terms and conditions for admission:
o Contributions may only be based on income and/or number of dependents
o Does this in fact apply in practice?
Contribution tables:
 What different rates are normally contained in a contribution table?
o Member rates, adult rates and child dependent rates
 What is a child dependent?
o a dependent who is under the age of 21 or older if he or she is permitted under the
rules of a medical scheme to be a dependent
Dependents:
 the spouse or partner, dependent children or other members of the member’s immediate
family in respect of whom the member is liable for family care and support; or
 any other person who, under the rules of a medical scheme, is recognized as a dependent of
a member
Spouse:
 Spouse generally defined as the spouse of a member to whom the member is married in
terms of any law or custom
 Spouse would include a civil union marriage
Partner:
 Generally defined as a person with whom the member has a committed and serious
relationship akin to a marriage based on objective criteria of mutual dependency and a
shared and common household, irrespective of the gender of either party
Child:
 Generally direct descendants, stepchildren and adopted children
 Need to check as some schemes do apply a wider definition.
o Child dependent, under age 21 they receive a lower rate.
Dependent child:
 A child factually dependent, irrespective of age.
Immediate family:
 Mother, father and siblings
 Memo to model rules
Community within scheme:
 Registration requirements for benefit options
 Why different benefit options?
o Discounted network options and preferred provider networks
Minimum benefits:
 No limitation shall apply to the re-imbursement of any relevant health service obtained by a
member from a public hospital where this service complies with the general scope and level
as contemplated in para (o) and may not be different from the entitlement in terms of a
service available to a public hospital patient.
 Prescribed minimum benefits (PMB)
o Reg 8(1) - must pay in full
o Reg 8(2)(a) – may provide that only in full if from a designated service provider (DSP)
 Public hospital
o
o

 100% co-payment?
Reg 8(2)(b) - co-payment if not from DSP unless involuntarily obtained
The prescribed minimum benefit conditions are listed by organ-system chapter and
set out a diagnosis and treatment.
PMB Involuntarily obtained
o The service was not available from the designated service provider or would not be
provided without unreasonable delay;
o Immediate medical or surgical treatment for a PMB condition was required under
circumstances or at locations which reasonably precluded the beneficiary from
obtaining such treatment from a DSP; or
o There was no DSP within reasonable proximity to the beneficiary’s ordinary place of
business or personal residence.
Regulation 8 pay in full requirement:
 What if any, is/are the underlying problem/s regarding this requirement?
 medical scheme cannot compensate a broker directly or indirectly for any other services
other than for providing broker services.
Example questions:
Your client needs treatment for a condition that falls within the prescribed minimum benefits but
which condition is otherwise excluded from benefits in terms of the rules of the medical scheme.
The rules of the medical scheme identify the public hospital system as the designated service
provider for the prescribed minimum benefits. Your client wants to know whether he would enjoy
medical scheme cover, and if, to what extent he would be covered, if his private doctor treated him
in a public hospital. Please motivate your answer.
(3)
Your client is informed by the public hospital that the procedure he requires can only be performed
in 14 months’ time. His doctor is of the opinion that this would be to the detriment of his health and
recommends that the treatment is obtained in a private hospital which can accommodate him
immediately. Your client wants to know whether the medical scheme would cover this treatment
and to what extent. Please motivate your answer.
(2)
Medical schemes vs insurance, who wants control?
 DoH certainly wants control
 But the respective Acts draw the lines
 Demarcation regulations

Business of a medical scheme:
o means the business of undertaking in return for a premium or contribution, the
liability associated with one or more of the following activities;



Providing for the obtaining of any relevant health service;
granting assistance in defraying expenditure incurred in connection with the
rendering of any relevant health service;
rendering a relevant health service, either by the medical scheme itself, or
by any supplier or group of suppliers of a relevant health service or by any
person, in association with or in terms of an agreement with a medical
scheme.
Health/accident and health policy:
 Means a contract in terms of which a person, in return for a premium, undertakes to provide
policy benefits upon a health event and includes a reinsurance policy in respect of such a
contract—
 excluding any contract—
o that provides for the conducting of the business of a medical scheme referred to in
section 1(1) of the MSA; or
o of which the policyholder is a medical scheme registered under the MSA, and which
contract—
 relates to a particular member of the scheme or to the beneficiaries of that
member; and
 is entered into by the medical scheme to fund in whole or in part its liability
to the member or the beneficiaries of the member referred to in
subparagraph (aa) in terms of its rules; but

Included as a health/accident policy:
o specifically including, notwithstanding paragraph (a)(i), any contracts identified by
the Minister by regulation under section 72(2A) as a health policy.
Health/accident policies:
Type
Purpose
Medical
To cover shortfall
expense
shortfall (gap
cover)
Non-medical
expense as a
result of
hospitalization
To cover nonmedical expenses
Requirements
One or more sums of money;
In aggregate not > R175 000 per
insured per annum;
Group underwriting;
Non-discrimination;
Not refuse contract unless previous
fraud;
May differentiate on age basis – age
bands;
May provide for w/periods – 90 days
and unexpired
Long / Short
Short
Fixed sum per insured per day not >
R3 716 or max lump sum of
R24 778pa;
Not require hospitalization > 3 days;
Calculated from day 1;
Not paid or ceded to service provider;
Not linked to indemnity;
Group underwriting;
Non-discrimination;
Long/short
Not refuse contrat unless previous
fraud;
May differentiate on age basis – age
ands;
May provide for w/periods – 90 days
and unexpired;
May not require MS m/ship
Frail care
HIV, AIDs,
Tuberculosis,
malaria testing
and treatment
International
travel
Medical
emergency


To cover costs or
expenses of
assistance for
activities of daily
living
To cover expenses
for testing and
treatment.
May not require MS m/ship
Long
Not linked to indemnity;
Group underwriting;
Non-discrimination;
Not refuse contract unless previous
fraud;
May differentiate on age basis – age
ands;
May provide for w/periods – 90 days
and unexpired;
May not require MS m/ship
Long (as rider
benefit) /
short
To cover cost of
May not require MS m/ship
health service while
travelling in country
not ordinarily
resident
To cover cost or
May not require MS m/ship
provide
education/transport;
Cover cost of
emergency
treatment
Short
Long (as rider
benefit) /
short
Excluded policies
o Major medical and dread disease policies paying stated amount on diagnosis
o Disability products
Primary healthcare policies
o Subject to MSA – 2 year exemption (extended 31 March 2024)
Type
Medical
expense
shortfall (gap
cover)
Benefit
One or more sums of money;
In aggregate not > R175 000
per insured per annum.
Considerations
Depends on MS product;
Are hospital costs covered in
full – agreements?
MS rate?
Supplier agreements?
Non – medical
expense as
result of
hospitalization
Frail care
HIV, AIDs,
Tuberculosis,
malaria testing
and treatment
International
travel
Medical
emergency
Fixed sum per insured per
day not > R3 716 or max
lump sum R24 778 pa.
Need if employed?
If self-employed?
Other insurance products?
To cover costs or expenses
of assistance for activities of
daily living
Not generally covered by MS
or limited benefits.
Need to see exactly what is
covered
Cost?
To cover expenses for testing PMB
and treatment.
To cover cost of health
service while travelling in
country not ordinarily
resident
To cover cost or provide
education/transport;
Cover cost of emergency
treatment
As and when required
PMB
Benefit options:
 Registration requirements
o be self-supporting in terms of membership and financial performance;
o be financially sound; and
o not jeopardize the financial soundness of any existing benefit option
 Why different benefit options?
 Risks of catering for different markets
Exercise:
ABC is a restricted m/ship scheme catering for some 4000 employees. M/ship profile ranges from
young/healthy to elderly/not so healthy and low income to high income. Your client wants to know
the following:
 Would it be possible to register 3 options with the same major medical benefits but high,
medium and low day-to-day cover? Please motivate your answer. (4)
Benefit option features:
 Traditional options
o Generally, refers to options where day to day cover paid from risk pool
o Insurance cover generally aimed at?
o Measures to curb costs?
 Hospital plans
o Aimed at?
 Savings account options
o Generally, hospital plan with compulsory savings for day-day
o Member control costs
o Real reason?
o Limited to 25%
o Not used for debt – exception?
o Not used for PMB
o Credit balances payable?
o Debit balances
o Tax
 Above threshold benefits
o Aimed at?
o Coupled with savings or risk benefits
o Self-payment gap
o Above threshold benefits
o Measures to curb risk
 Capitation options
o Scheme contracts with managed care org offering capitation services
o Offering incorporated in the rules
o Expenses for scheme fixed - escape clauses
o How different from network options?
 Discounted network options
o Discounted contributions based on provider choice
Choosing a medical scheme:
 Stage 1 – Selection criteria for short list
o Scheme size
 Membership growth
 Exposure to GEMS
 Average age/Pensioner ratio (2019)
 Open average age 34.9 (34.4) / 9.2% (9.6%)
 Closed average age 31.1 (30.8) / 6.9% (6.5%)
o
Financial stability
 Solvency ratios
 Prescribed 25% of gross contributions (2019)
 Open 29.35% (29.28%)
 Closed 44.31% (41.94%)
 Operating profit/loss
 Why incurring loss?
 Scheme increases/interim increases
 Red flag
 Claims ratio v non-healthcare costs


 Open net claims 89.34% (89.85%) – closed 92.15% (90.71%)
 Claims paying ability
 Ability to pay claims from cash and cash equivalents (average 3.8
months)
o Service levels
o Governance
Stage 2 – Establish needs
o What are clients current and future needs?
Stage 3 – Match needs and benefits
o What limitations apply to benefits
o Financial affordability
The multi pillar approach:
0. A basic public pension that provides a minimal level of protection
a. Old age pension
b. Unfunded old age pension ($1 440 pa) – age 60 - means tested
1. A public mandatory and contributory system linked to earnings
a. SA does not have this pillar
2. A private, mandatory and filly funded system
a. Occupational retirement funds, pension and provident.
i. Not compulsory - very common. DC and Tax-incentivized
b. Most large companies have a pension fund
i. coverage in formal sector < 60 %
ii. Some based on collective agreements
c. Contributions: employer (10.7%) and employee (7.2%)
d. Average retirement age - 63 (and dropping)
e. Pension Fund: Max 1/3 lump sum balance life annuity
f. Provident fund: Lump sum
g. Investments: 60 to 70% equity investment common
i. Some guarenteed / smoothed bonus funds
h. Asset management fees: 80 to 100 BPS
i. Members (very often) choose investment alternatives – and take the risk
j. ”EET”
i. 27.5% deductable (max $26 000 pa)
ii. roll up no tax
iii. lump sums taxed at up to 36%
3. A voluntary and fully funded system
a. RA funds
b. Private pension products. Same tax-incentives.
4. Financial and non-financial support outside formal pension arrangements
Protection of personal information act (POPIA)
 Goals:
o To promote the protection of personal information;
o To establish minimum requirements for the processing of personal information;
o To provide for the establishment of an Information Regulator;
o To provide for the issuing of codes of conduct;
o To provide for the rights of persons regarding unsolicited electronic communications
and automated decision making;
o To regulate the flow of personal information across the borders of the Republic.
Definitions:
 ‘‘data subject’’ means the person (client/fund member/insured) to whom personal
information relates.
 ‘‘responsible party’’ means a public or private body (FSP/fund/insurer) or any other person
which, alone or in conjunction with others, determines the purpose of and means for
processing personal information.
 ‘‘operator’’ means a person who processes personal information for a responsible party in
terms of a contract or mandate, without coming under the direct authority of that party.
 processing’’ means any operation or activity or any set of operations, whether or not by
automatic means, concerning personal information, including—
o (a) the collection, receipt, recording, organisation, collation, storage, updating or
modification, retrieval, alteration, consultation or use;
o (b) dissemination by means of transmission, distribution or making available in any
other form; or
o (c) merging, linking, as well as restriction, degradation, erasure or destruction of
information.
Personal information is:
 ‘‘personal information” means information relating to an identifiable, living, natural person,
and where it is applicable, an identifiable, existing juristic person, including, but not limited
to—
o (a) information relating to the race, gender, sex, pregnancy, marital status, national,
ethnic or social origin, colour, sexual orientation, age, physical or mental health,
well-being, disability, religion, conscience, belief, culture, language and birth of the
person;
o
o
o
o
o
o
o
(b) information relating to the education or the medical, financial, criminal or
employment history of the person;
(c) any identifying number, symbol, e-mail address, physical address, telephone
number, location information, online identifier or other particular assignment to the
person;
(d) the biometric information of the person;
(e) the personal opinions, views or preferences of the person;
(f) correspondence sent by the person that is implicitly or explicitly of a private or
confidential nature or further correspondence that would reveal the contents of the
original correspondence;
(g) the views or opinions of another individual about the person; and
(h) the name of the person if it appears with other personal information relating to
the person or if the disclosure of the name itself would reveal information about the
person.
Conditions for lawful processing:
 Accountability
o Responsible Party must ensure that conditions are complied with.
 Processing Limitation
o Personal information must be processed
 In a lawful and reasonable manner;
 Only if, for the purpose it is processed, it is adequate, relevant and not
excessive;
 Only if
 the data subject consents to the processing;
 processing is necessary to carry out actions for the conclusion or
performance of a contract to which the data subject is party;
 processing complies with an obligation imposed by law on the
responsible party;
 processing protects a legitimate interest of the data subject;
 processing is necessary for the proper performance of a public law
duty by a public body; or
 processing is necessary for pursuing the legitimate interests of the
responsible party or of a third party to whom the information is
supplied.
 Purpose Specification
o Collected for a specific, explicitly defined and lawful purpose related to a function or
activity of the responsible party.
o Records may not be retained any longer that is necessary for achieving the purpose
for which the information was collected.

Further Processing Limitation
o Further processing must be in accordance with or compatible with the purpose for
which the information was collected initially.

Information Quality
o Responsible party must ensure that personal information is complete, accurate and
not misleading.

Openness
o Responsible party must maintain the documentation of all processing operations.
o Data subject must be informed of information that is being collected.

Security Safeguards
o Responsible party must secure the integrity and confidentiality of personal
information.
o Operator must only process information with the knowledge or authority of the
responsible party.
o The responsible party must inform the Regulator and the data subject where there
are reasonable grounds to believe that personal information has been accessed or
acquired by an unauthorized person.

Data Subject Participation
o Data subject has the right to request a responsible party to:
 Confirm that it holds personal information about the data subject;
 Correct or delete personal information.
Chapter 10: Principles of insurance
Sources of RSA insurance law:
 Common law
o Basis of RSA insurance laws are Roman-Dutch law
 Legislation
o Long-term insurance Act 18 of 2017, the financial sector regulation Act 9 of 2017,
and the financial advisory and intermediary service act 37 of 2002(FAIS act).
 Constitution
o Supreme law of RSA, and without it, any law/contract is invalid.
Taxation of long-term insurance policies:
 Taxed in accordance of section 29A of the income tax act, in terms of S29(3), every insurer
must establish 5 separate funds, and thereafter maintain such funds in accordance with the
provisions of that section.
o The untaxed policyholder fund:
 Assets market value = to value of liabilities in relation to:
 Business carried on by the insurer with, and any policy of which he is
the owner, pension fund, provident fund, retirement annuity fund
or benefit fund.
 Any policy where the owner is a person where any amount
constituting a gross income of whatever nature would be exempt
from tax in terms of S10 were it to be received or accrued to that
person. Provided that the insurer has satisfied beyond all reasonable
doubt that the owner of such a policy is a person or body and,
 Any annuity contracts entered into by it in respect of which
annuities are being paid.

o
The individual policyholder fund:
 Assets market value = value of liabilities in relation to any policy of which the
owner is any person other than a company.
o
The company policyholder fund.
 Assets market value = value of liabilities in relation to any policy of which the
owner is a company.
o
The Corporate fund
 All assets held by the insurer and all liabilities owed by it, other than those
contemplated in the other three funds above.
o
The risk policy fund
 Business in respect of risk policies is taxed in this fifth fund,
 Assets market value = value of liabilities in relation to any risk policy.
 The taxable income of the risk policy fund will be taxed at a rate of 28%.
Tax rate:
o Taxable income derived from long term insurance business is subject to a tax rate of
30% in respect of the insurers individual policyholder fund.
o The company policyholder fund and the corporate fund are taxed at the corporate
rate of 28%.
o The income of the untaxed policyholder fund is exempt from tax (section 29A (9)).
Chapter 24.4.4: Retirement funds
 Retirement funds pay no tax. This has a significant impact on the after-tax returns of
retirement funding vehicles:
o Individual
4.13% - 7.5%
o Trust
4.13%
o Company
5.4%
o Retirement fund
7.5%
Chapter 25.10.3: contributions to all retirement funds from 1st march 2016 (section 11F)
 Section 11(F) of the income tax act states that notwithstanding section 23(G) certain tax
deductions are allowed in respect of contributions to any pension fund, provident fund or
retirement annuity fund.
o Preservation fund and provident fund are unaffected by S11F, due to no
contributions being allowed and therefore no tax deduction.
 The total deductions for the year of assessment must not exceed the lesser of:
o R350 000 or
o 27.5% of the greater:
 Renumeration
 Taxable income before any deductions under section 6 or section 18A.
o Taxable income before:
 Allowing deductions under section 6 (foreign tax deduction) or section 18A
(donations to PBO) and
 The inclusion of any CGT.

Tax deductible contributions to retirement funds are therefore subject to three limits:
o Monetary limit: no member may deduct contributions in excess of an annual limit of
R350 000. This ensures wealthy individuals don’t receive excessive deductions.
o Percentage limit: deductions in respect of contributions made by a member are
allowed up to 27.5% on the greater taxable income or renumeration. This means
that self employed individuals can make deductible contributions as can formally
employed individuals. The latter can make individual contributions based on
renumeration if they earn income from sources other than formal employment.
o Taxable income limit: limited to (a) taxable income from carrying on a trade plus (b)
passive income but excluding (c) capital gains.

The Explanatory Memorandum to the 2016 Taxation Laws Amendment Act:
o Contributions made to pension and retirement annuity funds before 1 March 2016
that have not previously been allowed as a deduction can also be taken into account
and can thus be rolled over from previous tax-years.
o In terms of contributions made to provident funds by members before 1 March
2016 (and thus not allowed as a deduction for income tax purposes), it was
indicated by SARS such pre-1 March 2016 contributions will not be rolled over as
provident funds were not subject to the annuitisation regime before 1 March 2021.
The annuitisation regime became applicable to provident funds on 1 March 2021,
but it is not certain whether the roll-over relief for contributions made before 1
March 2016 will now apply – no amendment made to Section 11F.

Disallowed portion of contribution:
o Any amount contributed to retirement fund from any previous year of assessment
which has been disallowed solely by exceeding the limit except funds that have been
contributed in:



Allowed as a deduction against income in any year of assessment
Accounted for under paragraph 5(1)(a) or 6(1)(b)(i) of the second schedule
Exempted under section 10C

Contributions by an employer on behalf of an employee:
o Any amount paid on behalf of the employee by the employer must be:
 (a)
 Equal to the amount of cash equivalent of the value of the taxable
benefit contemplated in paragraph 2(1) of the seventh schedule
determined in accordance with paragraph 12D of that schedule;
 If that amount is paid by an employer to a retirement annuity fund,
be equal to the amount of cash equivalent of the value of the
taxable benefit contemplated in paragraph 2(h) of the seventh
schedule in accordance with paragraph 13 of that schedule.
 (b)
 To have been contributed by that person.

Partnerships:
o For the purposes of section 11F:
 A partner in a partnership must be deemed an employee or the partnership
and;
 A partnership must e deemed to be the employer of the partners in that
partnership.
Chapter 25.10.4 – contributions made by an employer to pension, provident and benefit funds:
 As of 1st march 2016, all employer contributions to approved retirement funds are 100%
deductible in terms of amended section 11(I), and taxed as a fringe benefit in the hands of
the member. The value of the fringe benefit for tax purposes depends on whether the
contributions are made to a defined benefit fund or a defined contribution fund.
o
Contribution fund: contribution allocable to the employee will be includible as a
taxable fringe benefit for that employee as at cash value of the contribution.
o
Benefit fund: value of the fringe benefit will be determined through a special
formula.
 Any contributions by an employer for the benefit of an employee-member
will be deemed to have been made by the employee, thereby being tax
deductible subject to the limits described above.
o
Travel allowance: the value included in remuneration is:
 “80 per cent of the amount of the taxable benefit as determined in terms of
paragraph 7 of the Seventh Schedule: Provided that where the employer is
satisfied that at least 80 per cent of the use of the motor vehicle for a year of
assessment will be for business purposes, then only 20 per cent of such
amount must be included”
Renumeration:
 “Remuneration” is defined in paragraph 1 of the Fourth Schedule to the Income Tax Act and
it includes any payments, (in cash or otherwise) such as: Salary/wages, leave pay, overtime,
bonus, gratuity, fees, pension, fringe benefits, allowances, taxable amount on vesting of
shares (employees share schemes), annuity, restraint of trade payments etc.
 The amount paid by an employer towards a pension, provident, or retirement annuity fund
is now also a fringe benefit (Par 2(l) & 2(h) of the 7th Schedule to the Income Tax Act) and is
thus included in remuneration.
 does not include fees paid to a person for services rendered in the course of any trade
carried on by him independently from the payer of such fees.
 also does not include any amount paid or payable to any employee wholly in reimbursement
of expenditure actually incurred by such employee in the course of his employment.
Tax deduction of contributions: Section 11F
 Taxable Income” means the sum of:
o The amount remaining after deducting from income the allowable deductions
against such income; and
o All amounts to be included or deemed to be included in the taxable income of any
person in terms of the Income Tax Act.


Contributions not allowed as a deduction may be rolled over to the next tax year (before 1
March 2016 only allowed with RA’s);
o Any non-deducted contributions that remain upon retirement may 1st be applied to
the lump sum (2nd Schedule of ITA) and then the annuity income generated from
compulsory annuities (s 10C) and if there is any additional income, it may be applied
as a deduction in terms of Sec 11F;
o Employer contributions is now fringe benefit taxable (these contributions will be
treated as if they have been made by the employee). The employer is now able to
deduct the full contribution made on behalf of employee (s11(l) as amended) for
income tax purposes;
Employer contributions to defined benefit funds – deduction based on a formula prescribed
in the Income Tax Act.
Steps in Calculating Allowable deduction of contribution where the member did not make a capital
gain in the tax year:
1. Establish the remuneration of the taxpayer.
2. Establish the taxable income for calculating the section 11F deduction of the taxpayer. The
taxable income of the member would thus be established as follows:
i. Gross income (this will include the amount of the contribution made by the
employer on behalf of the employee, as discussed above).
ii. Minus exemptions
iii. Minus Deductions (excluding the deduction under section 11F)
iv. Plus, taxable allowances (taxable portion of travel allowance etc.)
b. = Taxable income for purposes of calculating the section 11F deduction.
3. Establish which one of the amounts calculated in step (i) or (ii) is higher and multiply the
higher amount with 27.5%. If the answer is less than R350 000, this is the deductible
amount, if it is R350 000 or higher, R350 000 is the deductible amount.
……………………………………………………………………………………………………………………………………..
 Remember: If the amount that the taxpayer contributed to one or more pension, provident
or retirement annuity fund is less than the maximum amount calculated in step 3, the
taxpayer may of course only deduct the amount that he or she contributed (i.e. if the
member contributed less than the maximum amount allowed as a deduction, the taxpayer
may only deduct the amount of the actual contribution).
 If the amount that the member contributed to one or more pension, provident and
retirement annuity fund in the year of assessment is bigger than the deduction calculated in
step 3, the difference between the amount so contributed and the deduction calculated in
step 3 will be carried over to the next year of assessment.
 In this regard always bear in mind that the amount contributed by the employer of the
member (where applicable) will be a taxable fringe benefit in the hands of the member
(employee) but will also be deemed to be a contribution made by the member for purposes
of calculating the deduction under section 11F.
Example 1: Tax deductibility of contributions: Salaried taxpayer
 Mr John Smith is employed by ABC (Pty) Ltd, and earns a salary of R1 500 000 per annum.
 In addition to this his employer contributes R150 000 to his pension fund, and Mr Smith also
contributes R150 000 to this pension fund. He also contributed R200 000 to a retirement
annuity fund in this year of assessment (2022/2023). His total contributions thus amount to
R500 000 per annum.
o
o
o


His total remuneration is thus R1 650 000 (R1 500 000 plus the fringe benefit of
R150 000).
In this instance his total taxable income for purposes of calculating the section 11F
deduction will also be:
 R1 500 000 plus R150 000 (annual employer contribution to pension fund)
 = R1 650 000 (gross income) minus R0 (exemption)
 = R1 650 000 minus R0 (deductions other than section 11F) plus R0 (taxable
allowances)
 = R1 650 000 (taxable income)
Remuneration and taxable income are thus the same in this instance. The amount
deductible under section 11F will thus be:
 R1 650 000 x 27.5% = R453 750. As this amount exceeds R350 000 the
amount deductible under section 11F is limited to R350 000.
If we thus calculate the taxable income of Mr Smith for the 2021/2022 year of assessment, it
will be:
o R1 500 000 + R150 000 (employer contribution to the pension fund is a taxable
fringe benefit)
o = R1 650 000 (taxable income) – R0 (exemptions)
o = R1 650 000 (income) – R350 000 (deduction under section 11F
o = R1 300 000 + R0 (taxable allowances) + R0 (taxable capital gain)
o = R1 300 000 (taxable income against which the tax tables will be applied).
He has thus made total contributions of R500 000 for the 2021/2022 year of assessment, but
was only entitled to a R350 000 Sec 11F deduction: R150 000 (R500 000 – R350 000) is
therefore carried over to the 2023/2024 year of assessment.
Example 2: Tax Deductibility of contributions: Salaried taxpayer with disallowed contributions in
previous tax year
 In the following year of assessment (2023/2024) Mr Smith (see Example 1) earns R1 600 000.
In addition to this his employer makes a contribution of R160 000 to his pension fund. Mr
Smith also contributes R160 000 to his pension fund, but makes no contributions to his
retirement annuity fund in this year, bringing the total contributions to R320 000.
o His total remuneration is thus R1 760 000 (R1 600 000 plus the fringe benefit of
R160 000).
o In this instance his total taxable income for purposes of calculating the section 11F
deduction will also be:
o R1 600 000 plus R160 000
o = R1 760 000 (gross income) minus R0 (exemption)
o = R1 760 000 (income) minus R0 (deductions other than section 11F) plus R0
(taxable allowances)
o = R1 760 000 (taxable income)
o Remuneration and taxable income is thus the same in this instance. The amount
potentially deductible under section 11F will thus be:
o


R1 760 000 x 27.5% = R484 000. As this amount exceeds R350 000 the amount
deductible under section 11F is limited to R350 000.
The balance of R120 000 (R320 000 contribution in 2023/2024 year of assessment plus R150
000 contribution carried over from 2022/2023 year of assessment = R470 000 contribution
& deemed contribution minus R350 000 deduction allowed under section 11F) is carried
forward to the next year of assessment.
If we thus calculate the taxable income of Mr Smith for the 2022/2023 year of assessment, it
will be:
o R1 600 000 + R160 000 (employer contribution to the pension fund is a taxable
fringe benefit)
o = R1 760 000 (gross income) – R0 (exemptions)
o = R1 760 000 (income) – R350 000 (deduction under section 11F = R1 410 000 + R0
(taxable allowances) + R0 (taxable capital gains)
o = R1 410 000 (taxable income).
Example 3: Tax Deductibility of contributions: Sole proprietor not earning remuneration
 Mr Simon Tshabalala, aged 45, is the sole proprietor of a business.
 He earned R500 000 in the current year of assessment from his business, and incurred
expenses in the amount of R100 000, which expenses are deductible in terms of Section
11(a) of the Income Tax Act.
 He also earned interest in the amount of R50 000 from his money market account and R30
000 dividends from his unit trust portfolio.
 Mr Tshabalala want to know what the maximum allowable deduction he is entitled to in
respect of contributions to a retirement annuity fund.
o Mr Tshabalala has no remuneration – he is not an employee but a sole proprietor,
essentially earning income as an independent contractor. The R50 000 interest and
R30 000 dividends earned also do not constitute remuneration.
o In this instance his total taxable income for purposes of calculating the section 11F
deduction will be:
 R500 000 (business income) plus R50 000 (interest) + R30 000 (dividends)
 = R580 000 (gross income) minus R23 800 (interest exemption for persons
younger than age 65) minus R30 000 (exempt local dividends)
 = R526 200 (income) minus R100 000 (deduction under section 11(a) for
expenses incurred in the production of income)
 = R426 200 plus R0 (taxable allowances)
 = R426 200 (taxable income for purposes of calculating the section 11F
deduction).
o Taxable income is thus higher than remuneration in this instance. The amount
potentially deductible under section 11F will thus be:
 R426 200 x 27.5% = R117 205. As this amount is smaller than R350 000 the
amount deductible under section 11F is limited to R117 205.


He is currently not contributing to any fund, so he will not be allowed to deduct any amount
under section 11F.
If Mr Tshabalala however decides to contribute the maximum allowable deduction under
section 11F, taxable income for the year of assessment will be:
o R500 000 (business income) plus R50 000 (interest) + R30 000 (dividends)
o = R580 000 (gross income) minus R23 800 (interest exemption for persons younger
than age 65) minus R30 000 (exempt local dividends)
o
o
o
= R526 200 (income) minus R100 000 (deduction under section 11(a) for expenses
incurred in the production of income) – R117 205 (deduction under section 11F)
= R308 995 plus R0 (taxable allowances) plus R0 (taxable capital gain)
= R308 995 (taxable income).
Example 6: Tax Deductibility of contributions: Taxpayer is an employee receiving a travel allowance
 Mr John Jacobs is employed and earns R400 000 per year.
 His employer contributes R40 000 to his pension fund and Mr Jacobs contributes R40 000 to
his pension fund.
 Mr Jacobs also receives a travel allowance of R50 000 per year. His employer is not satisfied
that at least 80% of the use of his motor vehicle will be for business purposes. At the end of
the tax year Mr the taxable portion of the travel allowance is calculated to be R20 000.
 Mr Jacobs wants to contribute to a retirement annuity fund and wishes to know what the
maximum deduction is that he will be entitled to.
o Mr Jacobs’ remuneration is:
 R400 000 (salary) + R40 000 (employer’s contribution to pension fund) + R40
000 (R50 000 travel allowance x 80%: as per the definition of remuneration
80% of his travel allowance will form part of his remuneration unless his
employer is satisfied that at least 80% of the use of his motor vehicle will be
for business purposes, in which case 20% of the travel allowance will be
included as remuneration)
 = R480 000 (remuneration)
o The taxable income for purposes of calculating the section 11F deduction of Mr
Jacobs is:
 R400 000 (salary) + R40 000 (employers contribution to pension fund)
 = R440 000 (gross income) – R0 (exemptions)
 = R440 000 (income) – R0 (deductions) + R20 000 (calculated taxable portion
of his travel allowance)
 = R460 000 (taxable income for purposes of calculating the section 11F
deduction)
o His remuneration is thus higher than his taxable income in this instance. The amount
potentially deductible under section 11F will thus be:
 R480 000 x 27.5% = R132 000. As this amount is smaller than R350 000 the
amount deductible under section 11F is limited to R132 000.


If his employer was satisfied that at least 80% of the use of his motor vehicle will be for
business purposes and included only 20% of the allowance in his remuneration, his
remuneration would be as follows:
o R400 000 (salary) + R40 000 (employer’s contribution to pension fund) + R10 000 (as
per the definition of remuneration 20% of his travel allowance will from part of his
remuneration where his employer is satisfied that at least 80% of the use of his
motor vehicle will be for business purposes)
o = R450 000.
If this was the case in this example his remuneration (R450 000) would be less than his
taxable income (R460 000) and we would use the taxable income for calculating the section
11F deduction.
Example 7: Tax Deductibility of contributions: Taxpayer contributes to a provident fund before and
after 1 March 2016
 Mrs Cathy Madonsela is employed by XYZ (Pty) Ltd. In the 2022/2023 year of assessment,
she earned a salary of R1 800 000 per annum.
 In addition to this her employer contributed R200 000 to her provident fund. Mrs Madonsela
also contributed R200 000 to this provident fund in the same year of assessment.
 Prior to 1 March 2016, Mrs Madonsela had made contributions in the amount of R500 000
to her provident fund.
o Her total remuneration is thus R2 000 000 (R1 800 000 plus the fringe benefit of
R200 000, being the contribution made to the provident fund by her employer).
o In this instance her total taxable income for purposes of calculating the section 11F
deduction will also be:
 R1 800 000 plus R200 000 (annual employer contribution to provident fund)
 = R2 000 000 (gross income) minus R0 (exemption)
 = R2 000 000 minus R0 (deductions other than section 11F) plus R0 (taxable
allowances)
 = R2 000 000 (taxable income)
o Remuneration and taxable income are thus the same amount in this instance. The
amount potentially deductible under section 11F will thus be:
 R2 000 000 x 27.5% = R550 000. As this amount exceeds R350 000 the
amount deductible under section 11F is limited to R350 000.


The balance of R50 000 (R400 000 contribution minus R350 000 deduction allowed under
section 11F) is carried forward to the next year of assessment.
At this stage it is uncertain whether the amount of R500 000, being the contributions to the
provident fund by Mrs Madonsela prior to 1 March 2016 will be carried over to 2023/2024
year of assessment for purposes of the section 11F deduction, due to the annuitisation
regime becoming applicable to provident funds. See notes on slide 9. As no amendment was
made: assume that it is not carried over for purposes of section 11F.
Example 8: Tax Deductibility of contributions: Taxpayer contributes to a pension fund before and
after 1 March 2016
 Mrs Joan Botha is employed by PQR (Pty) Ltd.
 In the 2022/2023 year of assessment she earns a salary of R1 800 000 per annum.
 In addition to this her employer contributes R200 000 to her pension fund. Mrs Botha also
contributes R200 000 to this pension fund in the same year of assessment.
 Prior to 1 March 2016, Mrs Botha made contributions in the amount of R500 000 to her
pension fund that were not allowed as a tax deduction, as it exceeded the maximum
allowable deduction. Assume that this amount was not deductible in previous years of
assessment, as Mrs. Botha had contributed amounts to her pension fund equal to the
maximum allowable deduction.
o Her total remuneration is thus R2 000 000 (R1 800 000 plus the fringe benefit of
R200 000, being the contribution made to the pension fund by her employer).
o In this instance her total taxable income for purposes of calculating the section 11F
deduction will also be:
 R1 800 000 plus R200 000 (annual employer contribution to pension fund)
 = R2 000 000 (gross income) minus R0 (exemption)
 = R2 000 000 minus R0 (deductions other than section 11F) plus R0 (taxable
allowances)
 = R2 000 000 (taxable income)



Remuneration and taxable income are thus the same amount in this instance. The amount
potentially deductible under section 11F will thus be:
o R2 000 000 x 27.5% = R550 000. As this amount exceeds R350 000 the amount
deductible under section 11F is limited to R350 000.
The balance of R550 000 (R400 000 contribution in 2021/2022 year of assessment minus
R350 000 deduction allowed under section 11F plus R500 000 contributions to the pension
fund prior to 1 March 2016 that were not allowed as a tax deduction as it the contributions
exceeded the maximum deduction allowable to the member) is carried forward to the next
year of assessment in terms of Section 11F(3).
If we thus calculate the taxable income of Mrs Botha for the 2022/2023 year of assessment,
it will be:
o R1 800 000 + R200 000 (employer contribution to the pension fund is a taxable
fringe benefit)
o = R2 000 000 (taxable income) – R0 (exemptions)
o = R2 000 000 (income) – R350 000 (deduction under section 11F = R1 650 000 + R0
(taxable allowances) + R0 (taxable capital gain)
o = R1 650 000 (taxable income).
Contributions as from 1st march 2016: effect of taxable capital gain:
 The maximum deduction allowed against iro contributions to all retirement funds (sec 11F)
(pension, provident & retirement annuity funds) is the lesser of:
(i) R350 000, or
(ii) 27.5% of the greater of :
 (a)Remuneration (other than in respect of any retirement fund lump sum
benefit, retirement fund lump sum withdrawal benefit and severance
benefit) as defined in paragraph 1 of the Fourth Schedule or
 (b) Taxable income (other than in respect of any retirement fund lump sum
benefit, retirement fund lump sum withdrawal benefit and severance
benefit) as determined before allowing this deduction and any Sec 18A
deduction (deduction for donations to public benefit organisations etc)
(iii) Taxable Income before:
 (i) Allowing this deduction; and
 (ii) The inclusion of the taxable capital gain
 The effect of the above is that although taxable capital gains are included in the as taxable
income for purposes of calculating the “27.5% of taxable income” calculation, it is not
included as part of the amount (taxable income) that it is deducted from – see examples 9,
10 & 11.
Steps in Calculating Allowable deduction of contribution where the member makes a taxable capital
gain in the tax year:
1. Establish the remuneration of the taxpayer.
2. Establish the taxable income for calculating the section 11F deduction of the taxpayer. The
taxable income of the member would thus be established as follows:
Gross income (this will include the amount of the contribution made by the
employer on behalf of the employee, as discussed above).
Minus exemptions
Minus Deductions (excluding the deduction under section 11F)
Plus, taxable allowances (taxable portion of travel allowance etc.)
Plus, taxable capital gain
= Taxable income for purposes of calculating the section 11F deduction.
3. Establish which one of the amounts calculated in step (i) or (ii) is higher and multiply the
higher amount with 27.5%. If the answer is less than R350 000, this is potentially the
deductible amount, if it is R350 000 or higher, R350 000 is the potentially deductible
amount.
4. Calculate the taxable income again as per step (ii) again, but only up to the point before the
taxable capital gain is added. Thus:
Gross income
Minus exemptions
Minus Deductions (excluding the deduction under section 11F)
Plus taxable allowances (taxable portion of travel allowance etc.)
= Amount from which the section 11F deduction is deducted.
5. If the amount in step 3 is lower than then answer in step 4 the full amount in step 3 is
deducted, i.e. the amount calculated in step 3 will be the maximum deduction allowed
under section 11F.
If the amount calculated in step 4 is smaller than the amount calculated in step 3, the maximum
allowable deduction under section 11F will be limited to the amount calculated in step 4. This
situation will only occur in some of the instances where a taxable capital gain is included in the
taxable income of the member (as per step 2), and the taxable capital gain exceeds the income
calculated before adding the taxable capital gain.
Remember:
 Remember: If the amount that the taxpayer contributed to one or more pension, provident
or retirement annuity fund is less than the maximum amount calculated in step (v), the
taxpayer may of course only deduct the amount that he or she contributed (i.e. if the
member contributed less than the maximum amount allowed as a deduction, the taxpayer
may only deduct the amount of the actual contribution).
 If the amount that the member contributed to one or more pension, provident and
retirement annuity fund in the year of assessment is bigger than the deduction calculated in
step (v), the difference between the amount so contributed and the deduction calculated in
step (v) will be carried over to the next year of assessment.
 In this regard always bear in mind that the amount contributed by the employer of the
member (where applicable) will be a taxable fringe benefit in the hands of the member
(employee) but will also be deemed to be a contribution made by the member for purposes
of calculating the deduction under section 11F.
Example 9: Tax Deductibility of contributions from 1 March 2016: Income of taxpayer is lower than
taxable capital gain
 Mr Thrift (aged 37) receives remuneration of R75 000 for part-time work over the course of
the 2022/2023 year of assessment.
 He also receives R10 000 in interest from a money market account and sells unit trusts to
receive a capital gain of R750 000. The value of the taxable capital gain is R300 000 (R790
000 – R40 000 annual exclusion for individuals = R750 000 capital gain x 40% inclusion rate) .
 Before the end of the year he contributes R100 000 to his retirement annuity fund.
 He wants to know what the maximum deduction is that he will enjoy under section 11F.
o
o
Mr Thrift’s remuneration is R75 000 (part time work)
The taxable income for purposes of calculating the section 11F deduction of Mr Thrift
is:
 = R75 000 (salary) + R10 000 (interest)

o
o
o

= R85 000 (gross income) – R10 000 (interest exemption limited to R23 800
for persons under age 65)
 = R75 000 (income) – R0 (deductions) + R0 (taxable allowances) + R300 000
(taxable capital gain)
 = R375 000 (taxable income for purposes of calculating the section 11F
deduction)
His taxable income is thus higher than his remuneration in this instance. The amount
potentially deductible under section 11F will thus be:
 R375 000 x 27.5% = R103 125.
 As this amount is smaller than R350 000 the amount potentially deductible
under section 11F is limited to R103 125.
His taxable income before allowing for possible taxable capital gains is thus:
 = R75 000 (salary) + R10 000 (interest)
 = R85 000 (gross income) – R10 000 (interest exemption limited to R23 800
for persons under age 65)
 = R75 000 (income) – R0 (deductions) + R0 (taxable allowances)
 = R75 000 (taxable income before adding taxable capital gains tax).
As the amount in 4 (R75 000) is smaller than the answer in 3 (R103 125), the amount
calculated in 4, i.e., R75 000 is the maximum amount deductible under section 11F.
Remember: He is currently contributing R100 000 to his retirement annuity fund, but he will
only allow to deduct R75 000 under section 11F. The balance of the contributions, i.e. R25
000 (R100 000 contributions minus R75 000 section 11F deduction) will be carried forward
to the following year of assessment.
Example 10: Tax Deductibility of contributions from 1 March 2016: Income of taxpayer is higher than
taxable capital gain
 Mr Extravagance (aged 37) receives remuneration of R500 000 for part-time work over the
course of the 2022/2023 year of assessment.
 He also receives R10 000 in interest from a money market account and sells unit trusts to
receive a capital gain of R790 000. The value of the taxable capital gain is R300 000 (R790
000 – R40 000 annual exclusion for individuals = R750 000 x 40% inclusion rate for
individuals).
 Before the end of the year he contributes R100 000 to his retirement annuity fund.
 He wants to know whether he will enjoy a deduction for this contribution of R100 000 under
section 11F.
o Mr Extravagance’s remuneration is: R500 000 (part time work)
o The taxable income for purposes of calculating the section 11F deduction of Mr
Extravagance is:
 = R500 000 (salary) + R10 000 (interest)
 = R510 000 (gross income) – R10 000 (interest exemption limited to R23 800
for persons under age 65)
 = R500 000 (income) – R0 (deductions) + R0 (taxable allowances) + R300 000
(taxable capital gain)
o His taxable income is thus higher than his remuneration in this instance. The amount
potentially deductible under section 11F will thus be:
 R800 000 x 27.5% = R220 000.
 As this amount is smaller than R350 000 the amount potentially deductible
under section 11F is limited to R220 000.
o His taxable income before allowing for possible taxable capital gains is thus:
 = R500 000 (salary) + R10 000 (interest)

o
o
o
= R510 000 (gross income) – R10 000 (interest exemption limited to R23 800
for persons under age 65)
 = R500 000 (income) – R0 (deductions) + R0 (taxable allowances)
 = R500 000 (taxable income (taxable income before adding possible capital
gains tax).
As the amount in 3 is smaller than the answer in 4, the amount calculated in 3, i.e.
R220 000 is the maximum amount deductible under section 11F.
Remember: He is currently however only contributing R100 000 to his retirement
annuity fund, and he will therefore only be allowed to deduct R100 000 under
section 11F.
If we assume that he does not increase his contributions to a retirement fund, his
taxable income for the year of assessment will thus be:
 = R500 000 (salary) + R10 000 (interest)
 = R510 000 (gross income) – R10 000 (interest exemption limited to R23 800
for persons under age 65)
 = R500 000 (income) – R100 000 (section 11F deduction – the maximum
allowable deduction is R220 000, but he is only contributing R100 000) + R0
(taxable allowances) + R300 000 (taxable capital gain)
 = R700 000 (taxable income).
Example 11: Tax Deductibility of contributions from 1 March 2016: Taxable income consists out of
taxable capital gain only
 Mr Frugal (aged 37) sells unit trusts to receive a capital gain of R750 000. The value of the
taxable capital gain is R300 000 (R750 000 x 40% inclusion rate) .
 He does not earn any other income for the year.
 Before the end of the year he contributes R100 000 to his retirement annuity fund. He wants
to know what the maximum deduction is that he will enjoy under section 11F.
o Mr Frugal’s remuneration is: R0 (no remuneration)
o The taxable income for purposes of calculating the section 11F deduction of Mr
Frugal is:
 = R0 (gross income) – R0 (exemptions)
 = R0 (income) – R0 (deductions) + R0 (taxable allowances) + R300 000
(taxable capital gain)
 = R300 000 (taxable income for purposes of calculating the section 11F
deduction)
o His taxable income is thus higher than his remuneration in this instance. The amount
potentially deductible under section 11F will thus be:
 R300 000 x 27.5% = R82 500.
 As this amount is smaller than R350 000 the amount potentially deductible
under section 11F is limited to R82 500.
o His taxable income before allowing for possible taxable capital gains is thus:
 R0 (gross income) – R0 (exemptions)
 = R0 (income) – R0 (deductions) + R0 (taxable allowances)
 = R0 (taxable income before adding the taxable capital gain).
o As the amount in (iv) is smaller than the answer in (iii), the amount calculated in (iv),
i.e. R0 is the maximum amount deductible under section 11F – there is therefore no
deduction allowed under section 11F in this instance.
o
Remember: He is currently contributing R100 000 to his retirement annuity fund,
but he will not be allowed to deduct any amount under section 11F. The
contributions of R100 000 made in the year of assessment will be carried forward to
the following year of assessment.
o
His taxable income for the year of assessment will thus be:
 R0 (gross income) – R0 (exemptions)
 = R0 (income) – R0 (section 11F and other deductions) + R0 (taxable
allowances) + R300 000 (taxable capital gain)
 = R300 000 (taxable income).
Tax within investment:
 The tax within the investment (i.e., before the member withdraws, retires or dies) is 0% - in
terms of the 5 Funds approach it is taxed in the untaxed policy holder’s fund (Sec 29A of the
Income Tax Act).
Four different types of clients: Retirement planning
General: Retirement Fund Lump Sum Benefits & Retirement Fund Lump Sum Withdrawal Benefits
 Retirement fund lump sum benefit (taxed in terms of “retirement lump sum table where
applicable”):
o Lump sum from pension/provident/retirement annuity/preservation fund on
retirement.
o Lump sum from pension/provident/retirement annuity/preservation fund on death.
o Lump sum from pension/provident/retirement annuity/preservation fund on
retrenchment.
o Commutation of a compulsory annuity
o Amount transferred to another fund upon or after reaching normal retirement age
in the fund being transferred from.


Retirement fund lump sum withdrawal benefit (taxed in terms of “retirement lump sum
withdrawal table where applicable”):
o Lump sum from Provident/preservation fund on withdrawal prior to retirement.
o Lump sum awarded to non-member spouse in divorce.
o Amount transferred to another fund before reaching normal retirement age in the
fund being transferred from.
NB: Amount paid by pension/provident/retirement annuity/preservation fund in respect of
arrear maintenance due by fund member does not qualify as a retirement fund lump sum
benefit or retirement fund lump sum withdrawal benefit – taxed a normal income (Read
SARS Interpretation Note 89 – tax-on-tax principle)
Tax on withdrawal from a retirement fund: After 1 march 2009
 Par 6 of 2nd Schedule as per the Taxation Laws Amendment Act 2009:
 Taxable portion = Withdrawal Lump Sum LESS:
o Amounts transferred to approved funds (see slide 6);
o Contributions which did not previously rank as a deduction i.t.o. section 11F;
o Any amounts taxed upon transfer from one retirement fund to another (like Pension
to Provident Fund transfers);
o Pre - 1998 portion of retirement interest transferred from Public Sector Funds (or
former par(a) or (b) funds) to another fund (NB – see slides 19 – 22 in this regard) –
the tax-free amount is calculated on the full amount transferred to another fund.
Before 1 March 2018 the pre-1 March 1998 portion was only preserved on the
transfer from the public sector form to another fund – any subsequent transfers
meant that the pre-1 March 1998 tax-free portion was lost. From 1 March 2018 the
tax-free portion is retained on a transfer to a second fund, but not on any
subsequent transfers;
o Any divorce awards previously taxed when transferred to a retirement fund.
 The following transfers of a pension interest are allowed to take place tax-free (so-called
approved transfers) as from 1 March 2021 – i.e., deduction against lump sum received on
withdrawal where the member of the fund being transferred from has not yet reached
normal retirement age:
The taxable portion is taxed as follows:
(NB: not applicable where the member withdraws as a result of retrenchment situation)
Tax on Withdrawal from a Retirement Fund Example 1
 Mary resigns from her employment and on the 31st of October 2022. She belonged to the
company’s pension fund and is entitled to a withdrawal benefit of R500 000. She contributed
R20 000 that did not qualify as a deduction. She would like to take the full amount in cash.
What is her tax liability?
o Taxable: R500 000 – R20 000 = R480 000 (taxable portion of lump sum)
o Apply withdrawal tax table to R480 000:
o = 18% of the amount above R25 000
o = 18% of (R480 000 – R25 000)
o
o
= 18% x R455 000
= R81 900
Example 2: Tax on withdrawal from a retirement fund:
 Simon resigns from his employment 30th of June 2022 and is entitled to a withdrawal benefit
of R800 000 from his pension fund. He decides to take an amount of R200 000 in cash and
the balance of R600 000 he transfers to a retirement annuity. What is his tax liability?
o Taxable: R800 000 – R600 000 (transfer to an approved fund) = R200 000 (taxable
amount).
o Apply withdrawal tax table to R200 000:
o = 18% of the taxable amount above R25 000
o = 18% of (R200 000 – R25 000)
o = 18% x R175 000
o = R31 500
Example 3: Tax on withdrawal from a retirement fund
 Albert resigns from his employment on 1 Sep 2022 and is entitled to a withdrawal benefit of
R 1 200 000 from his provident fund. He made contributions of R650 000 that were not tax
deductible. He wants to transfer an amount of R500 000 to a RA and use the balance of
R700 000 to pay his bank overdraft. He has not received any retirement benefits before.
What is the after-tax amount he will receive?
o Taxable portion = Withdrawal Lump Sum LESS:
o Amounts transferred to approved funds;
o Contributions which did not previously rank as a deduction ito sec 11F.
o
o
Taxable portion: R1 200 000 – R500 000 (amount transferred to an approved fund) –
R650 000 (contributions not allowed as a tax deduction) = R50 000 (taxable amount)
Tax payable :
 18% of the amount above R25 000
 = 18% of (R50 000 – R25 000)
 = R4 500
 After – tax amount : R700 000 – R4 500 = R695 500
Example 4: tax on withdrawal from a retirement fund:
 Albert resigns from his employment on 1 Sep 2022 and is entitled to a withdrawal benefit of
R 1 200 000 from his provident fund. He has not made any contributions that were not taxdeductible. He decides to take the full amount in cash.
o The full amount is taxable.
o Thus:
o R203 400 + 36% of taxable amount above R990 000
o = R203 400 + 36% of (R1 200 000 – R990 000)
o = R203 400 + 36% of R210 000
o = R203 400 + R75 600
o = R279 000 (tax payable)
o
o
o
He will thus receive the following amount after tax:
R1 200 000 – R279 000
= R921 000
Withdrawals Government Employees Pension Fund (GEPF) & certain other Public Sector Funds:
o NB Study: Public Sector Retirement Funds: The Taxation of Lump Sums, Transfers
to Approved Funds and Aspects related to Divorce – Carl Muller, 2022 Premiums &
Problems Article Edition
 Where withdrawals are made from the GEPF and other Par (a) & (b) funds, e.g. the Transnet
Retirement Fund) and the member belonged to this fund before 1 March 1998, a formula
has to be applied to establish the taxable portion of the lump sum, as lump sums received
from GEPF (and other funds e.g. Transnet Retirement Fund) were only taxable form 1 March
1998.
 Calculated in terms of Par 2A of the 2nd Schedule to the Income Tax Act:
o A = B/C x D, where
o A = the taxable portion of the lump sum;
o B = The number of completed years of service as member of the GEPF after 1 March
1998;
o C = The total number of completed years of service as member of the GEPF ; and
o D = The lump sum payable to the member.
Example 5: Tax on withdrawal from a retirement fund: GEDF

ANSWER
o A = Taxable Amount
o B = 24
o C = 42
o D = R900 000
o Apply Formula : 24/42 x R900 000
o = R514 285.71 – post 1 March 1998 portion, which is potentially taxable
o Tax-free portion therefore is: R900 000 – R504 878.05 = R395 121.95

If Josef has no disallowed contributions the taxable amount of R504 878.05 will thus be
taxed in terms of the withdrawal table:
o = 18% of the amount above R25 000
o = 18% of (R514 285.71 – R25 000)
o = 18% of R489 285.71
o = R88 071.43.

Joseph will thus receive after tax:
o R900 000 – R88 071.43
o = R811 928.57




Assume the facts are the same, but that Joseph transferred to the full GEPF benefit to the
ABC pension preservation fund, and decided to immediately withdraw one third (Rule 14.4.1
of the GEPF rules discussed in Lecture 1 – pre-recorded) as a lump sum after transfer. What
would the consequences be from a tax perspective?
Thus: on transfer of the R900 000 from the GEPF to the pension preservation fund, there will
not be any tax payable as it is an approved transfer (pension fund to pension preservation
fund).
The tax-free portion (i.e. potion related to pre-1 March 1998 as per the calculation) will be
calculated on the full transfer amount and will then serve as a deduction against any lump
sum received form the fund transferred to (i.e. in this instance the preservation fund), i.e.,
either on withdrawal or retirement from the fund that the amount was transferred to
On withdrawal of the amount of R300 000 (one third), the tax situation will look as follows:
o A = Taxable Amount
o B = 24
o C = 42
o D = R900 000 (NB: The formula is applied to the full amount transferred to the
preservation fund and not the one third withdrawn)
 Apply Formula : 24/42 x R900 000
 = R514 285.71 – post 1 March 1998 portion, which is potentially taxable
 Tax-free portion is therefore: R900 000 – R514 285.71
 = R385 714.29 (this is the value of the deduction upon withdrawal form the
preservation fund)
o As Joseph is only taking one third of the lump sum (as provided for in the GEPF
Rules), i.e. R300 000 in this instance, it is smaller than the deduction (tax-free
portion) of R395 121.95, and Joseph will not pay any tax on the R300 000 received.
Withdrawals: GEPF & Other Public Sector Funds:
 Important aspects to remember: transfers from GEPF/public sector funds before 1 March
2006 where member withdraws from fund being transferred to
o Where the retirement interest in the GEPF or another public sector fund was
transferred to another fund before 1 March 2006, the pre-1 March 1998 tax-free
portion was not preserved.
o From 1 March 2006, the Income Tax Act was amended to provide that such tax-free
portion (deduction) was preserved and thus applicable when the member exited the
fund that the interest was transferred to on withdrawal.
o The 2007 Taxation Laws Amendment Act that affected this, provided that the
section “shall be deemed to have come into operation on 1 March 2006 and shall
apply in respect of any lump sum benefit received or accrued on or after that date”.
o It thus seems to indicate that the deduction will be applicable to all amounts
received or accrued on withdrawal from the funds (to where the benefit was
transferred) in such circumstances, irrespective of the transfer from the GEPF/public
sector fund occurred before or after 1 March 2006. However, SARS interprets the
amendment to only be applicable where the transfer from the GEPF/public sector
fund occurred on/or after 1 March 2006.
o Where a person thus transferred a benefit from the GEPF/public sector fund to
another fund before 1 March 2006, but receives a lump sum payment on
withdrawal from such other fund on or after 1 March 2006, the deduction in respect
of the pre-1 March 1998 tax-free portion will not be allowed.
 Applies to any lump sum received or accrued on/after 1st march 2006:
We will only preserve the money if you transfer it to another fund and then
withdraw from it on/after 2006.
o
o
o
Important aspects to remember: transfers from GEPF before 1 March 2006
 NB: GEPF however: 2 portions applicable to a lump sum on resignation
being:
 A cash resignation benefit; and
 The difference between the member’s benefit in (a) and the
member’s accrued actuarial interest in the fund, if any.
Before 1 March 2006, SARS interpreted the GEPF Law to provide that the cash
resignation portion accrued to the member and this became taxable on resignation
from the GEPF even if the member transferred the retirement interest in the GEPF
to another approved fund. The effect of this was as follows:
 The cash resignation benefit portion of the transfer amount was taxed (as it
was deemed to accrue to the member) which would mean that the pre-1998
portion thereof would accrue tax-free.
 The balance of the amount (difference between the member’s cash
resignation benefit and the member’s accrued actuarial interest in the fund,
if any) would be transferred tax-free to an approved fund, but this balance
lost it’s portion of the calculated pre 1 March 1998 portion – i.e. on exit of
the fund the member would not be entitled to a deduction of the tax-free
portion as it would not have been preserved due to the transfer occurring
before 1 March 2006.
 Another effect of this was that a member of the GEPF could not transfer
his/her GEPF benefit to a preservation fund: the reason for this is because
the cash resignation portion was deemed to accrue to the member and
taxed (as per (a) above), it was regarded to be a contribution, and a
preservation fund may only receive transfers from other funds (no
contributions to preservation fund possible – see Lecture 1 & 8).
On/after 1 Marc 2006, SARS did not view the cash resignation benefit portion as
accruing to the member on transfer to another fund, and a tax-free transfer to a
pension, pension preservation or retirement annuity fund was thus possible, with
preservation of the tax-free pre-1 March 1998 portion (due to legislative changes –
see previous slide).
Withdrawals Government Employees Pension Fund (GEPF) & certain other Public Sector Funds:
 Important aspects to remember: Second transfer after exit from GEPF/public sector fund
(2018 amendment)
 The pre-1 March 1998 portion as per the formula is only available as a deduction in respect
of the first fund to which it is transferred from the public sector fund, and for one
subsequent transfer thereafter (from 1 March 2018).
 If it is thereafter (after the transfer to the second fund) transferred to another fund, this taxfree portion is effectively lost to the member. If Joseph in our example had thus first
transferred his GEPF benefit into the ABC Pension Preservation Fund, thereafter transferred
the benefit into the XYZ Pension Preservation Fund and then to the DEF Pension
Preservation Fund, the pre 1 March 1998 tax-free portion (as per the formula) would
essentially be lost if he withdraws before retirement or takes a lump sum on retirement, or
his beneficiaries opt for a lump sum on death from the DEF Pension Preservation Fund, and
such a lump sum would be fully taxable.
 It is further important to note that it is the view of SARS that in order to preserve the pre-1
March 1998 portion on such subsequent (2nd) transfer, both the 2nd transfer and the accrual
of the lump sum (i.e., on withdrawal/retirement/death) had to take place on or after 1
March 2018. Where a member had thus made the second transfer before 1 March 2018 but
decides to withdraw a lump sum or retire and receive a lump sum on or after 1 March 2018,
the deduction in respect of the pre-1 March 1998 tax-free portion will not be available to
him/her.

Important aspects to remember: Pre-1 March 1998 tax-free portion not deductible against
other funds (i.e. funds other than the fund transferred to from GEPF/public sector fund or
second transfer after 1 March 2018).
 Where a benefit is transferred from the GEPF/Public Sector Fund to a
pension preservation fund/provident preservation, pension/provident or
retirement annuity fund), and a withdrawal is made,
 or the client retires from this fund and is not able to use the full pre-1 March
1998 portion,
o the general view is that the balance of this tax-free portion may not be used as a
deduction against lump sums from other funds of which the person may be a
member.
o
As the calculated pre-1 March 1998 tax-free portion in respect of Joseph in our
example (see previous slides) was more than R300 000 (whilst he only received a
lump sum payment of R300 000 form the GEPF) he will not be allowed to apply the
balance in excess of R300 000 as a deduction against lump sums received on
subsequent withdrawals or retirement from other funds of which he may be a
member.
Tax on retirement lump sums at retirement and death: Deductions
 Paragraph 5 of 2nd Schedule: Taxable portion = Retirement Fund Lump Sum LESS:
o Contributions which did not previously rank as a deduction ito sec 11F/allowed as a
deduction against prior lump sums from retirement funds/exempt against
compulsory/qualifying annuities (lecture 10)
o Any amounts taxed upon transfer from one retirement fund to another retirement
(like Pension to Provident Fund transfers);
o Any pre-1998 amounts transferred from Public Sector Funds (or former par(a) or (b)
funds. E.g. GEPF, Transnet etc.); NB – the aspects discussed in slides 19-22 are also
relevant here
o Any divorce awards previously taxed when transferred to a retirement fund.
 Paragraph 5 is similar to six except for 6A.


Paragraph 6A of 2nd Schedule: If a member has reached retirement age in terms of the
rules of the pension/provident/pension preservation/provident preservation fund but
does not elect to retire from such fund the member of such fund may elect to transfer the
retirement interest on or after normal retirement age as follows (if the rules of the fund
being transferred form allows for this):
o pension fund into a pension preservation fund, provident preservation fund or a
retirement annuity fund; or
o provident fund into a pension preservation fund, provident preservation fund or a
retirement annuity fund;
o pension preservation or provident preservation fund into another pension
preservation or provident preservation fund or a retirement annuity fund.
There is a deduction equal to the retirement interest transferred (i.e. tax-free transfer)
Tax free transfers upon or after reaching normal retirement age:
 Where a member of a fund transfers a retirement interest from one fund to another
(irrespective of whether before or after reaching normal retirement age of the fund being
transferred from), the amount transferred to another fund accrues to the member in terms
of the legislation (Second Schedule to the Income Tax Act).
 If it was thus not for the deductions afforded in the Second Schedule, these amounts would
be taxable in the hands of the member.
 Before the 2021 Taxation Laws Amendment Act was promulgated, paragraph 6A of the
Second Schedule to the Act only provided for a deduction where a member of a pension or
provident fund who had reached retirement age in terms of the rules of the
pension/provident fund transferred a benefit to a pension/provident preservation or
retirement annuity fund.
 After promulgation of the 2021 Taxation Laws Amendment Act, paragraph 6A now also
provides for a deduction (and thus in effect a tax-free transfer) where a member of a
pension preservation/provident preservation fund who had reached retirement age in terms
of the rules of the pension preservation /provident preservation fund transfers to another
pension preservation/provident preservation or retirement annuity fund.
 In Response Document, Treasury indicated that they are not in favour of any tax-free
transfers to an occupational fund if the member has reached retirement age in any other
fund ; but
o What about a tax-free transfer from one retirement annuity fund where the
member has already reached normal retirement age to another RA Fund?
o Does this mean such a transfer will be taxed where the member of the retirement
annuity fund is older than 55 (normal retirement age of a RA Fund defined as age
55 in section 1 of the Act)?
o
Latest directive documentation form SARS appear to indicate that such a transfer
will not even be allowed.
Latest table applicable to:
 retirement fund benefits on retirement, death and withdrawal on retrenchment, and
 severance benefits received from an employer
Tax on retirement lump sums at retirement, death and retrenchment, and tax on severance benefits
 Par 2(a) of 2nd Schedule as per the Taxation Laws Amendment Act 2009: The Retirement
Table will apply if the termination of employment is due to:
o The employer having ceased to carry on, or intending to cease carrying on the trade
in respect of which he or she was employed, or
o The person having become redundant because the employer had a general
reduction in staff or a reduction in staff of a particular class; and
o







Members are not shareholders with more than 5% share capital/member’s interest
in a company.
Therefore, the Retirement Table will apply in this instance and NOT the Withdrawal table
like it usually would upon withdrawal from a retirement fund
NB: If the member decides to first transfer the benefit to a preservation fund on
retrenchment and thereafter decides to withdraw the benefit (or a portion thereof) the
withdrawal will be taxed in terms of the withdrawal table and not the retirement table.
Severance benefits are defined in section 1 of the Income Tax Act.
It essentially includes any lump sum received from employer in respect of relinquishment,
termination, loss etc. of office (employment) where the employee:
o Is 55 years of age or older;
o Has become permanently incapable (disabled) as a result of sickness, accident,
injury, infirmity of body and mind etc.;
o Is retrenched (either as a result of the employer ceasing to trade or where the
employer is reducing personnel) and includes voluntary packages taken on
retrenchment.
It will not be deemed to be severance benefit if the employee owns more than 5%
share/member’s interest in the company.
If it is a benefit payable via an employer owned policy (e.g. a deferred compensation policy),
it will also not qualify as a severance benefit.
SARS also dies not view leave pay as a severance benefit as it not view as a payment in
respect of relinquishment, termination, loss etc. of office (employment) – see SARS letter to
ASISA dated 12 July 2012: no direct link between ceasing of employment and leave pay
received – leave pay viewed as an amount received in respect of services rendered.
Example 1: Tax on retirement lump sums at retirement
 Jimmy is due to retire on the 31st of October 2022 from a Pension Fund.
 His estimated retirement Pension Fund value is R2 400 000.
 During his membership to the Pension Fund, he contributed R60 000 which did not qualify as
a deduction for purposes of income tax.
 Jimmy has not received a benefit from a retirement fund before.
 Jimmy would like to take the maximum amount in cash.
o Calculate the following:
 What is the tax liability on the lump sum for Jimmy as on 31 Oct 2022?
o Lump sum: R2 400 000 / 3 = R800 000
o Taxable portion: R800 000 – R60 000 = R740 000
o
Tax Payable on lump sum:
 = R36 000 + 27% on the taxable amount above R700 000
 = R36 000 + 27% of (R740 000 – R700 000)
 = R36 000 + 27% of R40 000
 = R36 000 + 10 800
 = R46 800
Tax on retirement lump sums at retirement, death and retrenchment: GEPF and Certain Public
Sector Funds:
 GOVERNMENT PENSION FUND or par (a) & (b) funds
o Portions prior to 1 March 1998 vested tax-free
o Apply a formula to calculate portion post March 1998
o
o
o
A = Taxable portion to be included in gross income ito 2nd Schedule (par 5 and 6)
B = Completed years after 1 March 1998
C = Total nr of completed years in fund
Example 1: Tax on retirement lump sums at retirement – GEPF and Certain Public Sector Funds


Tax – free portion: R961 538.46
Taxable portion: R1 538 461.54
o Tax Payable on lump sum:
 = R130 500 + 36% of taxable amount above R1 050 000
 = R130 500 + 36% of (R1 538 461.54 – R1 050 000)
 = R130 500 + 36% of R488 461.54
 = R130 500 + R175 846.15
 = R306 346.15 (tax payable)
Transfers from GEPF & Other Public Sector Funds: Subsequent retirement or death
 Important aspects to remember: transfers from GEPF/public sector funds before 1 March
2009 to another fund where member retires or from fund being transferred to, or dies and
beneficiaries/dependants opt for lump sum.
o Where the retirement interest in the GEPF or another public sector fund was
transferred to another fund before 1 March 2009, the pre-1 March 1998 tax-free
portion was not preserved where the member retired or died (i.e., in/from the fund
being transferred to).
o From 1 March 2009, the Income Tax Act was amended to provide that such tax-free
portion (deduction) was preserved and thus applicable when the member exited the
fund that the interest was transferred to on retirement or death (preservation of
pre-1March 1998 portion on withdrawal already provided for from 1 March 2006).
o The 2009 Taxation Laws Amendment Act provided that the section “shall be deemed
to have come into operation on 1 March 2009 and shall apply in respect of any lump
sum benefit received or accrued on or after that date”. It is again important to bear
in mind that SARS interprets the amendment to only be applicable where the
transfer from the public sector fund occurred on/or after 1 March 2009.
o Where a person thus transferred a benefit from the GEPF/public sector fund to
another fund before 1 March 2009, but receives a lump sum payment on retirement
or death from such other fund on or after 1 March 2009, the deduction in respect of
the pre-1 March 1998 tax-free portion will not be allowed.
Example 2: Retirement tax on lump sums at retirement – GEPF and Certain Public Sector Funds
 Mrs Dlamini resigned from the GEPF on 1 March 2009 and transferred her full actuarial
reserve of R1 mil to a RA.
 She had 30 years membership in the GEPF and 11 years of these were post 1 March 1998 (1
March 1998 to 1 March 2009). What will be applied when Mrs Dlamini retires from her RA
in the future:
o Formula: 11/30 x R1 000 000 = R366 666.67 portion post March 98
o Portion prior to March 1998: R1 000 000 – R366 666.67 = R633 333.33
o When she vests her RA in the future, R633 333.33 will be tax-free and
o this amount may be deducted from the lump sum taken on retirement to calculate
the taxable portion.
 If the transfer from the GEPF had occurred before 1 March 2009, the pre-1 March 1998 taxfree portion will be lost, as we are dealing with a retirement from the RA Fund.
Tax on retirement lump sums at retirement – Certain Public Sector Funds: Example 3


In this instance we will apply the so-called “reverse formula” to establish the answer (please
note that the “reverse formula” is not a formula prescribed in the Income Tax Act, but
merely a method to establish the maximum lump sum to be taken if there is both a pre-1
March 1998 tax-free portion and an amount left in respect of the 0% tax rate):
C (total completed years of service) ÷ B (completed years of service after 1 March 1998) x
R500 000 (the amount left to be taxed at 0% on retirement)
o
o
35 (total years of service) ÷ 24 (completed years of service post 1 March 1998) x
R500 000 (amount available to be taxed at 0%)
= R729 166.67
o
o
o
o
Let’s test the answer with the prescribed formula:
A = B/C x D
= 24/35 x R729 166.67
= R500 000 (taxable amount)
o
R500 000 taxed at 0% (no prior retirement/withdrawal lump sums or severance
benefits)
= R0 tax payable
o

If Simon in our example had, for example took a taxable lump sum withdrawal from a fund
on/after 1 March 2009 (or on retirement on/after 1 October 2007 or received a severance
benefit on or after 1 March 2011) in the amount of R200 000, it would in essence mean that
he had used R200 000 of his 0% tax rate applicable to retirement, and would thus have R300
000 (R500 000 – R200 000) left to be taxed at 0%. This would mean that if he wanted to take
the maximum lump sum without paying tax, the calculation would look as follows:
o 35 (total years of service) ÷ 24 (completed years of service post 1 March 1998) x
R300 000 (amount available to be taxed at 0%)
o = R437 500
Tax retirement lump sums on death: Example 1
 Kevin died on the 31st of May 2022.
 He was a member of a pension fund.
 The lump sum benefit payable by the fund, was R1 900 000 (R1 000 000 from an approved
group life fund and R900 000 was his Pension Fund Value).
 The Lump sum will be deemed to have accrued to Kevin immediately prior to his death.
o Apply the tax table as at retirement to R1 900 000
o Tax Payable : R130 500 + 36% (R1 900 000 – R1 050 000 )
o = R436 500
Tax on retirement lump sums at withdrawal, retirement, death and retrenchment, and tax on
severance benefits: Aggregation
 Any lump sums received from a retirement fund (either previous withdrawal or retirement)
as well as severance benefits received will be taken into account in the lump sum tax
calculation upon withdrawal, retirement, death or receipt of a severance benefit, where
such previous withdrawal, retirement or severance benefit was received on or after the
following dates:
o Retirement lump sums which accrued on/or after 1 October 2007 will be taken into
account;
o
o
Lump sums on withdrawal benefits which accrued on/or after 1 March 2009 will be
taken into account (this will include withdrawal from retirement funds due to
retrenchment);
Severance benefits as from 1 March 2011.
Steps in calculating tax liability:






Step 1
o Calculate the taxable lump sum for current tax year.
Step 2
o Identify and add previous taxable amounts from Retirement (as from 1 October
2007) and Withdrawal (as from 1 March 2009) and Severance Payments (as from 1
March 2011)
Step 3
o Add Step 1 + Step 2.
Step 4
o Calculate the tax payable on the total amount calculated in Step 3 – using the
Withdrawal Table (withdrawals other than on retrenchment) or the Retirement Tax
Table (retirement lump sums received on retirement, death or withdrawal on
retrenchment or severance benefit received)
Step 5
o Calculate the tax payable on the previous amounts received – thus the amounts
calculated in Step 2 – using the same tax table used in step 4. This amount is
referred to as the “hypothetical tax”.
Step 6
o Tax Payable:
Tax on retirement lump sums at retirement: Aggregation Example 1
 John has a RA, vesting on the 30th of Aug 2022. The expected taxable lump sum is R1 000
000.
 John also retired from other funds before as follows:



Step 1
o Calculate the taxable lump sum for current tax year.
R1 000 000 – R0 = R1 000 000
Step 2
o Identify and add previous taxable amounts from Retirement (as from 1 October
2007) and Withdrawal (as from 1 March 2009) and Severance Benefits (as from 1
March 2011).
R1 180 000 + R300 000 = R1 480 000
Step 3
o Add Step 1 + Step 2.
R1 480 000 + R1 000 000 = R2 480 000



Step 4
o Calculate the tax payable on the total amount calculated in Step 3 – using the
Retirement Tax Table.
o Tax on R2 480 000 = R130 500 + 36% x (R2 480 000 – R1 050 000)
 = R645 300
Step 5
o Calculate the tax payable on the previous amounts received – thus the amounts
calculated in Step 2 – using the Retirement Tax Table. This amount is referred to as
the “Hypothetical Tax”.
o Tax on R1 480 000 = R130 500 + 36% x (R1 480 000 – R1 050 000)
 = R285 300
Step 6
o Tax Payable:
Tax on retirement lump sums on withdrawal: Aggregation Example 3

Aggregation of retirement fund lump sums
 Harry wants to retire on the 31st of October 2022.
 He has a RA with an estimated value of R2 500 000 for the lump sum as at 31 Oct 2020. He
has R200 000 disallowed contributions to such RA. The RA is currently paid-up.
 He resigned from his 1st employer in 1980 when he used his pension fund of R25 000 to
travel overseas.
 He resigned from employment in July 2009 and he used his provident fund to pay his debts.
His taxable portion of his provident fund at such time was R900 000.
Tax on retirement lump sums on retrenchment: Aggregation Example 4
 Susan (age 47) is employed by ABC (Pty)Ltd.
 ABC (Pty) Ltd will be ceasing trade in November 2022.
 Susan holds no shares in ABC (Pty)Ltd.
 Her employer will be paying her a severance amount of R250 000, when it ceases trade.
 She is also a member of her employer’s provident fund and her fund value is equal to
R750 000.
 Susan has made contributions of R50 000, to the provident fund, which did not qualify as an
income tax deduction.

Susan was retrenched before, in April 2000, and received a severance payment of R100 000
at such time.
 She transferred her pension fund value (of R275 000) at that stage to a pension preservation
fund. She made a taxable withdrawal of R30 000 from the preservation fund in June 2010.
o Calculate the after-tax amount payable to Susan, should she receive the full
amount in cash.

Step 1: Calculate the taxable amount from the provident fund:
o
R750 000 – R50 000
= R700 000
o
Add severance pay
= R250 000
o
Total taxable amount for current tax year = R950 000
o
o
Step 2:
Identify and add earlier/previous taxable amount(s) received upon retirement (from
1 Oct 2007), withdrawal (from 1 March 2009) and Retrenchment (from 1 March
2011): R30 000 from Preservation fund in June 2010.
 NB – previous severance pays (R100 000) not added as it accrued to her
before 1 March 2011.

Step 3: Add taxable lump sums received earlier and current (as determined in step 1 & step
2):
o
= R950 000 + R30 000
o
= R980 000

Step 4: Calculate the tax per the retirement table on the total of the current and earlier
lump sums (i.e., the total of step 3):
o
= Tax on R980 000
o
= R36 000 + 27% (R980 000 – R700 000)
o
= R111 600

Step 5: Calculate the tax per the retirement table on the earlier lump sum received:
o
= Tax on R30 000
o
= R0

Step 6: Deduct the tax calculated on the earlier amount from the total tax
o calculated (i.e. deduct tax calculated in step 5 from step 4):
o
= R111 600 – R0
o
= R111 600
Susan will receive the following after-tax amount:
= (R750 000 + R250 000) – R111 600 = R888 400
Compulsory annuities and income tax: Position at retirement
 In accordance with definition of “retirement annuity fund”, “pension fund”, “pension
preservation fund”, “provident fund” and “provident preservation fund” in section 1(1) of
Income Tax Act, a member retiring is upon retirement, allowed to receive a maximum of one
third of the total value of the retirement interest as a lump-sum - remainder of the
retirement interest must be utilized for an annuity (including a living annuity).



The annuity can be provided by the retirement fund in one of three ways, namely, the
annuity can be:
o paid directly by the retirement fund to the member (i.e., paid directly from the
retirement fund’s coffers),
o purchased from a South African registered insurer in the name of the fund (i.e., a
fund-owned annuity purchased form a long-term insurer), or
o purchased by the retirement fund from a South African registered in the name of
the retiring member (member owned annuity purchased from a long-term insurer).
Prior to 1 March 2022, fund members were not allowed to purchase more than one type of
above types of annuities.
2021 Taxation Laws Amendment Act:
o More than one of above types of annuities may be purchased by retiring member
from 1 March 2022, but if more than one annuity is purchased, each annuity must
be purchased with a minimum consideration of R165 000.
Compulsory annuities:
 Fully taxable in the hands of the annuitant as normal income, but possible exemption
against compulsory/qualifying annuities in terms of Sec 10C in respect of:
o Contributions made to a pension, provident or retirement annuity fund not
previously allowed as a deduction (either in terms of Sec 11F or against lump sums
in terms of the Second Schedule to the Income Tax Act) or already previously
exempted in terms of section 10C.

Where person is receiving an annuity upon retirement from a retirement fund or as a
beneficiary of a deceased member/ex member, and this person is also receiving
remuneration form another source, annuity amount is added to other remuneration on
assessment by SARS to determine the tax liability of such person.
o



In many cases annuitant does not foresee additional tax liability that ensues due to
the additional income pushing him/her into a higher tax bracket, which creates tax
due to SARS on assessment.
Legislation amended from 1 March 2022:
o Increase in deduction of PAYE where a pensioner is receiving remuneration (e.g.,
salary or annuity income) from more than one source
o SARS will aggregate the income of the taxpayer, and based on that give an
instruction to the provider of the living annuity (retirement fund or long-term
insurer) at which rate to deduct PAYE.
Notwithstanding the PAYE withholding rate provided by SARS, a pensioner may at any time,
request his or her retirement fund administrator to withhold PAYE at a rate higher than the
rate provided by SARS.
Notwithstanding the PAYE withholding rate provided by SARS, a pensioner may request his
or her retirement fund administrator to withhold PAYE at a rate that is equal to the PAYE
withholding rate under the normal PAYE withholding tables.
o In such a case, the retirement fund administrator is required to inform the pensioner
of the possibility that the PAYE withholding rate will be insufficient to cover the tax
liability of the taxpayer on assessment;
Position Prior to 1st March 2020: Section 10 exemption of disallowed contributions against annuity
income.
 Sec 10C (2) of the Income Tax Act before amended by 2019 Taxation Laws Amendment Act
reads:
o (2) There shall be exempt from normal tax in respect of the aggregate of
compulsory annuities payable to a person an amount equal to so much of the
person’s own contributions to any pension fund, provident fund and retirement
annuity fund that did not rank for a deduction against the person’s income in terms
of section 11F as has not previously been—
 (a) allowed to the person as a deduction in terms of the Second Schedule; or
 (b) exempted from normal tax in terms of this section,
o in respect of any prior year of assessment.
 The section as above was applicable for compulsory annuities received up to 29 February
2020.


Where a member of a pension, provident or retirement annuity fund retired from such fund,
and there are contributions that were previously disallowed to the member as a deduction
for income tax purposes, these disallowed contributions will be deductible from the lump
sum taken on retirement.
o Contributions to a pension, provident and retirement annuity fund in excess of the
amount allowed as a deduction from the lump sum are exempt from a compulsory
annuity accruing to the member from 1 March 2014 to 29 February 2020.
o A compulsory annuity was defined as the remainder of the retirement interest of a
person payable as an annuity contemplated in the definition of a pension fund,
pension preservation fund and a retirement annuity fund.
Sec 10C did not include compulsory annuities purchased through funds (retirement interest)
from provident funds or provident preservation funds (even though the rules of a provident
fund may make provision for the option of using all or a portion of the retirement interest to
purchase an annuity) where the annuity income accrued before 1 March 2020.

A person was however, before 1 March 2020, able to exempt non-deductible contributions
by members of provident funds against annuity income of pension funds, retirement annuity
funds and pension preservation funds that members of such provident funds may also have
belonged to.
Section 10C: Exemption of disallowed contributions against annuity income:
 Effective from 1 March 2020: Amendment in Income Tax Act – Sec 10C(2):
 By the substitution in subsection (2) for the words preceding paragraph (a) of the following
words:
o “(2) There shall be exempt from normal tax in respect of the aggregate of qualifying
annuities payable to a person an amount equal to so much of the person’s own
contributions to any pension fund, provident fund and retirement annuity fund that
did not rank for a deduction against the person’s income in terms of section 11F as
has not previously been—
 (a) allowed to the person as a deduction in terms of the Second Schedule; or
 (b) exempted from normal tax in terms of this section,
o in respect of any prior year of assessment

The 2020 Taxation Laws Amendment Act amended the definition of “qualifying annuity” as
follows:
o “Qualifying annuity” means the amount of the retirement interest of a person
payable in the form of an annuity (including a living annuity)—
o (a) as contemplated in paragraph (ii) (dd) of the proviso to paragraph (c) of the
definition of “pension fund”;
o (b) as contemplated in paragraph (e) of the proviso to the definition of “pension
preservation fund”;
o (c) as contemplated in paragraph (b) (ii) of the proviso to the definition of
“retirement annuity fund”;
o (d) as contemplated in paragraph (b) (iv) of the proviso to the definition of
“provident fund” in section 1 (1); or
o (e) as contemplated in paragraph (e) of the definition of “provident preservation
fund” in section 1 (1).

Where a member of a pension, provident or retirement annuity fund retired from such fund,
and there are contributions that were previously disallowed to the member as a deduction
for income tax purposes, these disallowed contributions will be deductible from the lump
sum taken on retirement.
o Contributions to a pension, provident and retirement annuity fund in excess of the
amount allowed as a deduction from the lump sum are exempt from a qualifying
annuity accruing to the member from 1 March 2020.
o A qualifying annuity is essentially defined as the remainder of the retirement
interest of a person payable as an annuity contemplated in the definition of a
pension fund, pension preservation fund and a retirement annuity fund as well as an
annuity by a provident and provident preservation fund.
Sec 10C therefore now also includes compulsory annuities purchased through funds
(retirement interest) from provident funds or provident preservation funds where the

annuity income accrued on/after 1 March 2020

A person will thus, from 1 March 2020, be able to exempt contributions not already allowed
as a deduction/ exemption against compulsory annuity income purchased with the
retirement interest in a pension, provident, pension preservation, provident preservation or
retirement annuity fund.
Example 1: Sec10C = Position before 1st march 2020
 Mr Alf Marais is a Member of the XYZ Provident Fund. He decides to retire from this fund on
1 March 2019. The value in this fund is R5 515 000. His disallowed contributions to the fund
(assume that all disallowed contributions were made before 1 March 2016) amount to R1
515 000. He decides to take R515 000 as a lump sum, and use the balance to purchase a
compulsory annuity. His income from this annuity amounts to R300 000 for the 2019-2020
year of assessment. He wants to know what the tax consequences of his decision will be.
 He will be able to deduct the R515 000 in full for income tax purposes with regard to the
lump sum taken and will thus receive the lump sum tax-free (Par 5 of the 2nd Schedule).
 He will however not be able to exempt the balance of his disallowed contributions (R1 515
000 – R515 000 = R1 000 000) in terms of Sec 10C in the 2019/2020 year of assessment, as
the definition of a compulsory annuity (before 1 March 2020) does not include a compulsory
annuity purchased from the retirement interest of a provident fund.
Example 2: Position before 1 March 2020
 Mr Peter Jones is a Member of the XYZ Provident Fund. He decides to retire from this fund
on 1 March 2019. The value in this fund is R5 515 000. His contributions to the fund not
allowed as a tax deduction amount to R1 515 000 – assume that these contributions were
made in the 2016-2017 and 2018-2019 years of assessment, i.e. after 1 March 2016. He
decides to take R515 000 as a lump sum, and use the balance to purchase a compulsory
annuity. His income from this annuity amounts to R300 000 for the 2019-2020 year of
assessment. He wants to know what the tax consequences of his decision will be.
 He will be able to deduct the R515 000 in full for income tax purposes with regard to the
lump sum taken and will thus receive the lump sum tax free (Par 5 of the 2nd Schedule).
 He will however not be able to exempt the balance of his disallowed contributions (R1 515
000 – R515 000 = R1 000 000) in terms of Sec 10C, as the definition of a compulsory annuity
does not include a compulsory annuity purchased from the retirement interest of a
provident fund.
 As the contributions not allowed as a deduction in terms of Sec 11F were made after 1
March 2016, it will be carried over to the next year of assessment in terms of Sec 11F.
o His remuneration is R300 000 (annuity).
o Is taxable is is also R300 000 (no Sec 10C exemption allowed).
o He would thus be entitled to a Sec 11F deduction of:
 R300 000 x 27.5% = R82 500.
o His taxable income would thus be:
 R300 000 – R0 (exemptions) – R82 500 (Sec 11F deduction)
 = R217 500.
o He will thus carry disallowed contributions of R917 500 (R1 000 000 – R82 500) over
to the following year of assessment.
Example 3: Position before 1 March 2020
 Let’s assume Mr Peter Jones, (see Example 2) had also retired from his retirement annuity
fund in the 2019-2020 year of assessment.
 He decides to use his full retirement interest to purchase a compulsory annuity. The value of
this pension interest in the retirement annuity fund is R3 000 000. All of his contributions to
this retirement annuity fund were deductible under Sec 11F.
 His income from this annuity is R100 000 for the year of assessment. He wants to know what
the tax consequences of this decision will be.
o Although all Mr Jones’ contributions to the retirement annuity fund were deductible
under Sec 11F, he also made R1 000 000 contributions to his provident fund that
were not deductible under Sec 11F or Paragraph 5(1)(a) of the Second Schedule (see
previous slides).
o His gross income for the 2019-2020 year of assessment will thus be R400 000:
 R300 000 (compulsory annuity from the remaining retirement interest in his
provident fund)
 plus R100 000 (compulsory annuity from the retirement interest in his
provident fund).
o R100 000 of his income will be exempt under Sec 10(C), as the annuity purchased
with his pension interest in the retirement annuity fund complies with the definition
of compulsory annuity. This will leave him with R900 000 (R1 000 000 – R100 000) to
be carried over to the next year of assessment.
o Although all his contributions to the retirement annuity were allowed as deductions
for income tax purposes, the amounts not previously allowed as deductions against
the contributions (after 1 March 2016) made to this provident fund, will be allowed
as a deduction against the income from the compulsory annuity purchased with his
retirement interest in the retirement annuity fund.
o The R300 000 income purchased with his retirement interest in the provident fund
will not be exempt in terms of Sec 10(C) as explained in the previous example.
o As the contributions not allowed as a deduction in terms of Sec 11F were made after
1 March 2016, it will be carried over to the next year of assessment in terms of Sec
11F.
 His remuneration is R400 000 (annuity from provident fund and from retirement annuity
fund).
 His taxable income (for purposes of Sec 11F is
o R400 000 (gross income: annuity from provident fund and from retirement annuity
fund) – R100 000 (Sec 10C: exempt compulsory annuity income from RA Fund)
o = R300 000.
 He would thus be entitled to a Sec 11F deduction of:
o R400 000 (remuneration is higher than taxable income) x 27.5% = R110 000 (it is
smaller than the maximum allowable deduction of R350 000).
 His taxable income would thus be:
o R400 000 – R100 000 (Sec 10C exemption) – R110 000 (Sec 11F deduction)
o = R190 000.
 He will thus carry disallowed contributions of R790 000 (R1 000 000 – R100 000 – R110 000)
over to the following year of assessment.
Example 4: Position from 1st march 2020:
 Let’s assume Mr Peter Jones, (see Example 2 & 3) had also retired from his retirement
annuity fund in the 2019-2020 year of assessment.
 He decides to use his full retirement interest to purchase a compulsory annuity. The value of
this pension interest in the retirement annuity fund is R3 000 000. All of his contributions to
this retirement annuity fund was deductible under Sec 11F.
 His income from this annuity is R100 000 for the 2020/2021 year of assessment. He wants to
know what the tax consequences of this decision will be.
 Although all Mr Jones’ contributions to the retirement annuity fund were deductible under
Sec 11F, he also made R1 000 000 contributions to his provident fund that were not
deductible under Sec 11F or Paragraph 5(1)(a) of the Second Schedule (see previous slides).
 His gross income for the 2020/2021 year of assessment will thus be R400 000: R300 000
(compulsory annuity from the remaining retirement interest in his provident fund) plus R100
000 (compulsory annuity from the retirement interest in his provident fund).
o R400 000 of his income will be exempt under Sec 10(C), as both the annuities
purchased with his pension interest in the retirement annuity fund and provident
fund complies with the definition of qualifying annuity.
o This will leave him with R600 000 (R1 000 000 – R400 000) to be carried over to the
next year of assessment.
o His taxable income would thus be:
 R400 000 – R400 000 (Sec 10C exemption)
 = R0.
Example 5: Position from 1 March 2020
 Mr Alf Marais is a Member of the XYZ Provident Fund. He decides to retire from this fund on
1 March 2021. The value in this fund is R5 515 000. His disallowed contributions to the fund
(assume that all disallowed contributions were made before 1 March 2016) amount to R1
515 000. He decides to take R515 000 as a lump sum, and use the balance to purchase a
compulsory annuity. His income from this annuity amounts to R300 000 for the 2022-2023
year of assessment. He wants to know what the tax consequences of his decision will be.
 He will be able to deduct the R515 000 in full for income tax purposes with regard to the
lump sum taken and will thus receive the lump sum tax-free (Par 5 of the 2nd Schedule).
 He will be able to exempt the balance of his disallowed contributions (R1 515 000 – R515
000 = R1 000 000) in terms of Sec 10C, as the definition of a qualifying annuity (on/after 1
March 2020) now includes an annuity purchased from the retirement interest by a provident
fund/ provident preservation fund.
o His taxable income will thus be: R300 000 gross income minus R300 000 (Section 10C
exemption) = R0 (taxable income). Thus R700 000 left of disallowed contribution.
Example 6: (as this example does not contain an annuity purchased with the retirement interest in a
provident/provident preservation fund, it will be applicable to both the position before and after 1
March 2020)
 Mr Ralph Morena (aged 60), the sole proprietor of a business, retires from a retirement
annuity fund on 1 March 2022.
 His total retirement interest in the fund is R5 000 000.
 He has made contributions of R1 000 000 that did not qualify for a deduction under Sec 11F.
 He decides to take R400 000 as a lump sum and use the balance of the retirement interest to
purchase a compulsory annuity.



His compulsory annuity income for the 2022-2023 year of assessment is R200 000.
Mr Morena also earned an income of R300 000 from his small business.
He wants to know what the tax consequences of this decision will be.
o The R400 000 taken as a lump sum will pay out tax-free, as it will be deductible
under paragraph 5(1)(a) of the Second Schedule to the Income Tax Act. He will at
this stage thus have contributions of R600 000 (R1 000 000 – R400 000) to the
retirement annuity fund that were not previously allowed as a deduction or
exemption for income tax purposes.
o His remuneration would be: R200 000
o His taxable income for purposes of calculating the Sec 11F deduction would be:
 R200 000 (compulsory annuity income) + R300 000 (business income)
 = R500 000 (gross income) minus R200 000 (exemption Sec 10C)
 = R300 000 (taxable income for purposes of Sec 11F)
o His disallowed contributions that he could apply in terms of Sec 11F at this stage
would be:
 R600 000 (R1 000 000 – R400 000 lump sum taken) – R200 000 (disallowed
contributions exempted in terms of Sec 10C) = R400 000
o As his taxable income is bigger than his remuneration, the deduction in terms of Sec
11F would be: R300 000 (taxable income for purposes of Sec 11F) x 27.5% = R82 500.
o His income tax calculation would thus look as follows:
 R200 000 (compulsory annuity income) + R300 000 (business income)
 = R500 000 (gross income) minus R200 000 (exemption Sec 10C)
 = R300 000 – R82 500 (deduction Sec 11F)
 = R217 500 (taxable income against which the tax tables will be applied).
o The amount of disallowed contributions carried forward to the following year of
assessment would thus be: R400 000 (see previous slide) minus R82 500 (deduction
allowed under Sec 11F)
 = R317 500.
Example 7: (as this example does not contain an annuity purchased with the retirement interest in a
provident/provident preservation fund, it will be applicable to both the position before and after 1
March 2020
 Mr Johan Van Der Walt, retires from a pension fund on 1 October 2022. His total retirement
interest in the fund is R5 000 000. He has made contributions of R1 000 000 that did not
qualify for a deduction under Sec 11F, as amended.
 He decides to take R400 000 as a lump sum and use the balance of the retirement interest to
purchase a compulsory annuity.
 His compulsory annuity income for the 2022-2023 year of assessment is R200 000.
 Mr Van Der Walt also earned a salary of R300 000 in the 2022/2023 year of assessment prior
to retirement.
 He wants to know what the tax consequences of this decision will be.
 The R400 000 taken as a lump sum will pay out tax-free, as it will be deductible under
paragraph 5(1)(a) of the Second Schedule to the Income Tax Act.
 He will at this stage thus have contributions of R600 000 (R1 000 000 – R400 000) to the
pension fund that were not previously allowed as a deduction or exemption for income tax
purposes.

An amount of R200 000 will be exempt against his compulsory annuity income under Sec
10C.
o If we assume that Mr Van Der Walt is not entitled to any other exemptions or
relevant deductions from his income, he will be able to deduct an amount of R137
500 from his income in terms of Sec 11F of the Income Tax Act, calculated as
follows:
 R200 000 (compulsory annuity income) + R300 000 (salary)
 = R500 000 (gross income) minus R200 000 (amount exempt under Sec 10(C)
 = R300 000 ( taxable income before applying Sec 11F).
o His remuneration for the year of assessment is:
 R300 000 (salary) + R200 000 (annuity income)
 = R500 000
o As he is entitled to deduct 27.5% of the higher amount of taxable income or
remuneration, but limited to R350 000, he will be also be able to deduct:
 R500 000 x 27.5% = R137 500.
o His income tax calculation would thus look as follows:
 R200 000 (compulsory annuity income) + R300 000 (salary)
 = R500 000 (gross income) minus R200 000 (exemption Sec 10C)
 = R300 000 – R137 500 (deduction Sec 11F)
 = R162 500 (taxable income against which the tax tables will be applied).
o The balance of the contributions to the pension fund, i.e. that were not yet allowed
as a tax deduction or exemption (R1 000 000 – R400 000 deduction against lump
sum under par 5(1)(a) of the 2nd Schedule) – R200 000 (exemption under Sec 10C) –
R137 500 (deduction under Sec 11F) = R262 500) will be carried to the 2023-2024
year of assessment, and will thus be deductible under paragraph 5 or 6 of the
Second Schedule, should he retire/withdraw from another retirement fund, exempt
under Sec 10C in respect of compulsory annuity income earned and deductible
against income in terms of Sec 11F.
Example 8: (as this example does not contain an annuity purchased with the retirement interest in a
provident/provident preservation fund, it will be applicable to both the position before and after 1
March 2020)
 Mr Jimmy Reddy, retires from a retirement annuity fund on 1 August 2022. His total
retirement interest in the fund is R2 500 000. He has made contributions of R200 000 that
did not qualify for a deduction under Sec 11F. He is not a member of another retirement
fund. He wishes to take R500 000 as a lump sum and use the balance of the retirement
interest to purchase a compulsory annuity. He wants to know whether he will be able to
structure his tax liability in such a fashion that the R500 000 lump sum becomes fully taxable
in order to make use of the 0% tax rate on the first R500 000 taken as a lump sum, and have
the R200 000 exempted against his compulsory annuity in terms of Sec 10C.
o Answer: Mr Reddy will unfortunately not be able to do this. The amount of R200 000
that did not rank as a deduction under Sec 11F will first be applied against his lump
sum taken (as it will accrue to him before the annuity income accrues to him) and
any balance in respect of such disallowed contributions, where applicable, will be
exempted in terms of Sec 10C.
o Mr Reddy may thus consider to rather take a lump sum of R700 000 on retirement in
order to make full use of the deduction afforded to him under paragraph 5(1)(a) of
the Second Schedule to the Act: R200 000 of this amount will be deductible from the
o
lump sum for income tax purposes, and the remaining R500 000 will be taxed at 0%
in accordance with the tax tables applicable to retirement fund lump sums on
retirement. He will thus effectively receive an amount of R700 000 on which no
income tax will be payable.
If he takes an amount of R500 000 as a lump sum, R200 000 of this will be
deductible for tax purposes in respect of such lump sum taken and the balance of
R300 000 will be taxed at 0% in accordance with the tax tables applicable to
retirement fund lump sums on retirement. None of the income received from the
compulsory annuity will rank as an exempt in terms of Sec 10C. If this option is
exercised, he will only receive a lump sum amount of R500 000 (R200 000 deduction
against lump sum and R300 000 taxed at 0%) on which no income tax will be
payable.
Example 9: Sec10C
 Mr Johan Van Tonder, who purchased a living annuity when he retired from his retirement
annuity fund dies. At the time of his death he has contributions made to this fund (before
retirement) in the amount of R700 000 that have not been deductible under Sec 11F or
deductible against lump sums taken on retirement (Par 5 of the 2nd Schedule to the Income
Tax Act).
 His beneficiary decides to have the remainder of the investment paid as an annuity. The
beneficiary received an annuity of R150 000 in the 2020-2021 year of assessment and wants
to know whether this income will be exempt in terms of Sec 10C of the Income Tax Act.
o Answer: The annuity will not be exempt in terms of Sec 10C, as this exemption is
only available to the person that made the disallowed contributions.
o The above principle is applicable to this scenario before and after 1 March 2020.
Important aspects:
 One must take cognizance of the fact that this exemption is only available to the member of
the fund that made the contributions.
o Where beneficiaries of a living annuity decide to continue receiving an annuity after
the death of the original annuitant (i.e., after the death of the member of the fund
that had made the contributions before retirement), this exemption will not be
available to these subsequent annuitants.
 If a beneficiary has however made contributions to a fund (or funds) of which the beneficiary
is a member that have not been allowed as a deduction/exemption, such beneficiary should
in my view be entitled to the Sec 10C exemption in respect of such non-deductible/nonexempt contributions made by the beneficiary.
 It must be borne in mind that deductions not allowed in respect of contributions made and
not accounted for in calculating the tax on the lump sum taken on retirement (or withdrawal
from the fund before retirement) will only be exempt against a qualifying (before 1 March
2019: compulsory) annuity taken by the client, and not against any other income accruing to
the client.
 It is important to note that if a person belongs to multiple funds and has made contributions
not previously allowed as a deduction/exemption, such a person will be able to exempt such
contributions against the annuity purchased on retirement from any of such funds,
irrespective of whether such contributions not previously allowed as a deduction/exemption
were made to that specific fund or not.

In terms of the provisions of Sec 10(C) contributions to pension, provident and retirement
annuity funds that were disallowed as deductions by fund members for income tax purposes
will on retirement first have to be set off against the lump sum taken by a member, where
after it will be exempted against the qualifying annuity (as defined in this section).
o Members will thus not be allowed to exercise a choice to have all disallowed
contributions exempted from compulsory annuity income where he/she also elects
to take a portion of the retirement interest as a lump sum, thus making full use of
the 0% tax rate on the first R500 000 in respect of lump sums.
o This could in certain instances encourage members to take larger lump sum
payments on retirement to ensure the maximum tax benefit.
Retirement planning and divorce: marital regimes
 Marriages in community of property: The pension interests of the spouses will form part of
the joint estate.
o Ndaba v Ndaba (600/2015) [2016] ZASCA 162 (4 November 2016) – where a divorce
court orders division of the joint estate it will automatically include a person’s
pension interest, no need for Court to make specific reference to division of the
pension interest.
o However: order will need to be amended to refer to pension interest to make order
enforceable against retirement fund.
o Example:
 Parvesh (aged 35) and Redi (aged 30) were married in community of
property. They were divorced on 10 April 2021. Their final divorce order
provides that their joint estate must be divided equally. Parvesh is a
member of a retirement annuity fund, but the final divorce order makes no
reference to the retirement annuity fund.
 Redi will be entitled to 50% of the pension interest in the retirement
annuity fund but will only be able to enforce the divorce order
against the retirement annuity fund if the divorce order is amended
to comply with the provisions of the Divorce Act.

Marriages out of community of property with accrual: The pension interests will form part of
the estates of the spouses and will be taken into account for the accrual calculation.

Marriages out of community property without accrual before 1/11/84: The spouses retain
their own separate estates and there is no sharing of assets at divorce, unless a court of law
orders a redistribution of assets in terms of Section 7(3) of the Divorce Act.
o A pension interest forms part of the spouse’s estate and will form part of the assets if
redistribution is ordered by a court. The parties may also agree to share the pension
interest.
Marriages out of community of property without accrual after 1/11/84 The spouses retain
their own separate estates and there is no sharing of assets at divorce
o Section 7(3) of Divorce Act does not make provision for this (and Section 7(7)(c) of
the Divorce Act provides that a pension interest is not deemed to be part of a
person’s estate for divorce purposes.
o Pension interests are thus not considered as assets in the estate for this marital
regime and will thus not be enforceable against a retirement fund.

o
Example:
 Louis and Riana were married out of community of property with exclusion
of the accrual system in 1995. In 2020 Riana instituted divorce proceedings
against Louis. Louis is a member of a provident fund.
 The retirement interest of Louis in the provident fund will not
constitute a pension interest for divorce purposes, even if the Court
orders a redistribution of assets.

Customary Unions The spouses retain their own separate estates and there is no sharing of
assets at divorce, unless a court of law orders a redistribution of assets in terms of Section
7(3) of the Divorce Act.
o A pension interest forms part of the spouse’s estate and will form part of the assets if
redistribution is ordered. The parties may also agree to share the pension interest.

Muslim Marriages:
o Pension fund Adjudicator, PFA held that Muslim spouses fell into the definition of
spouse in the definitions section of the Act, and the settlement agreement (made
order of Court) complied with definition of “pension interest” i.t.o. Section 1 of
Divorce Act and S 37D(4) of Pension Funds Act.
o Ruling criticized on basis that S37D(1)(d)(ii) only authorizes deductions of a share of
pension interest if ordered via divorce order granted i.t.o. S7(8) of Divorce Act.
o

Thereafter section 37D amended to read:
 Fund may make certain deductions from pension benefits
 (1) A registered fund may—
 (d) deduct from a member’s or deferred pensioner’s benefit,
member’s interest or minimum individual reserve, or the capital
value of a pensioner’s pension after retirement, as the case may
be—
 (i) any amount assigned from such benefit or individual reserve to a
non-member spouse in terms of a decree granted under section 7 (8)
(a) of the Divorce Act, 1979 (Act No. 70 of 1979) or in terms of any
order made by a court in respect of the division of assets of a
marriage under Islamic law pursuant to its dissolution;
 Court order thus a requirement.
Common law relationships
o Parties living together, i.e. co-habitees who have not had their relationships/unions
registered i.t.o. the Marriage Act or Civil Union Act or married in terms of the tenets
of a major religion - cannot share in the pension assets/interest of their partner
upon termination (other than death) of the relationship.
o Upon death, the co-habitee may be seen as a dependant or having a permanent
union with the deceased partner and may benefit i.t.o. section 37C of Pension Funds
Act.
Pensionable interest on divorce:
 Divorce Act 70 of 1979 & Pension Funds Act: Pensionable interest is:
o Pension & Provident Fund:

Pension interest in relation to a Pension & Provident Fund defined in Section
1 of the Divorce Act as: “the benefits to which that party as such a member
would have been entitled in terms of the rules of that fund if his membership
of the fund would have been terminated on the date of the divorce on
account of his resignation from his office;”
o
Preservation funds:
 Despite paragraph (b) of the definition of “pension interest” in section
1 (1) of the Divorce Act, 1979 (Act No. 70 of 1979), the portion of the
pension interest of a member or a deferred pensioner of a pension
preservation fund or provident preservation fund, that is assigned to a nonmember spouse, refers to the equivalent portion of the benefits to which that
member would have been entitled to in terms of the rules of the fund if his or
her membership of the fund terminated, or the member or the deferred
pensioner retired on the date on which the decree was granted.
o
Retirement annuity fund:
 Effect of the above sections, if read together is:
 that in the case of a spouse being a member of a retirement annuity
fund, value of the pension interest will be the lower of premiums
paid plus simple interest at the rate prescribed by the Minister in
terms of the Prescribed Rate of Interest Act; or
 premiums plus fund return (premiums plus fund return should
effectively be the value in the fund).
 The value of the pension interest is determined at date of divorce.
 Calculation of “premiums paid plus simple interest at the rate prescribed by
the Minister in terms of the Prescribed Rate of Interest Act” usually requires
an actuarial calculation.
Retirement annuity fund: calculation of members contributions to the fund up to divorce.
 The sum of the member’s contributions to the fund up to the date of divorce plus simple
annual interest as provided for in the Prescribed Rate of Interest Act. This is dependent on
date of divorce:
o Up to 31 July 2014: 15.5%
o From 1 August 2014 to 29 February 2016: 9%
o On 8 January 2016 the Prescribed Rate of interest Act was amended to the following
effect:
 The rate of interest is the repurchase rate as determined from time to time
by the South African Reserve Bank, plus 3,5 percent per annum.
 This interest rate is effective from the first day of the second month
following the month in which the repurchase rate is determined by the
South African Reserve Bank.
 The effect of this:
 Date of Divorce: From 1 May 2022 to the last day of the month
following the month of the next repo change: interest rate which is
applicable is 7.75% per annum
Pension interest on divorce: deferred pensioners who are members of pension and provident funds:
 The rules of a pension/provident fund can provide that if the member resigns before
reaching normal retirement age, that the member may preserve his/her retirement interest
in such pension/provident fund.
 From 1 March 2015, the Income Tax Act was amended to the effect that a member of a
pension/provident fund does not need to retire from such fund upon reaching normal
retirement age, but will be allowed to preserve his/her retirement interest in such
pension/provident fund.
 Section 37D of the Pension Funds Act amended to provide as follows: Fund may make
certain deductions from pension benefits:
o (1) A registered fund may—
o (d) deduct from a member’s or deferred pensioner’s benefit, member’s interest or
minimum individual reserve, or the capital value of a pensioner’s pension after
retirement, as the case may be—
o (i) any amount assigned from such benefit or individual reserve to a non-member
spouse in terms of a decree granted under section 7 (8) (a) of the Divorce Act, 1979
(Act No. 70 of 1979) or in terms of any order made by a court in respect of the
division of assets of a marriage under Islamic law pursuant to its dissolution;
 The effect thereof is that there is no pension interest (benefit) to be
assigned to the member due to the definition.

if a member is divorced after he/she has preserved his/her retirement interest in a
pension/provident fund as in (1) or (2) above, will it constitute a “pension interest” for
divorce purposes?
o definition of pension interest in relation to pension and provident funds refers to
benefits that member would have been entitled to on resignation from office on
date of divorce. In case of a deferred member, member has already resigned from
office before date of divorce and therefore court held that since member no longer
had a pension interest in fund ex-spouse was not entitled to have such benefit
included in divorce as a deemed asset.
o However: did not leave non-member spouse without remedy as divorce settlement
agreement between parties remained binding and could claim share of member’s
deferred pension benefit when it is claimed by him.

This creates following anomaly where a member of a pension or provident fund resigns from
employment:
o If member opts to preserve retirement interest in pension/provident fund after
(assuming that fund rules make provision for this), and such member is divorced
after date of preservation, the non-member would not have a claim against the
retirement interest in the pension/provident fund, as it would fall foul of the
definition of “pension interest” in section 1 of the Divorce Act.
o However: if a member opts to transfer retirement interest to a pension
preservation/provident preservation fund after resignation, and such member is
divorced after date of transfer, the non-member would have a claim against
retirement interest in the pension preservation/provident preservation fund, as it
would fall within ambit of extension of the definition of “pension interest” in section
37D(6) of Pension Funds Act.
o
Similarly, if member of pension/provident fund opts to transfer retirement interest to
a retirement annuity fund after resignation, and such member is divorced after date
of transfer, the non-member would have a claim against retirement interest in the
retirement annuity fund, as it would fall within the ambit of definition of “pension
interest” in section 1 of the Divorce Act.
Divorce – Clean break principle:
 Introduced the “clean break” approach whereby payment may be made to the “nonmember spouse” immediately after divorce.

Section 37D(1)(d)(i):
o (1) A registered fund may—
o (d) deduct from a member’s or deferred pensioner’s benefit, member’s interest or
minimum individual reserve, or the capital value of a pensioner’s pension after
retirement, as the case may be—
o (i) any amount assigned from such benefit or individual reserve to a non-member
spouse in terms of a decree granted under section 7 (8) (a) of the Divorce Act, 1979
(Act No. 70 of 1979) or in terms of any order made by a court in respect of the
division of assets of a marriage under Islamic law pursuant to its dissolution;

Financial Services Laws General Amendment Act 22 of 2008:
o All pension interests awarded ito divorce orders issued prior to 13 Sep 2007 are
deemed to accrue on that date. The “clean break” approach was therefore now
effectively applied to all divorce orders.
o The Act also amended section 37D of the Pension Funds Act further:
 (i) The fund must ask the non-member spouse how the benefit is to be paid,
within 45 days of receiving the divorce order;
 (ii) The non-member spouse must notify the fund within 120 days whether
the amount must be paid in cash or transferred to another retirement fund;
 (iii) The fund must give effect to this election within 60 days;
 (iv) Interest is payable on the amount from the expiry of the 120-day
election period;
 (v) Where the non-member spouse does not make the election within the
120 days, the fund must make the payment in cash within 30 days
thereafter.
Is the non-member spouse entitled to growth/interest on pension interest from date of divorce to
date of Payment?
 Section 37D(4)(c) of Pension Funds provides:
o (c) A non-member spouse—
 (i) is not a member or beneficiary in relation to the pension fund; and
 (ii) is entitled to the accrual of fund return from the date of the deduction
contemplated in paragraph (a) (ii) until payment or transfer thereof, but not
to any other interest or growth.
 (a) For purposes of section 7 (8) (a) of the Divorce Act, 1979 (Act No. 70 of
1979), the portion of the pension interest assigned to the non-member
spouse in terms of a decree of divorce or decree for the dissolution of a
o

customary marriage is deemed to accrue to the member on the date on
which the decree of divorce or decree for the dissolution of a customary
marriage is granted, and, on the written submission of the court order by the
non-member spouse—
 (ii) must be deducted on the date on which an election is made or, if no
election is made within the period referred to in paragraph (b) (ii), the date
on which that period expires;
Therefore, the member spouse is not entitled to any growth/interest on the pension
interest other than fund return from date of deduction to date of payment/transfer
of the pension interest.
The options of the nonmember spouse in respect of the pension interest awarded to
him/her are set out in Section 37D(4)(b) (i):
o (b) (i) The pension fund must, within 45 days of the submission of the court order by
the non-member spouse, request the non-member spouse to elect if the amount to
be deducted must be paid directly to him or her, or if it must be transferred to a
pension fund on his or her behalf.
o SARS interprets the above section to provide that the non-member either has the
option to have the full pension interest transferred to an approved fund or
alternatively to have the full amount paid in cash.
 The non-member spouse will thus not have the option to have a portion of
the pension interest paid in cash, and a balance thereof transferred to an
approved fund.
o If the non-member spouse transfers the benefit to an approved fund, no tax is
payable by the non- member spouse on such transfer.
Tax Consequences: Divorce
 Divorce Orders PRIOR to 13 Sep 2007
o Where the deduction was made before1 March 2009, the member spouse was
regarded as the tax payer. The divorce order was taxed at the member’s average
rate of tax.
o Where the deduction is made after 1 March 2009, no tax is payable.
 Divorce Orders AFTER to 13 Sep 2007
o The non-member spouse will be responsible for the tax, even if the claim by the nonmember spouse is after the date of the member’s withdrawal from the fund.
o The retirement fund lump sum withdrawal table will be applied to calculate the tax
payable by the non-member.
o The non-member may transfer to an approved retirement fund and such a transfer
is tax-free.
o Upon retirement or withdrawal from retirement funds by the non-member, the
taxed divorce award would be aggregated with other lump sums.
o Example:
 Stanley is the contracting party on a living annuity. Stanley, who was
married out of community of property with inclusion of the accrual system is
divorced on3 August 2021.
 Only the right to future income of the living annuity maybe taken
into account for the accrual calculation.

The following transfers of a pension interest are allowed to take place tax-free (so-called
approved transfers) – changes from 1 March 2021:
Pension Interest and Divorce – Divorce Orders
 The Divorce Order must contain:
o A specific reference to “pension interest” must be made as defined in the Divorce
Act.
 If the fund is a preservation fund the order must read “pension interest” as
defined in section 37D (6) of the Pension Funds Act.
o The name of the Fund.
 Where the fund is not named, it must at least be possible to determine from
the wording of the order which fund the parties had in mind.
o A specified percentage or amount (if it is an amount, it may not exceed the value of
the pension interest, as discussed in previous slides) of the pension interest must be
provided.
 It must be clear from the order how much of the member’s pension interest
has been assigned to the non-member spouse.
Divorce: GEDF
 The GEPF not governed by the Pension Funds Act but by the GEPF Law of 1996.
 Provision for the “clean break” principle in relation to persons who are divorced form GEPF
members.
o The service reduction approach.
o Effect of these amendments can be summarized as follows:
 Where member of the GEPF is divorced on or after 1 August 2019 and
former spouse of the member was paid a portion of member’s pension
interest, member’s benefit would be reduced in terms of service reduction
approach; and
 Where member of the GEPF was divorced before 1 August 2019 and former
spouse of member was paid a portion of the member’s pension interest,
member has a choice:
 If member wants divorce debt approach to be applicable to divorce,
member must notify GEPF on or before 22 May 2020 that he/she
still wants divorce debt to be applicable to him/her.
 If member does not provide notification as provided for in (a) above,
member’s benefit would be reduced in terms of service reduction
approach.
o GEPF is a defined benefit fund and benefits of members are thus calculated via
formulas prescribed in GEPF Rules. Reduction in years of pensionable service will
thus have effect that member’s benefits are accordingly reduced.
Divorce: Compulsory annuities:
 Compulsory Annuities can be paid by a fund (fund owned) or can be in the name of a
member (paid by an insurer.
 A compulsory annuity provided by a fund is compulsory, non-commutable and payable for
and based on the lifetime of the annuitant.
o The definition of “pension interest” does not include compulsory annuities.
o However Sec 37D of the Pension Funds Act (as amended) provides:
 Fund may make certain deductions from pension benefits.
 (1) A registered fund may (d) deduct from a member’s or deferred
pensioner’s benefit, member’s interest or minimum individual
reserve, or the capital value of a pensioner’s pension after
retirement, as the case may be.
 (i) any amount assigned from such benefit or individual reserve to a
non-member spouse in terms of a decree granted under section 7 (8)
(a) of the Divorce Act, 1979 (Act No. 70 of 1979) or in terms of any
order made by a court in respect of the division of assets of a
marriage under Islamic law pursuant to its dissolution;
 The general view however appears to be that until the definition of “pension
interest” is amended in the Divorce Act, a compulsory annuity will not be
part of assets for divorce purposes.
o

SCA: The underlying capital value of a living annuity is not taken into account for
purposes of the accrual calculation on divorce, nor may the annuity income be split
on divorce, because:
 It does not constitute a “pension interest” as defined in the Divorce Act; and
 The underlying capital is owned by the insurer and not the annuitant.
 The right of annuitant to receive annuity income in future forms part of
estate of such annuitant and is taken into account for purposes of accrual
calculation.
 Accrual claim per se will thus not necessarily have an effect of maintenance
claim.
Where marriage is terminated as a result of the death of one of the spouses:
o Value of the right in the annuity has to be calculated in relation to the right of the
annuitant to receive future annuity income. Where annuitant dies, there is no
annuity payable to such annuitant from date of death, and the value of future
annuity income in this regard will thus be nil.
o Where there is a beneficiary nominated on a member owned living annuity, such
beneficiary will on acceptance of the benefit, be the only person entitled to the
benefit, based on principles of a stipulatio alteri entered into between long term
insurer and the annuitant. Where we are dealing with a fund-owned living annuity,
benefits of the living annuity will be dealt with in terms of provisions of section 37C
of Pension Funds Act.
o Where there is no nominated beneficiary, and proceeds of living annuity is paid to
estate of the deceased, such capital payment will however be taken into account in
respect of matrimonial consequences of marriage.
Voluntary annuities: Sec10A of the income tax act
 CAPITAL PORTION EXEMPT if:
o Agreement between insurer and natural person; and
o Annuity payable until death of the annuitant or the expiry of a specified term; and
o Annuity payable to the purchaser or his/her surviving spouse; and
o Must not be an annuity payable by the insurer under the rules of a pension,
provident or RA fund
 Calculating capital portion on voluntary portion
o Y=A/BxC
o Y = Capital portion
o A = Cash consideration (paid for annuity)
o B = Payments made to annuitant
o C = Annuity
Case Study on Retirement planning: Comparison on tax for compulsory annuity vs voluntary annuity
 Albert retires from his pension fund at the age of 60.
 The total value of his interest in the pension fund is R1 500 000.
 The maximum lump sum that he is entitled to take is R500 000.
 He has a marginal tax rate of 41%.
 This is the first time he is retiring from a retirement fund and he has no disallowed
contributions or any other tax-free amounts.
 Albert would like to receive an income from the full fund value.
 Should Albert take the full pension fund value and purchase a compulsory annuity or should
he select to take the tax-free portion of the lump sum and purchase a voluntary annuity?
Which option will be more beneficial – illustrate this by comparing the tax-free portion ito of
a compulsory annuity vs a voluntary annuity?
o
Assumptions
 Albert’s life expectancy at retirement is 17,421 years (age now 60 tables)
 Annuity rate of R1 500 per annum per R10 000 of consideration for both
compulsory and voluntary annuities
o
Option 1: Compulsory annuity
 Lump sum:
 R500 000 will be taxed at 0%, thus max he may take R500 000
without paying tax, let’s first assume that he opts not to take a lump
sum and uses the whole amount to purchase a compulsory annuity.
 For purposes of this example, we are only going to compare the
difference between the R500 000 (the portion taxed at 0%) and not
the full amount as the balance will in any event be used to purchase
a compulsory annuity)
 Compulsory Annuity:
 R500 000/R10 000 x R1 500 = R75 000 per annum
 Tax on annuity: R75 000 x 41% = R30 750
 After tax annuity = R75 000 – R30 750
 = R44 250
o
Option 2” voluntary annuity
 Lump sum:
 R500 000 will be taxed at 0%, thus max he may take R500 000
without paying any tax to purchase a voluntary annuity.

Annuity:
 R500 000/R10 000 x R1 500 = R75 000 per annum



Capital portion of annuity:
o Y=A/BxC
o = [R500 000/ (R75 000 x 17.421)] x R75 000
o = R500 000/ R1 306 575 x R75 000
o = R28 701 – tax exempt portion
Tax on annuity:
o R75 000 – R28 701 = R46 299 x 41% = R18 983
After tax annuity:
o R75 000 – R18 983 = R56 017 – Voluntary annuity option
provide more income
Voluntary annuities: Commutation (s10A(3)(c))
 The commuted value is taxable, the exempted amount:
 X = A – D where
o X = Exempt amount
o A = The amount of the total cash consideration given by purchaser
o D = The sum of the capital elements of all annuity amounts payable ito the annuity
contract prior commutation
Example = Retirement planning - Voluntary annuities: Commutation
 A taxpayer purchases a VPA for R50 000. The Annual annuity is R7 000 of which the capital
element is R4 000. After 3 yrs. the taxpayer commutes the annuity and receives a
commuted value of R41 000. What amount will form part of his gross income?
o Exemption :
 X
=A–D
 = R50 000 – (R4 000 x 3)
 = R38 000
o Taxable portion
 = commuted value – exemption
 = R41 000 – R38 000
 = R3 000
Retirement planning: Exemption foreign pensions
 From a South African perspective, that the calculated proportion of the lump sum or income
attributed to foreign service would be exempt from income tax in South Africa.
o Sec 10(1)(gC) was amended that the exemption be made applicable only to foreign
retirement funds (i.e. retirement funds not registered in South Africa).
o Amounts transferred from a source (fund) outside SA to a South African fund is
however still exempt.

Sec 10(1)(gC)(ii) provides as follows:
o 10. Exemptions. — (1) There shall be exempt from normal tax—
 (ii) lump sum, pension or annuity received by or accrued to any resident
from a source outside the Republic as consideration for past employment
outside the Republic other than from any pension fund, pension
preservation fund, provident fund, provident preservation fund or
retirement annuity fund as defined in section 1(1) or a company that is
resident and that is registered in terms of the Long-term Insurance Act as a
o
o
person carrying on long term insurance business excluding any amount
transferred to that fund or insurer from a source outside the Republic in
respect of that member;
If we analyse the section as it currently stands, the requirements are as follows:
 The lump sum/pension/annuity received must be from a source outside
South Africa in respect of past employment in a foreign country; The
reference to foreign source relates to where the employment was exercised
and not from where the lump sum/pension/annuity is paid – see SARS
interpretation note 104.
 The lump sum/pension/annuity received may not be received from a South
African pension/provident/ preservation/retirement annuity fund or from a
South African long-term insurer; unless
 The lump sum/pension/annuity emanates from an amount transferred to
such a fund or long-term insurer from a source outside South Africa (i.e.,
from a transfer from a foreign fund).
There could however be instances where:
 The person belonged to a foreign retirement fund but worked in South
Africa for a period of time and in a foreign country for the rest of the time
during his/her membership of such foreign fund; and/or
 A transfer occurred from a foreign fund to a South African Fund in the above
circumstances.
Example 1: Exempting foreign pensions
 Mr Joe Smith is employed by ABC Ltd. He belongs to the Foreign Pension Fund, a pension
fund duly registered in Isle of Man. During his employment with ABC Ltd, he worked in South
Africa for a period of 12 years and 5 months, and in Isle of Man for a period of 5 years and 6
months. His total service with ABC Ltd was thus 17 years and 11 months (12 years and 5
months plus 5 years and 6 months). He has retired from the Foreign Pension Fund and
received an income from an off-shore annuity of R400 000 for the 2020-2021 year of
assessment. There is no double tax agreement between South Africa and Isle of Man, and
assume no income tax is payable in Isle of Man. Calculate which portion will be taxable in
South Africa.
o The following requirements are met (requirement (c) not applicable as no amount
was transferred to a South African fund/long term insurer):
 The annuity was received from a source outside South Africa in respect of
past employment in a foreign country;
 The annuity received was not received from a South African
pension/provident/ preservation/retirement annuity fund or from a South
African long-term insurer.
o Therefore:
 66 months (5 years and 6 months) Isle of Man service x R400 000 income
 215 months (17 years and 11 months) total service
 = R122 790.70 (exempt in South Africa)
o An amount of R277 209.30 (R400 000 – R122 209.70) would thus have been taxable
in South Africa, taxed as normal income in line with his marginal tax rates.
Example 2: exemption foreign pensions
 Mr Joe Smith is employed by ABC Ltd. He belongs to the Local Pension Fund, a pension fund
duly registered in South Africa. During his employment with ABC Ltd, he worked in South
Africa for a period of 12 years and 5 months, and in Isle of Man for a period of 5 years and 6
months. His total service with ABC Ltd was thus 17 years and 11 months (12 years and 5
months plus 5 years and 6 months). He has retired from the Local Pension Fund and received
an income from a South African annuity (it does not matter if it is a fund owned annuity or a
member owned annuity) of R400 000 for the 2019-2020 year of assessment. There is no
double tax agreement between South Africa and Isle of Man, and assume no income tax is
payable in Isle of Man. Calculate which portion will be taxable in South Africa.
o The full R400 00 will be taxable in South Africa, as all the requirements are not met:
 The annuity was received from a source outside South Africa in respect of
past employment in a foreign country; but
 The annuity received was received from a South African pension/provident/
preservation/retirement annuity fund (fund owned annuity) or from a South
African long-term insurer (member owned annuity)
Example 3: Exemption for foreign pension received or accrued (example from SARS Interpretation
Note 104):
 X is a resident of the Republic and worked for a foreign employer from 1992 to 2019. During
this period, X was a member of the employer’s foreign retirement fund. X retired in the 2019
year of assessment after 27 years’ service, and qualified for a lump sum of R1,2 million and a
monthly pension of R45 000. X rendered services on behalf of the foreign employer, for 9
years in the Republic and for 18 years in the foreign country. Although X retired in the
Republic, X remained a member of the foreign retirement fund. For purposes of
simplification, the applicable provisions of a double tax treaty and the application of
exchange rates have not been considered in this example.
 Result: X, a resident of the Republic, received a lump sum and a pension from a source
outside the Republic as consideration for past employment outside the Republic. X therefore
qualifies for an exemption from normal tax, which is calculated as follows:
o Lump Sum
 Foreign services rendered
 Total services rendered × Total amount received or accrued
 = 18 years
 27 years × R1,2 million
 = R800 000
 An amount of R800 000 qualifies for exemption from normal tax in the
Republic. Of the total lump sum of R1,2 million, R400 000 will therefore be
subject to tax in the Republic (R1,2 million less the R800 000 exemption).
 Note that, as the lump sum was not received or did not accrue from a local
retirement fund, the amount of R400 000 will not qualify for the rates of tax
applicable to retirement fund lump sum benefits. The amount will be
included in X’s “gross income” as defined in section 1(1) and will be subject
to tax by application of the rates of normal tax applicable to natural persons.
o Monthly pension
 Foreign services rendered
 Total services rendered × Total amount received or accrued
 =18 years
 27 years × R45 000
 = R30 000
 An amount of R30 000 qualifies for exemption from normal tax in the
Republic. Of the total monthly annuity of R45 000, R15 000 will therefore be
subject to normal tax in the Republic (R45 000 less the exemption of R30
000).
Example 4 - Exemption for amounts received by or accrued to a resident from a local retirement
fund (with a foreign fund transfer) (example from SARS Interpretation Note 104):
 Z, a resident of the Republic, is employed by a multinational company from 1994 to
2019. Z contributed to the employer’s foreign fund from 1994 to 2014. In 2014, Z
decided to remain in the Republic and chose to transfer the full value of R15 million in
the foreign fund (at that stage) into the employer’s local retirement fund. During the 20
years that Z was a member of the foreign fund, Z rendered 15 years’ service outside the
Republic and 5 years’ service in the Republic. Z subsequently retires in 2019. The
member’s fund value on retirement date is R27 million. Z takes R9 million as a lump sum
and the remaining R18 million in the form of a monthly pension (amounting to R90 000
per month) from the employer’s local retirement fund. For purposes of simplification,
the applicable provisions of a double tax treaty and the application of exchange rates
have not been considered in this example.
o Lump sum
o Step 1
 The portion of the lump sum payable to Z which relates to the amount
transferred from the foreign fund to the local retirement fund will be
calculated as follows:
 The amount transferred
 Total retirement interest × Amount received or accrued
 =R15 million

R27 million × R9 million
 = R5 million
 This means that R5 million of the lump sum is attributable to the
amount transferred from the foreign fund to the local retirement fund.
o Step 2
 Only the portion of the amount transferred that relates to foreign
services will qualify for exemption, and the following formula can be
applied:
 Foreign services rendered
 Total services rendered
Amount calculated in Step 1
 =15 years

20 years × R5 million
 = R3 750 000
 An amount of R3 750 000 qualifies for exemption from normal tax in the
Republic. Of the total lump sum of R9 million, R5 250 000 will therefore
be subject to tax as per the rates of tax applicable to retirement fund
lump sum benefits (R9 million less the R3 750 000 exemption).
o
o
Monthly pension
Step 1
 The portion of the monthly pension payable to Z that relates to the
amount transferred from the foreign fund to the local retirement fund
will be calculated as follows:
 The amount transferred
 Total retirement interest × Amount received or accrued
 = R15 million

R27 million × R90 000
 = R50 000
 This means that R50 000 of the monthly pension is attributable to the
amount transferred from the foreign fund to the local retirement fund.
o
Step 2
 Only the portion of the amount transferred that relates to foreign
services will qualify for exemption, and the following formula can be
applied:
 Foreign services rendered
 Total services rendered
× Amount calculated in Step 1
 = 15 years

20 years × R50 000
 = R37 500
 An amount of R37 500 qualifies for exemption from normal tax in the
Republic. Of the total annuity of R90 000, R52 500 will therefore be
subject to normal tax (R90 000 less the exemption of R37 500).
Example 5: Exemption for amounts received by or accrued to a resident from an insurer (with a
foreign fund transfer) (example from SARS Interpretation Note 104):
 Y, a resident of the Republic, is employed by a multinational company from 1999 to 2019. Y
contributed to the employer’s foreign fund from 1999 to 2014. In 2014, Y decided to remain
in the Republic and chose to transfer the full value of R9 million in the foreign fund (at that
stage) into a local retirement fund. During the 15 years that Y was a member of the foreign
fund, Y rendered 10 years’ service outside the Republic and 5 years’ service in the Republic.
Y subsequently retires in 2019. The member’s fund value on retirement date is R12 million.
Upon retirement, the local retirement fund purchased an annuity from an insurer, and Y
subsequently received an annuity of R120 000 per month. For purposes of simplification, the
applicable provisions of a double tax treaty and the application of exchange rates have not
been considered in this example.
o Step 1
 The portion of the annuity payable to Y that relates to the amount
transferred from the foreign fund to the local retirement fund will be
calculated as follows:
 The amount transferred
 Total retirement interest × Amount received or accrued
 = R9 million

R12 million × R120 000
 = R90 000
 This means that R90 000 of the annuity is attributable to the amount
transferred from the foreign fund to the insurer.
o Step 2
 Only the portion of the amount transferred that relates to foreign services
will qualify for exemption, and the following formula can be applied:
 Foreign services rendered
 Total services rendered × Amount calculated in Step 1
 10 years
 15 years × R90 000
 = R60 000
 An amount of R60 000 qualifies for exemption from normal tax in the
Republic. Of the total monthly annuity of R120 000, R60 000 will therefore
be subject to normal tax (R120 000 less the R60 000 exemption).
Source rules for retirement annuity funds:






Sec 9(2)(i) and 9(3) of the Income Tax Act deems the lump sum and annuity payments from a
pension and provident fund to be from a source outside South Africa, if the amounts
received are in respect of services rendered outside South Africa.
If a non-resident of South Africa thus receives a lump sum or annuity income from a South
African pension or provident fund but also rendered services abroad whilst remaining a
member of the South African pension or provident fund (e.g., where the employer also has
foreign offices), the proportionate portion of the income or lump sum in respect of the
foreign service would thus not be deemed to be from a South African source, and would
therefore not be taxable in South Africa.
If the person receiving the lump sum or income is a South African resident, it would however
still be taxable in South Africa based on the South African residence of the recipient (unless
there is a Double Tax Agreement in place that provides otherwise) – also see the discussion
in under the previous heading above.
o Due to the language used in the previous version of the above sections, there were
some opinions that these sections should also be applicable to retirement annuity
funds.
o The 2016 Taxation laws Amendment Act amended Sec 9(2)(i) to makes it clear that
this section is only applicable to pension, provident and preservation funds.
Lump sums and annuity income accruing to a non-resident in respect of membership to a
retirement annuity fund are thus deemed to be from a South African source irrespective of
whether such non-resident member was employed abroad when contributing to the
retirement annuity fund or not.
The lump sum and income accruing to the non-resident will thus be taxable in South Africa
unless a double tax agreement with the country of residence of such non-resident provides
otherwise.
This amendment became effective on 1 March 2017.
Retirement planning – divorce:
 To deal with the pre 1998 portion of the award, the calculation is as follows when dealing
with public sector funds (e.g., GEPF, Transnet Retirement Fund, Cape Municipal Pension
Fund etc.):
o A = B/C x D
o Where:
 A = taxable portion of lump sum
 B = number of completed years of service post 1998 to date award paid out
 C = total completed years of service to date award paid out
 D = value of award
Example:
 John became a member of the GEPF in February 1990. The value of his pension interest on
date of divorce was R2,000,000. Sue was awarded 40% of the interest (R800,000). Sue elects
to take the whole award in cash in March 2016. What tax will she pay?
 Therefore applying the Par 2A formula to Sue’s award:
o 18 (competed years after 1 March 1998)/26 (total completed years of service on
date of election) x R800,000 = R553 846 (taxable portion of lump sum).
 Therefore R553 846 will be taxed according to the Retirement Fund Lump sum withdrawal
table:
o = 18% of the amount above R25 000
o = 18% of R528 846
o = R95 192.31.
 She will thus receive an amount of R704 807.69 nett of tax.
Retirement funds and estate duty:
 Maximum retirement age of 70 in respect of membership to retirement annuity funds
removed in 2008.
 From 1 January 2009, no estate duty payable in respect of lump sums received from
pension, provident, preservation or retirement annuity funds, and annuities received from
these funds were already exempt from estate duty before this.
 As a consequence of these amendments, retirement funds became an attractive estate
planning tool. National Treasury however viewed some of the transactions that were
entered into as avoidance through excessive contributions to, in particular, retirement
annuity funds.
 Important development as many financial planners advised clients with surplus assets to
transfer lump sums to retirement annuities as estate planning tool.
o The effect of the tax and estate duty benefits through tax avoidance schemes as
discussed above was the amendment of the Estate Duty Act by the promulgation of
Section 3(2)(bA), which provided as follows (prior to the amendments of the 2019
Taxation Laws Amendment Act):
 (2) “Property” means any right in or to property, movable or immovable,
corporeal or incorporeal, and includes—
 (bA) so much of the amount of any contribution made by the deceased in
consequence of membership or past membership of any pension fund,
provident fund, or retirement annuity fund, as was not allowed as a
deduction in terms of section 11 (k), section 11 (n) or section 11F of the
Income Tax Act, 1962 (Act No. 58 of 1962), or paragraph 2 of the Second
Schedule to that Act or, as was not exempt in terms of section 10C of that
Act in determining the taxable income as defined in section 1 of that Act, of
the deceased;
 It is however important to note that Section 3(2)(bA) was only applicable in respect of:
o The estate of a person who dies on or after 1 January 2016; and
o Contributions made to pension, provident or retirement annuity funds on or after 1
March 2015 that were not allowed as a deduction under section 11(k), 11(n) or 11F,
or the Second Schedule of the Income Tax Act or exempted against compulsory
annuity income in terms of Section 10C of the Income Tax Act.
 The purposes of the above section was thus to include contributions made to retirement
funds not allowed as a deduction or exemption as at date of death, as property in the estate
of the deceased person who made such contributions, thus potentially increasing the liability
for estate duty in this regard.
 There were 2 possible interpretations of this section with regards to the reference to the
deductions in the Second Schedule to the Income Tax Act, i.e. should a deduction against a
lump sum applied on the death of the deceased (i.e. where the beneficiaries/dependants of
the deceased opted to take lump sum payments from pension-, provident-, preservation- or
retirement annuity funds or commute a living annuity as a lump sum) be taken into account
for calculating the value of the “property” to be included in the estate.
o My opinion: deductions against lump sums taken as a result of the death of the
deceased should be ignored, otherwise this purpose of this section would be
negated - to avoid non-deductible/non-exempt contributions to retirement funds to
be included as property, beneficiaries/dependants would merely have to opt for a
lump sum equal to or bigger that the value of such contributions to avoid an
increased estate duty liability in the estate of the deceased.

Section 3(2)(bA), was amended by the 2019 Taxation Laws Amendment and provided as
follows:
o (2) “Property” means any right in or to property, movable or immovable, corporeal
or incorporeal, and includes—
 (bA) so much of the amount of any contribution made by the deceased in
consequence of membership or past membership of any pension fund,
provident fund, or retirement annuity fund, as was allowed as a deduction in
terms of paragraph 5 of the Second Schedule to the Income Tax Act, 1962
(Act No. 58 of 1962), to determine the taxable portion of the lump sum
benefit that is deemed to have accrued to the deceased immediately prior
to his or her death;

Section 3(2)(bA), was deleted by the 2020 Taxation Laws Amendment Act and this inclusion
in the estate was essentially moved from “property” to “deemed property via the
promulgation of Section 3(3)(e) which now provides as follows:
o (3) Property which is deemed to be property of the deceased includes—
 (e) so much of the amount of any contribution made by the deceased in
consequence of membership or past membership of any pension fund,
provident fund, or retirement annuity fund, as was allowed as a deduction in
terms of paragraph 5 of the Second Schedule to the Income Tax Act, 1962
(Act No. 58 of 1962), to determine the taxable portion of the lump sum
benefit that is deemed to have accrued to the deceased immediately prior
to his or her death;
o From a practical perspective nothing changes, but it is in my view technically more
correct to list is under deemed property.
Whereas:
 section 3(2)(bA) prior to the 2019 amendment included contributions made to retirement
funds that were not allowed as a deduction prior to death (see notes on previous slides) as
property in an estate,
 section 3(2)(bA) after the 2019 amendment and consequently mirrored in the new section
3(3)(e) now includes the deduction allowed against a retirement fund lump sum paid
after/as a result of death (i.e. deemed to have accrued to the deceased immediately prior to
death) as property in an estate.
o Effect of amendment is that only an amount equal to the deduction allowed against
lump sum taken by beneficiaries/dependants upon death of the deceased will be
included as property in estate
o To put it differently: even if deceased made contributions to retirement fund not
previously allowed as a deduction/exemption, no amount would be included as
property for estate duty purposes if beneficiaries/dependants do not opt to take a
lump sum payment, because in absence of such lump sum payment there would be
no amount “allowed as a deduction in terms of paragraph 5 of the Second
Schedule to the Income Tax Act”.

This means that:
o Other Par 5 deductions (against retirement lump sums on retirement/
retrenchment) against lump sums that accrued to the deceased before death are
automatically eliminated as it has already been deducted;
o Par 6 deductions (against retirement lump sum withdrawals) against lump sums that
accrued to the deceased before death are automatically eliminated as it has already
been deducted;
o
o
o




Sec 11F deductions are automatically eliminated as it would have been deducted
before death;
Sec 10C exemptions are automatically eliminated as it has been exempted before
death;
The only amount left to be included as property is the Par 5 deduction applicable at
death, assuming that the beneficiaries take a lump sum.
The effect of this is thus that the only amount included as property for estate duty purposes
is the lump sum taken by the beneficiaries/dependents up to the value of the disallowed
contributions as a date of death:
o If the beneficiaries/dependants take a smaller amount than the disallowed
contributions, the smaller amount will be included as property; and
o If the dependents/beneficiaries take no amount as a lump sum, no amount will be
included as estate duty.
From a practical perspective, it makes sense, and in my view equitable:
o If a lump sum equal to the value of the Par 5 deduction at death is taken by the
beneficiaries/dependants, no tax will be payable on the lump sum. This will thus
create a tax arbitrage advantage for the estate if no estate duty is payable (and no
income tax is payable on the lump sum by the deceased).
o However if an annuity is taken by the beneficiaries/dependants, income tax will be
payable (that may be charged at a higher rate than estate duty, depending on the
marginal tax rate of the beneficiary/dependant – this is likely to be the case as it is
usually more affluent clients that would make large contributions to retirement
funds) as the dependants/beneficiaries will not be able to exempt the annuity
income in terms of section 10C (section 10C is only applicable to the member of the
fund who made the excess contributions, i.e. the deceased).
It is further important to note that the amended section 3(2)(bA) came into operation on 30
October 2019 is only applicable in respect of:
o The estate of a person who dies on or after 30 October 2019; and
o Contributions made on or after 1 March 2016 (NB: Section 3(2)(bA) before the
amendment was applicable to all such contributions made on or after 1 March 2015.
The effect of the amendment is now that only “excess” contributions made after 1
March 2016 is taken into account (thus not taking into account “excess”
contributions from 1 March 2015 to 29 February 2016).
Section 3(2)(e) which replaced section 3(2)(bA) is also applicable to such contributions made
on or after 1 March 2016 and it is deemed to have come into effect on 30 October 2019 (it is
thus now also applicable to deaths that occurred on or after 1 October 2019).
Example 1: Death before 30th october 2019
 On 1 May 2017, Joe made a lump sum contribution to his retirement annuity fund. At the
time of his death, an amount of R1 000 000 of this lump sum contribution had not been
allowed as a deduction in terms of Section 11F, or against lump sum payments in terms of
the Second Schedule, or exempted in terms of section 10C. At the time of Joe’s death the
fund value was R2 000 000. Joe dies on 1 September 2019.
Because Joe had died before 30 October 2019, the result is as follows:
o If the beneficiaries/dependents decide to take the full R2 000 000 as a lump sum,
the amount included in Joe’s estate as property for estate duty purposes would be
R1 000 000.
o If the beneficiaries/dependents decide to take R1 000 000 as a lump sum, the
amount included in Joe’s estate as property for estate duty purposes would be R1
000 000.
o
o
If the beneficiaries/dependents decide to take R600 000 as a lump sum, the amount
included in Joe’s estate as property for estate duty purposes would be R1 000 000.
If the beneficiaries/dependents decide not take a lump sum at all and use the full
benefit to purchase a compulsory annuity, the amount included in Joe’s estate as
property for estate duty purposes would be R1 000 000.
Example 2: death on/after 30th October 2019:
 On 1 May 2017, Joe made a lump sum contribution to his retirement annuity fund. At the
time of his death, an amount of R1 000 000 of this lump sum contribution had not been
allowed as a deduction in terms of Section 11F, or against lump sum payments in terms of
the Second Schedule, or exempted in terms of section 10C. At the time of Joe’s death the
fund value was R2 000 000. Joe dies on 1 May 2022.
 Because Joe had died on/after 30 October 2019, the result is as follows:
o If the beneficiaries/dependents decide to take the full R2 000 000 as a lump sum,
the amount included in Joe’s estate as deemed property for estate duty purposes
would be R1 000 000 (as the deduction allowed against the R2 000 000 lump sum in
terms of paragraph 5 of the Second Schedule would be R1 000 000).
o If the beneficiaries/dependents decide to take R1 000 000 as a lump sum, the
amount included in Joe’s estate as deemed property for estate duty purposes would
be R1 000 000 (as the deduction allowed against the R1 000 000 lump sum in terms
of paragraph 5 of the Second Schedule would be R1 000 000).
o If the beneficiaries/dependents decide to take R600 000 as a lump sum, the amount
included in Joe’s estate as deemed property for estate duty purposes would be R600
000 (as the deduction allowed against the R600 000 lump sum in terms of paragraph
5 of the Second Schedule would be R600 000).
o If the beneficiaries/dependents decide not take a lump sum at all and use the full
benefit to purchase a compulsory annuity, no amount would be included in Joe’s
estate as deemed property for estate duty purposes (as there is no lump sum taken,
no amount allowed as a deduction in terms of paragraph 5 of the Second Schedule).
Problematic areas (regards to Sec3(3)(e):
 Where benefit in the form of either retirement fund lump sum or annuity accrues to
beneficiary/dependant, value of disallowed contributions to fund will be deemed property in
estate of deceased & may attract estate duty: Sec 11 of Estate Duty Act would have to be
amended to facilitate apportionment of estate duty and & recovery from the
beneficiary/dependant by executor.
 Where trustees of a retirement fund exercise their discretion in such a fashion that fund
benefits are allocated to surviving spouse of the deceased and other persons, or where
surviving spouse and other persons are nominated as beneficiaries on a member-owned
living annuity, and there are contributions not previously allowed as a deduction, questions
arise as to whether section 4q is applicable, and if it is, the practical application of Section
4q.
Chapter 8: The time value of money
 Calculating the Future value of a single lump sum investment:
o Example:
Mathematical formula:
FV = PV (1 + i) ^n
FV = 1000 (1 + 0.1) ^3
FV = 1331
PV = 1331 / 1.331 = 1000
When using compound interest tables to determine a PV, we never divide the FV by the compound
interest factor. The PV factors are determined by calculating the inverse of (1 + i)^n. I.e. (we divide
(1+i)^n into 1.
1 / 1.331 = 0.75131
PV = 1.331 x 0.75131
PV = 1000
Example:
Calculating FV where interest is compounded more than once per annum:
 Divide the nominal interest rate by the payment periods
 Multiply the term (n) by the number of payment periods.
Recurring payments (Annuities):
Loans: installments is normally at the end of the month
Investing: Installments normally at the beginning of the month
Examples:
Amortization and the calculation of loan installments:
 Take note of:
o Intervals between installments are normally monthly
o Installments are normally paid at the end of the month.
When a person repays a loan in installments, normally consists of two components:
 Capital portion
 Interest portion
If Mr. Stewart wants to know the interest and capital components at the 13th installment, use the
[amort] function:
Example:
The PV of an escalating annuity:
When an annuity increases by a fixed percentage every year (Escalates), the normal time of money
program in financial calculators cannot be used to determine the PF and FV values.
Example:
Individual receives the following payments at the beginning of each year for the following 5 years:
The FV of an escalating Annuity:
Example:
Full example:
The Effective rate of return:
Chapter 8: Full examples:
Question 13:
Case study 1:
 Mr. M currently earns a salary of R120 000 pa
 He is 40 years old and will retire in 20 years’ time at the age of 60
 After retirement he will require an annual income of R90 000 before tax (present value –
today’s buying power)
 He would like his income after retirement to increase annually in line with inflation
 He is currently a member of his employer’s pension fund
 He and his employer each contribute 7,5% of his salary to the pension fund
 The total contribution is R18 000
 Of this only 90% (R16 200) is invested and the rest pays for the group life cover and other
expenses
 It is estimated that his salary will increase by 7% pa between today and his retirement date
o His contributions to the pension fund will thus also increase by 7% per annum
o A growth rate of 8% is projected for the pension fund
o It is a defined contribution pension fund and his interest in the fund is currently
R200 000
o In addition to his pension fund, he has made the following provision for his
retirement.
 Endowment policy which will mature at R810 000 at the date of his
retirement.
 Retirement annuity
 The current investment value of his interest in the fund is R35 000
 He contributes R2 000 pa to the fund
 He regards 9% as a reasonable growth rate for this fund
The following assumptions can be made:
 An inflation rate of 7%
 An interest rate of 9% pa on amounts invested before retirement (unless stated differently,
e.g., pension fund)
 His salary will increase at 7% pa (given above)
 That any annual investment that is made before retirement to erase the shortfall is to be
increased by 7% pa
 Amount invested in annuities after retirement will yield at 10% pa (this includes the pension
fund)
 Assume that at retirement date (age 60) Mr M will have a life expectancy of 17 years
 Assume that at retirement he will use the tax-free amount of the lump sum from his
retirement funds (assume this to be R500 000 at such time) to fund an overseas trip and
other lump sum expenses. He will use the balance to provide him with an income after
retirement.
1. Calculate the shortfall that will exist in the capital requirement at his retirement date
2. Calculate the first annual instalment that must be invested now, if escalated annually by 7% to
make provision for the shortfall
20
40
60
17
1: Calculate the need:
This must escalate by 7% pa (inflation rate)
Escalation rate
7%
Interest rate
10%
1.1
1.07 - 1 x 100
 Resultant rate = 2.80374%
Capital required to give to give Mr. M an income of R348 272 @60yrs old, escalating at 7% p.a.






BEGIN
1 P/YR
348 272 +/- PMT (income needed in first year at age 60)
17 N (period that the income is needed at age 60)
2.80374 I/YR (resultant rate: interest/growth rate of 10% and escalation rate of 7%)
PV: R4 789 317 required capital at retirement
This is the capital amount at age 60, that will provide him with an income of R348 272 per annum
escalating at 7% for 17 years. Thus, the PV at age 60 and not the PV today!
Mr M also requires R500 000 (value at retirement) for a overseas trip – this will be deducted from
the capital available at retirement.
Therefore, the NEED at age 60 is R4 789 317, what will be available in his Pension Endowment and
RA at age 60?
2: Calculate the CAPITAL AVAILABLE
Pension fund:
Investment premium of R16 200 pa
Escalation rate
7%
Interest rate
8%
1.08
1.07 - 1 x 100  Resultant rate = 0,93458%
BEGIN
1 P/YR
16 200 +/- PMT (current
contributions to pension fund)
20 N (years to retirement)
0.93458 I/YR (resultant rate)
PV: R297 023
BEGIN
1 P/YR
297 023 PV (current value pension fund)
20 N (years to retirement)
8 I/YR (interest/growth rate)
FV: R1 384 411 – the value of the contributions on retirement
The current Value is R200 000 in the fund, what would it be at age 60?
BEGIN
1 P/YR
200 000 PV (current value in fund)
20 N (years to retirement)
8 I/YR (interest/growth rate)
FV: R932 191 (fund value at retirement)
Total value of Pension fund at retirement:
FV of current value
R932 191
FV of future contributions
R1 384 411
R2 316 602 (FV at that point in time)
Retirement annuity
Current value is R35 000 in fund what would that be at 60:
BEGIN
1 P/YR
35 000 PV (current value)
2 000 PMT (premiums, not escalating)
20 N (years to retirement)
9 I/YR (growth/interest rate)
FV: R307 683 (value at retirement)
Therefore, the total retirement values are:
Pension fund
R2 316 602
RA
R307 683
= R2 624 285
Less R500 000 - trip
- R500 000
Total: R2 124 285
Total capital available at retirement:
Net retirement fund proceeds
Endowment policy
2: Calculate the shortfall:
Capital needed
Less: Capital available
CAPITAL SHORTFALL
R2 124 285
R810 000
= R2 934 285
R4 789 317
-R2 934 285
R1 855 032
The first instalment of the investment:
Interest rate =9%, Escalation rate =7%
1.09
1.07 - 1 x 100
 Resultant rate = 1.86916
Calculation of premium to fund shortfall:
BEGIN
1 P/YR
1 855 032 FV (shortfall at retirement)
20 N (years to retirement)
9 I/YR (growth rate of investment)
PV: R330 995 present value of shortfall at age 60 – i.e., this is the capital amount that he
would have to invest now to cover the shortfall.
BEGIN
1 P/YR
330 995 PV (present value of shortfall)
20 N (years to retirement)
1.86916 I/YR (resultant rate: (9% growth/interest & 7% escalation)
R19 621 PMT - annual premiums to fund shortfall, which premiums will escalate with 7% annually)
Preservation of capital:
When capital need is calculated, the need must be increased if capital needs to preserved during
retirement.
{PV / (1+i) ª - 1} + PV
Where PV = PV of escalating income required
 i = Interest rate
 a = term in years for which the income is payable
Case Study 3:
 Mr. Fourie needs R96 000 per annum (in today’s terms) after tax for 15 years after
retirement.
 He is retiring in 20 years’ time
 Assume the interest rate is 10%
 His income should escalate at 5% after retirement.
 The inflation rate is also equal to 5%
 Assume that his income will be taxed at 18% after retirement.
What capital does he require in 20 years’ time to provide him with this income? He would like the
capital to be preserved.
Income need:
 = R96 000 / (1- 0.18)
 = R96 000 ÷ 0.82
 = R117 073 before tax income need
Income in 20 years’ time:
BEGIN
117 073
PV
5
1/YR (inflation rate)
20
N (20 years to retirement)
R310 630
FV of annual before tax income
Resultant rate: (1.10/1.05 – 1) x 100 = 4.76190%
PV of capital required:
BEGIN
1 P/YR
+/– 310 630
PMT
15
N (number of years that income is required after retirement)
4.76
I/YR
R3 433 175
PV
{PV / (1+i) ª - 1} + PV
= 3 433 175 / ((1.10)15 – 1) + 3 433 175
= R4 513 724
On calculator:
3 433 175 ÷ ((1.115) – 1) + 3 433 175
FV of amount needed = R4 513 724
Alternatively use capital preservation tables
- Future income need x factor
(Where R310 630 x 14.5293 = R4 513 236.46,
14.5293 is factor for 5% esc, 10% return and 15 yrs.)
Example:
Jabu (aged 42) had a retirement planning needs analysis done, and it was calculated that his shortfall
at retirement (age 65) will be R1 500 000. If a growth rate of 7% on retirement investments is
assumed, how much will Jabu need to contribute annually to make provision for this shortfall, if Jabu
is willing to make contributions escalating at a rate of 6% per year?
Shortfall: 1 500 000
Growth = 7%
Escalation = 6%
Shortfall in today’s terms at retirement:
FV = 1 500 000
I/YR = 7%
N = 23
PV = R316 420.33
RR = (1.07/1.06 – 1) *100 = 0.9434
Premium needed:
PV -316 420.33
I/YR = 0.9434
N = 23
FV = 0
PMT = R15 222.80
Exam 2021 Afternoon Paper section A:
Question 1:
Joe (aged 63) is a member of the Transnet Retirement Fund (a public sector pension fund). This fund
is a defined contribution pension fund. He has reached retirement age and will retire from Transnet,
his effective retirement date being 31 October 2021. He was employed by Transnet on 1 February
1982 and has been a member of the Transnet Retirement Fund throughout his employment.
The value of his total retirement interest in the Transnet Fund is R12 000 000. Joe is planning on
taking the maximum amount allowable as a lump sum on retirement.
In 2017 Joe retired from the ABC Retirement Annuity Fund and opted to take a lump sum in the
amount of R850 000. At that stage Joe had made contributions to the ABC Retirement Annuity Fund
in the amount of R100 000 that were not previously allowed as a tax deduction or exemption. Apart
from this, Joe has neither received any other lump sums from a retirement fund, nor any severance
benefits.
1.1: Calculate the tax that Joe would pay on the lump sum that he receives from the Transnet
Retirement Fund on retirement.
Step1: current taxable lump sum to be received:
Value = R12 000 000
Allowed lump sum = 12 000 000/3 = R4 000 000
A = B / C x Lump sum
A = 23 / 39 x 4 000 000
A = R2 358 974.36
C = Start to end date of RA (2021-1982)
B = Time from 1 march 1998 until retirement date. (2021-1998)
Step 2: taxable previous lump sums that need to be aggregated:
850 000 – 100 000 = 750 000
Step 3: add step 1 & 2 together:
2 358 974.36 + 750 000 = 3 108 974.36
Step 4: calculate tax on step 3: (use table 12 – retirement lump sum benefits)
3 108 974.36 = 130 500 + 36%x(3 108 974.36-1 050 001)
=R871 731
Step 5: calculate the tax on step 2 using the same tax table:
=36 000 + 27%x (750 000 – 700 000)
=R49 500
Step 6: deduct step 4 with step 5:
871 731 – 49 500
=R822 231
1.2: After perusing your tax calculations, Joe informs you that he does not want to pay any tax on a
lump sum taken. Calculate the maximum amount that Joe will be able to take as a lump sum (if any)
without paying any tax thereon upon retirement from the Transnet Retirement Fund.
Joe has already taken more than R500 000 as a taxable lump sum and any amount he takes will thus
be taxed. This is proven by the "reverse formula" C/B=A (39/32 x 0 = 0).
Question 2:
Mr. Jabu (unmarried) is currently 34 years old and approaches you for advice on his retirement
planning. His wishes are as follows:
 He wants to retire at age 60.
 He wants to earn an after-tax annual retirement income equal to R800 000 in today’s terms,
which income must escalate at the rate of inflation. Assume an average tax rate of 25%
being applicable to his income after retirement.
 He wants this income to last until age 85.
He has made the following provisions:
 He is a member of a pension fund. He contributes 7.5% and his employer contributes 7.5%
of his annual salary (currently R1 000 000) to the pension fund. Of these contributions 2% is
paid towards his risk benefits and costs and 13% invested for retirement purposes. The
current fund value is R300 000. The contributions to this fund annually escalate in line with
his annual salary increases which are usually in line with inflation.

He is also a member to a retirement annuity fund. The current value of this fund is R500 000
and he makes level contributions of R30 000 per year.

He also plans to sell his primary residence at age 60 and use the proceeds to supplement his
retirement income, as he plans to retire in a holiday home that he inherited. The current
value of the primary residence is R3 000 000. The base cost in respect of his primary
residence is R2 500 000.
Assumptions and guidelines:
 You can assume a 4% per annum inflation rate throughout the period.
 Growth in the pension fund and retirement annuity fund is 8% per annum throughout.
 The market value of his primary residence increases with 7% per year.
 Growth on investments made after retirement is 8% per annum throughout.
 Capital gains tax implications, where applicable, will remain unchanged in terms of the
relevant current legislative provisions until retirement. You can assume that the marginal
rate of tax applicable to Jabu on retirement will be 45%.
 Any investments made to cover a possible shortfall will have an investment growth rate of
8% per annum.


When calculating a resultant rate, use 5 decimals.
Round all your answers to the nearest Rand.
2.1: What is the shortfall on retirement:
Shortfall:
He needs = PV = 800 000 / 75 = 1 066 667
I/YR = 4%
N = 26
FV = 2 957 301
RR = (1.08/1.04 - 1) *100 = 3.84615
PMT = 2 957 302
I/YR = 3.84615
N = 25 (-1 installment due to ending at retirement date)
PV needed = R48 765 882
Pension fund:
Current value:
PV = 300 000
N = 26
I/YR = 8%
FV = 2 218 906
RR = 3.84615
Premiums at retirement:
PMT = 130 000
I/YR = 3.84615%
N = 26
PV = R2 194 303
Pension fund value at retirement:
PV = 2 194 303
N = 26
I/YR = 8%
FV = R16 229 840
RA fund:
N = 26
PV = 500 000
PMT = 30 000
I/YR = 8%
FV = 6 288 700
Sale of House:
PV = R3 000 000
N = 26
I/YR = 7%
FV = 17 422 059
CGT on sale of house:
Proceeds:
Less: Base Cost
Capital Gain:
Less: Primary residence
exclusion
Final Capital Gain:
Less: Annual exclusion
Net Capital Gain
Taxable capital gain at 40%
inclusion rate:
Less: CGT liability at 45%
Proceeds after CGT:
17 422 059 – 2 318 771
17 422 059
(2 500 000)
14 922 059
(2 000 000)
12 922 059
(40 000)
12 8282 059
5 152 824
(2 318 771)
R15 103 288
Total provisions for retirement:
16 229 840 + 6 288 700 + 15 103 288
=R39 840 734
Shortfall:
48 765 882 – 39 840 734 = R8 925 148
2.2: The annual premium that needs to be paid by Jabu if an annual level premium is paid to
fund the shortfall:
FV = 8 925 148
N = 26
I/YR = 8%
PMT = 103 359
2.3 The annual premium that needs to be paid by Jabu if an annual premium that will escalate
in line with the annual inflation rate (4%) is paid to fund the shortfall.
Escalating premium to cover shortfall:
FV = 8 925 148
I/YR = 8%
N = 26
FV = 1 206 696
RR = (1.08/1.04-1)x100 = 3.84615%
PV = 1 206 696
N = 26
I/YR = 3.84615
PMT = 71 490
Question 3:
Johan (aged 66) has earned the following income in the 2021/2022 year of assessment:
 Compulsory Annuity Income from a living annuity: R300 000
 Rental income from his beach house: R250 000.
o He had incurred expenses in the production of the rental income in the amount of
R20 000.
 He sold a block of flats and made a total capital gain of R10 000 000.
 Interest from a South African bank account: R30 000.
At the beginning of the 2021/2022 year of assessment, Johan had contributions in the amount
of R400 000 that he had previously (during the 2017-2021 years of assessment) made to a
provident fund that was not allowed as a tax deduction or exemption.
Calculate the maximum amount that Johan would be able to contribute to a retirement annuity
fund in the 2021/2022 year of assessment that would be fully deductible for income tax
purposes.
Renumeration: 300 000
Taxable income:
300 000 + 250 000 + 30 000 = 580 000 (Gross income)
Less: 300 000 (Section 10C)
Less: 30 000 (interest)
=Income: 250 000
Less: 20 000 (section 11(a))
10000 – 40 000 = 9 960 000 x 0.4
=income 230 000
Plus, CGT: 3 984 000
=taxable income: 4 214 000
Therefore; his taxable income is thus higher;
4 214 000 x 27.5% = R1 158 850, But max deduction limited to R350 000.
His taxable income before capital gain is however R230 000, and this is his maximum amount
deductible under section 11F.
As he however has R100 000 left from the previous year that he is carrying over (400 000 – 300 000
S10C), he will only be able to contribute R130 000 (230 000 – 100 000).
Question 4:
On 28 February 2021, Greg’s retirement interest in the ABC Provident Fund was R2 000 000. He
resigns from employment during April 2026 and transfers the interest in the ABC Provident Fund to
the DEF Provident Fund (the provident fund of his new employer). At the time of transfer, his
retirement interest in the ABC Provident fund is R4 000 000.
After the transfer, he contributes to the DEF Provident Fund until his retirement from the DEF
Provident Fund in 2036. At time of his retirement, the total retirement interest in the DEF Provident
Fund is R12 000 000.
You establish the following in respect of his retirement interest at date of retirement:
 Of the total retirement interest in the DEF Provident Fund, R6 000 000 represents the R2 000
000 value as at 28 February 2021 plus growth thereon.

Of the total retirement interest in the DEF Provident Fund, R9 000 000 represents the R4 000
000 transfer value (April 2026) plus growth thereon.
 Of the total retirement interest in the DEF Provident Fund, R3 000 000 represents the
contributions made to the DEF Provident Fund after date of transfer, plus growth thereon.
Required:
 Round all your answers to the nearest Rand.
 Show all calculations.
4.1 Calculate the maximum lump sum that Greg will be able to take as a lump sum on
retirement from the DEF Provident Fund, assuming that Greg was 45 years of age on 28
February 2021.
Since the original R2 000 000 provident fund value was transferred the day before 1st march 2021,
Greg can take the total R6 000 000 (lump sum) as a vested interest plus growth thereon. This also
includes a third of the amount accumulated on/after 1st march 2021 which is R2 000 000
(6 000 000/3) and thus his total lump sum that he is able to take is R8 000 000.
4.2 Calculate the maximum lump sum that Greg will be able to take as a lump sum on
retirement from the DEF Provident Fund, assuming that Greg was 55 years of age on 28
February 2021.



Greg will be able to take R9 000 000 (as a lump sum) - Vested interest as at date of transfer
(April 2026)
plus, growth thereon
plus, one third of the amount accumulated after transfer,
o i.e., R9 000 000 + R1 000 000 (R3 000 000/3) = R10 000 000
Notes for 4.2:
 A member is only allowed to rake the full retirement interest as a lump sum if the member
(55 or older on 1 March 2021) remains a member of the same provident fund that he/she
was a member of on 1 March 2021 until retirement.

If such a member of a provident fund (older than 55 on 1 March 2021) transfers to any other
fund (pension/pension preservation/another provident/provident preservation/retirement
annuity fund) on/after 1 March 2021, the transfer value plus growth thereon is vested
(ringfenced) and may be taken as a lump sum, but contributions made to the new fund (i.e.
in the case of a pension, new provident or RA fund) after transfer (and growth thereon) will
be subject to the annuitization regime
o (i.e., of these contributions post transfer plus growth thereon: one third can be
taken as a lump sum and the balance will have to be used to purchase a compulsory
annuity)
o Unless this portion is less than R247 500 (in which case it could also be taken as a
lump).

The definitions of all funds in section 1 of the Income Tax Act have been amended to make
provision for the ringfencing in case of a transfer into such funds).

If a person who is older than 55 on 1 March 2021 only becomes a member of a provident
fund on/after 1 March 2021 all contributions made plus growth thereon will be subject to
the annuitization regime (unless the value is R247 500 or less on retirement).
2021 Exam paper: Afternoon section B:
Question 1:
Your client, a foreign citizen, is coming to work on contract in South Africa and wants to join a
medical scheme. He currently has private health insurance. He had a stent implanted in his heart
four years ago but has not had any medical conditions since then.
REQUIRED
1.1 Advise your client what waiting periods (if any) the medical scheme can or cannot impose. Please
motivate your answer.
 A 3-month general waiting period may apply.
 The 3-month general waiting period applies because he has not been a beneficiary of a
medical scheme within 90 days of application/never been a beneficiary of a medical scheme
 The 12-month condition specific waiting period cannot be applied as he did not receive
treatment etc. for any medical condition in the 12 months prior to application
1.2 Assume that the medical scheme will impose a waiting period on your client. Advise your client
regarding his entitlement to prescribed minimum benefits (if any). Please motivate your answer.
 No cover for Prescribed Minimum Benefits, since he has not been a beneficiary of a medical
scheme within 90 days of application/never been a beneficiary of a medical scheme.
Question 2:
Your clients are married and in full-time employment. Whilst the husband is a member of a
traditional plan on a restricted membership scheme, his wife is a member of an open medical
scheme, which entails a hospital plan with a savings account. Although both are happy with their
current medical scheme arrangements, they are looking at the pros and cons of continuing with the
current arrangement or the one or the other cancelling their membership and joining the other
spouse’s scheme as a dependent.
REQUIRED
List six factors they should consider in coming to a decision when weighing up the advantages and
drawbacks of their options.
 What saving, if any, can be made on total contributions.
 Whether or not the new scheme would impose waiting periods on registration of the
dependent.
 How the benefits offered by the two schemes compare.
 How the benefits offered meet their individual requirements.
 What benefits would potentially be limited per individual as a result of family sub-limits.
 The financial stability of the respective schemes.
 That the member would have insight into the medical claims of the dependent.
 The impact that the loss/gain of medical tax credits would have on their respective taxable
incomes.
Question 3:
Your client needs to undergo treatment for a prescribed minimum benefit condition which will
require hospitalization. He wants to know under which circumstances (if any) a medical scheme
would be obliged to pay for the treatment in full?
 If obtained from a public hospital
 If obtained from a scheme’s designated service provider
 If involuntarily obtained from a provider other than a designated service provider

If obtained anywhere if the scheme does not have a designated service provider
2021 exam paper: Morning:
Question 1:
Monica, Phoebe and Rachel are the three members in a business called Central Perk CC. The
business is a close corporation which operates franchised coffee shops across the Western Cape and
is managed by the owners. The membership interests are owned as follows:
Monica
Phoebe
Rachel
Total
40% (valued at R4 000 000)
35% (valued at R3 500 000)
25% (valued at R2 500 000)
100%
The members are considering converting the close corporation to a company, as Monica would like
to transfer ownership of her business interest to a trust to limit any growth in her personal estate.
1.1: Advise the members on the structural and income tax implications of converting the business
from a close corporation to a company, including an explanation of aspects that would remain the
same and aspects that would result in changes to the business.






Most of the provisions of the Companies Act are already applicable to close corporations.
A close corporation and a company are both separate legal entities.
The income tax implications for a close corporation and a company are the same.
The company would be able to have more than 10 owners, whereas the members of a CC
may not exceed 10, but this does not seem to be a requirement of the 3 business owners
The owners would not be able to sell the close corporation to company, but a company can
be sold to another company as a holding company.
The business does not have to convert to a company for Monica to transfer her shares to a
trust as a CC membership can also be owned by a trust, provided certain requirements are
met.
1.2: Assume that the business owners have converted the business to a company and that Monica’s
shares are now held in trust. Ross is from a professional trust company and is acting as trustee. The
trust deed determines that the trust will continue as is in the event of Monica’s death, for the
benefit of her children. The shareholders have asked for your assistance and advice on implementing
a buy and sell agreement funded by life policies.
Describe how the buy and sell cover should be structured to ensure there is sufficient provision for
any surviving business owners to buy a deceased owner’s interest in the same ratio as the current
ownership ratio. Include a motivation for the structure you recommend and show all calculations.
Monica is no longer a business owner, as all her shares are owned by the trust. The buy and sell
structure would thus not include cover on Monica’s life, as her death would not result in any
ownership of shares needing to change hands.
Since the trust deed determines that the trust will continue unchanged in the event of Monica’s
death, it is unlikely the trustee (Ross) will sell the shares in the business in event of Monica’s death
or in the event of Ross’s death.
Should Ross pass away he will probably be replaced by a professional trustee. So no death will
require a change of ownership of the shares in trust.
Cover owner
Monica’s trust: Ross (in his capacity as professional trustee)
 40/75 of R2 500 000 on the life of Rachel 1 333 333
 40/65 of R3 500 000 on the life of Phoebe 2 153 846
Phoebe
 35/75 of R2 500 000 on Rachel’s life 1 166 667
Rachel
 25/65 of R3 500 000 on Phoebe’s life 1 346 154
1.3 Explain the implications for ownership of the business if Monica should pass away before
converting the business to a company or entering into a buy and sell agreement.
The surviving members of the CC (Rachel and Phoebe) would need to give approval for the interest
in the business to be sold to any 3rd party (in terms of the CC Act).
This would effectively provide the 1st option to purchase to Rachel and Phoebe. They would
however need to be able to obtain funding to fund the purchase price should they choose to
exercise this option.
Should they be unable to obtain funding or make a payment arrangement, the executor of Monica’s
estate would need to find a 3rd party to purchase the interest from the deceased estate, or transfer
the business interest to Monica’s heirs in terms of her will.
1.4 Rachel has decided to take early retirement, at the age of 56. She wants to sell her interest in the
business and has asked you to calculate the capital gains tax implications if she should sell her
business interest at its current value of R2 500 000. Assume that she acquired the business interest
20 years ago at a cost of R300 000.
Calculate Rachel’s taxable capital gain (if any), if she were to dispose of her business interest during
the 2021 year of assessment. You may assume that she had no other disposals during the tax year.
Rachel will qualify for the small business asset CGT exclusion
*As she has owned the interest for more than 5 years (she acquired the business 20 years ago
*It is an active business asset (the business operates franchises)
*She is older than 55 (being 56)
*Value of the business does not exceed R10m (being valued at R2 500 000).
Note: there is no indication that Rachel has previously used any portion of this exclusion.
Proceeds
Less base cost
Capital gain
Less small business exclusion
Final capital gain
Less annual exclusion
Net capital gain
CGT inclusion rate of 40%
Taxable capital gain
2 500 000
-300 000
2 200 000
-1 800 000
400 000
-40 000
360 000
144 000
Question 2:
Atol and Ace are two brothers who own a coal transport business. Atol owns 30% while Ace owns
70% of the shares in the business. During 2020, the business has acquired a non-tax-deductible key
person policy on Atol’s life.
2.1 In the event of Atol’s death, the business would require a net payment of R900 000 (after taxes
and duties). Calculate, with reasons, how much life cover the business would need to take out on
Atol’s life.
The company is a “family company” in relation to Atol.
The policy proceeds are thus paid to a family company and consequently deemed to be property in
the life coverer’s estate for estate duty purposes. The company will be liable for such estate duty.
Section 4(p) will apply:
Total cover required (incl. provision for estate duty)
= initial cover divided by {100 – ((100 - %bus interest) x estate duty rate)}/100
Thus, initial cover (R900 000) divided by {100- ((100-30) x 20%)}/100
= R900 000/ ({100-14}/100)
=R900 000/0.86
= R1 046 511,63 is the total amount of cover required to fund the R900 000 keyperson cover
2.2 Explain whether (or not) your answer to Question 2.1 would change if Atol was not an owner in
the business, but only an employee, with Ace owning 100% of the shares in the business.
Yes, the answer would be different
Sec 4(p) would not apply as Atol would not own any interest in the business 1,0 mark can be earned
without reference to the specific section - the student just needs to indicate that no exclusion to the
estate dutiable amount will be allowed.
Since the cover/proceeds will still be paid to a family company, The proceeds will be subject to
estate duty at a rate of 20% R900 000/0.8 = R1 125 000 would be the total cover required 1 125 000
To provide for the R350 000 estate duty that will be payable on the proceeds payable to the
business.
The premiums plus 6% deduction is ignored in the calculation as it is unknown how many premiums
would have been paid at date of death
2.3 Explain how the brothers can change the income tax deductibility of the premiums on the policy
and what the implication of such a change would be.
In order for the premiums to be tax deductible the policy (which was taken out after 1 March 2012)
would need to meet the following requirements contained in sec 11(a)(ii) of the Income Tax Act:
 It must be a long-term insurance policy owned by the company,
 the company must be insured against the loss by reason of death of Atol,
 it must be a pure risk policy,
 the company must own the policy at time of payment of the premium
 and the policy contract must contain an addendum that sec 11(a)(ii) is applicable to the
policy.

The brothers would be able the make sec 11(w)(ii) applicable by meeting all the above
requirements BUT the proceeds will still be subject to income tax in terms of sec 10(gH) as it
requires that NO premium paid after 1 Match 2012 was deductible, and the premium or the
1st year of the policy would have been deductible.
Question 3:
Smart Art (Pty) Ltd is a business that collects investment art pieces and also provides art consulting
and valuation services. The owners of Smart Art (Pty) Ltd have given you the following financial
information as they would like you to calculate the value of the company.
The current rate of return on a low-risk investment is 7% per annum. Investing in a business with the
same investment risk as Smart Art (Pty) Ltd should yield a return of 15% per annum. The expected
annual income of the business is R700 000. You are provided with the company’s most recent
Statement of Financial Position (the Balance Sheet).
3.1 Use the information provided to select an appropriate valuation method and determine the
current value of the business. Motivate the valuation method applied.
The super profits method of valuation is appropriate
Since the business does investing and provides services, the value of the business will be contained
in its assets as well as its future earnings.
Expected income per year
Fair income (R1 500 000 x 7%)
Super profits
700 000
-105 000
595 000
Discounted value of super profit (end mode):
Pmt =
R595 000
i=
7%
n=
5
PV =
2 439 617
Plus, net assets
700 000
Value of the business: 3 839 617
Net current assets 600 000
Plus, fixed assets 900 000
Less loans -800 000
3.2 Explain why the calculated value of the business differs from the R1 500 000 total capital
employed in the business (as reflected in the balance sheet above).
The R1 500 000 reflected in the balance sheet contains only the current value of the capital
employed in the business, whereas the calculated value adds the discounted value of future profit
expected to be earned by the business in the next 5 years (regarded as the reasonably foreseeable
future).
3.3 Use the information provided to calculate a gearing ratio of the business and interpret the result
of your calculation. Round your answer to two decimals.
Debt to equity ratio:
Total debt/total equity (share capital plus retaining income plus other reserves)
= 800 000/700 000
=1.14
This ratio is indicative of high gearing: more of the business capital is obtain via debt than equity or
reserves. This exposes the business to interest rate risk.
OR
Debt to asset ratio: total debt (current and non-current)/total assets (current and non-current)
= 800 000/ (900 000+600 000)
= 0.53 0 ,53
This means 53% of the assets in the company is financed with debt. This is a high ratio indicative of
risk to creditors, especially unsecured creditors.
3.4 Comment on the appropriateness of using the gearing ratio calculated in Question 3.3 if the
business wanted to apply for a short-term loan from a financial institution, as well as the potential
success of such a loan application.
It is not appropriate to use a gearing ratio (debt to asset ratio/debt to equity ratio) in relation to a
short-term loan, as these solvency measures relate to long term loans and not short-term loans.
One would need to look at a liquidity ratio to be able to comment on short term loans and the
likelihood of the business being able to repay such a loan.
2020 exam paper:
QUESTION 1 (10 marks)
Ella, Alice, George and Andile are shareholders in Starship Enterprises (Pty) Ltd. The value of the
business is R3 500 000. Their shareholding is as follows:
Ella = 25%, Alice = 15%, George 40% and Andile = 20%.
They decide to effect buy-and sell policies on multiple lives, in other words each shareholder owns
one policy and pays one premium, covering the lives of the other shareholders with the policy. The
purpose of these policies will be to fund the purchase price in terms of a buy and sell agreement, to
allow the surviving business owners to purchase the business interest of a deceased owner’s interest
in the business in the event of death.
1.1 Calculate the cover amount per shareholder that George must affect on the lives of Ella, Alice
and Andile, keeping in mind that George has a 40% shareholding. Round your answer to the nearest
R1 000.
George = 40% share = R3 500 000 x 40% = R1 400 000
Ella = 25% (R875 000)
Alice = 15% (R525 000)
Andile = 20% (R700 000)
40 / 75 x R875 000 = R467 000
40 / 85 x R525 000 = R247 000
40 80 x R700 000 = R350 000
1.2 The shareholders of Starship Enterprises (Pty) Ltd have decided to apply for a small loan to
expand their business. The business is a fast-moving consumer goods retailer. Taking the following
financial information into account, determine whether the company will be able to service
additional debt and be likely to qualify for a short-term loan. Identify the most appropriate ratio to
serve as an indication of the ability of the business to service a short-term loan and show
calculations for this ratio. Motivate why the selected ratio is regarded as an appropriate indicator.
Since the business is a fast-moving consumer goods business, the turnover of stock will have an
important impact on the liquidity of the business and its ability to repay the short-term loan.
The acid test ratio will thus be the most appropriate ratio to determine whether the business will
have sufficient liquidity to service the loan:
 Acid test ratio: R2 250 000: R1 350 000 (1)
The acid test ratio is 1: 1,67 which indicates that the business will be able to meet their liabilities and
will probably qualify for a loan
1.3 Starship Enterprises (Pty) Ltd has recently entered into an agreement with their head of
marketing, Justin, according to which he is not allowed to work in the same retail industry for two
years, should he leave their employment. The amount that will be paid to him in such an event is R2
500 000. Explain the tax consequence applicable to Starship Enterprises (Pty) Ltd regarding the
payment to Justin.
A restraint of trade payment will be tax deductible for an employer on the following conditions:
 The amount constitutes income in the hands of the person to whom it is paid
 The tax deductible will be deductible in equal instalments over the longer of:
o 3 years; or
o The period of the restraint of trade period
 Starship Enterprises (Pty) Ltd will thus be able to deduct R833 333 per year over the next 3
tax years.
QUESTION 2:
Blue Flag Properties (Pty) Ltd is an investment company with assets of R27 000 000 (market value).
The liabilities in the business amount to R15 000 000. A fair rate of return for investing in this type of
business is 15% p.a. and the low-risk rate of return (e.g., bank deposit rate) is 7% p.a.
2.1 Identify the appropriate valuation method and use this to calculate the value of the business.
Motivate why the relevant valuation method is regarded as appropriate.
The intrinsic valuation method is the most appropriate valuation method, because this is an
investment company with its value contained in its assets:
R27 000 000
Less R15 000 0000
= R12 000 000
Tina is a 55% shareholder and key employee at Blue Flag Properties (Pty) Ltd. The business would
like to obtain protection against the risk of Tina’s death or disability. They have estimated that it
would cost the business about R4 000 000 to replace Tina should she die or become disabled. The
shareholders have decided that they would like to purchase a key person policy on Tina’s life, and
they would like the premiums to be deductible for income tax purposes.
2.2.1 Calculate the total amount of life and disability cover required on Tina’s life, taking all relevant
taxes into account (assuming a corporate tax rate of 28%); and
Income tax: R4 000 000/ 0.72
= R5 555 555 (amount of disability cover required)
Estate duty: R5 555 555 / {100 – ((100 – 55) x 20%)}
= R 5 555 555 / 0.91
= R6 105 006.00 (amount of life cover required)
No CGT has to be included in the calculation, since it is a tax-deductible policy, Tina is an employee
of the company and it would be reasonable to assume that the company did in fact deduct the
premiums that qualified for a deduction in terms of section 11(w) of the Income Tax Act.
 Examiners comment: The question states that Tina owns 55% of the shares, thus making it a
family company
2.2.2 Illustrate, with brief supporting reasons, to the business owners what the impact of the policy
proceeds will be on Tina’s estate duty calculation as well as on the company’s income tax calculation
in the event of Tina’s death (show all calculations).
Estate duty calculation:
Policy proceeds
Less sec 4(p) deduction (55% of R6 105 006.00)
Dutiable portion of proceeds
Estate duty at 20%
R6 105 006.00
R3 357 753.30
R2 747 252,70
R549 450,54
The above illustration is done when cover commences and no premium has yet been paid, thus this
illustrative calculation does not include the deduction of premiums plus 6%p.a. compound interest,
which will also be available in the actual estate duty calculation. The amount of this deduction will
depend on the premiums paid and term of the cover in place at the actual date of death.
Income tax calculation:
Thus, amount to be included in Blue Flag’s gross income in terms of para (m) of the definition of
gross income in section 1 of the Income Tax Act:
Policy proceeds
Less estate duty payable
Taxable income
Income tax at 28%
Proceeds after deducting income tax and estate duty:
R6 105 006.00
R549 450,54
R5 555 555,46
R1 555 555,53
R4 000 000
QUESTION 3:
Mildred is 57 and has recently taken a voluntary retrenchment package from her employer. She
wants to use some of the capital to start or acquire her own business. She has been an amateur
beekeeper for a number of years and would now like to use her experience and expertise to start
her own beekeeping and honey products distribution business. Mildred’s 15-year-old niece lives with
her and is her trusted assistant in the beekeeping venture. She would like to involve her niece in her
planned business venture.
Mildred has indicated that having complete control over her business is very important to her. She
does not have any future plans for big expansions to the business and is looking at the business
simply supplementing her pension income. She has taken retirement from her employer’s pension
fund and the pension income will meet about 70% of her income needs. She would also like to be
able to bequeath a successful small beekeeping business to her niece.
3.1 Advise Mildred on all the considerations relevant to selecting an appropriate business entity.
Note: In your answer, you must make a specific recommendation with respect to a specific business
entity.



Since Mildred wants complete ownership over the business, a partnership will not be a
suitable business entity
As a partnership requires more than one business owner
A company and a sole proprietorship will both be able to afford Mildred complete control
over the business as she can be the sole owner of the business.





The sole proprietor is simpler and easier to set up but will not afford Mildred a separate
legal entity.
If Mildred operates the business as a sole proprietorship the business will automatically
cease in the event of Mildred’s death and she will need to make sure that she makes special
arrangements in her will to allow her executor to continue operating the business to enable
her niece to inherit the business as a going concern.
A company will entail more formalities and requirements to set up, which may be
unnecessary if the business will always remain small and not expanded. In future it is,
however, possible that Mildred or her niece may want to expand the business (and possibly
include the niece as a co-owner with Mildred). If this should happen a company will be able
to accommodate such needs.
A company will also allow Mildred some options to structure her income from the business
(salary or dividends or loan repayments), to ensure that she optimizes her income tax
position.
Since a company is also a separate legal entity it will automatically continue in the event of
Mildred’s death and her niece will be able to inherit the shareholding in the company.
3.2 Advise Mildred how she will be able to involve her niece in the business now and ensure that the
niece is able to take over the business in the event of Mildred’s death.





The niece is 15 and can thus currently become an employee in the business.
Since Mildred wants to have complete control over the business, it should be recommended
that the niece is not given any business ownership at the moment (which would also be
problematic as she is still a minor and cannot enter into legal agreements on her own).
If the business is operated as company, Mildred can bequeath the shares in the company (or
a sole proprietorship as going concern) to her niece in Mildred’s will.
No buy and sell agreement will be required if she does not require the niece to purchase the
business interest from her deceased estate.
It should be borne in mind that if her niece should become the business owner before the
age of 18, she will still need a guardian to assist in managing the business and contracting as
she will still be a minor. In such a case the business could benefit from employing a business
manager to oversee the day-to-day management of the business.
3.3 Ignore your previous answers. Mildred chooses to operate the business as a sole proprietorship.
She wants to ensure the seamless continuation of the business in the event of her death. Should this
happen, she wants her niece to be able to take over the management of the business. Consequently,
Mildred is considering taking out key-person cover on her own life.
Advise Mildred on whether (or not) this is a viable option for her, with reference to relevant tax
implications. No calculations are required.

•
•
•
If the business is operated a sole proprietorship, it will not constitute a separate legal entity
and it will thus not be able to become the owner of a policy on Mildred’s life.
The policy will need to be bought by Mildred on her own life, as she and the business are
essentially the same entity.
This means that the policy cannot qualify for the premiums to be tax deductible, as it will be
be an employer owned policy.
The proceeds wil not be subject to income tax.
•
•
The proceeds will be subject to estate duty in her estate, as the sec 3(3)(a)(ii) deduction will
not be applicable, as its requirements are not met. The policy proceeds will thus be included
in the dutiable estate.
Mildred can nominate her niece as the beneficiary for proceeds, to ensure her niece receives
the proceeds to use for business purposes.
Section B:
Question 1:
Joe (aged 56) is a member of the Transnet Retirement Fund (a public sector pension fund). This fund
is a defined contribution pension fund. He has not yet reached retirement age and he is considering
resignation from Transnet, his effective resignation date being 31 October 2020. He was employed
by Transnet on 1 February 1990 and has been a member of the Transnet Retirement Fund
throughout his employment. The value of his total retirement interest in the Transnet Fund is R10
000 000. Joe has never retired or withdrawn from any other pension, provident, preservation or
retirement annuity fund, and he has never received a severance benefit from an employer.
Joe plans on starting his own business and wants to take the maximum lump sum from his
retirement benefit without paying any tax thereon, as he wishes to invest this lump sum in his new
business venture. He does not care if the full R500 000, taxed at 0%, is available to him when he
eventually retires - he wants to access the maximum amount that he can now, without paying any
tax thereon.
1.1: You advise Joe that he would be able to access a bigger amount tax-free as a lump sum if he
resigns and first transfers the full retirement interest in the Transnet Retirement Fund to a pension
preservation fund and thereafter make a withdrawal from the preservation fund. Motivate why you
would provide this advice.
The reason for this advice is that the amount of the tax-free portion will then be calculated on the
full transfer value from the Transnet Retirement Fund
and serve as a deduction against the lump sum amount that he withdraws from the preservation
fund, and the tax free-portion will thus not be calculated on the (smaller) amount withdrawn from
the preservation fund.
1.2 Based on your advice in 1.1, calculate the maximum lump sum that Joe can take in cash without
paying tax thereon, if he, on resignation, first transfers the full retirement interest to a preservation
fund and thereafter makes a withdrawal from the preservation fund. Round all your answers to the
nearest Rand.
A = B/C x D. where
A = The taxable portion of the lump sum
B = The amount of completed years of service after 1 March 1998
C = The total amount of completed years of service
D = The amount transferred for the Transnet Retirement Fund
Thus:
A = 22/30 x R10 000 000
= R7 333 333 (taxable portion).
The tax-free portion (par 6 deduction against the lump sum) is thus R10 000 000 – R7 333 333 = R2
666 667.
Joe can further take R25 000 as a withdrawal that will be taxed at 0%. Therefore, the total amount
that he can take without paying tax is R2 666 667 + R25 000 = R2 691 667
Note:
• The transfer takes place before reaching normal retirement age. If it had occurred after
reaching normal retirement age, a withdrawal prior to transfer would not be allowed as
paragraph (c)(ii)(dd) of the definition of “pension fund” in Section 1 of the Income Tax Act
indicates that the retirement interest (i.e. the full value) needs to be transferred to a
pension preservation fund. Marks would not have been allowed for other strategies, as no
other strategy would have resulted in a higher lump sum without paying tax as required by
the question.
1.3 Joe has heard that it is possible on resignation to take an amount in cash before transferring the
balance from a pension fund to a pension preservation fund, and that one further withdrawal will be
allowed from the preservation fund. He wants to know if he would be allowed to take the lump sum
calculated in 1.2 in cash and transfer the balance to a preservation fund. Illustrate the effect of such
a decision by calculating the tax that Joe would pay if he first takes a lump sum equal to the lump
sum calculated in 1.2 in cash on resignation and transfer the balance of his pension interest to a
pension preservation fund. Round all your answers to the nearest Rand.
A = B/C x D. where
A = The taxable portion of the lump sum
B = The amount of completed years of service after 1 March 1998
C = The total amount of completed years of service
D = The amount transferred for the Transnet Retirement Fund
Thus:
A = 22/30 x R2 691 667
= R1 973 889 (taxable portion).
Tax on R1 973 889
= R203 400 + 36% of the taxable amount above R990 000
= R203 400 + 36% of (R1 973 889 – R990 000)
= R203 400 + 36% of R983 889
= R203 400 + R354 200
= R557 600
Note:
• The facts state that he has not reached retirement age. He may thus still resign, take a
portion in cash, and transfer the balance to a preservation fund. If we were dealing with a
retirement scenario, he would be able to transfer to a preservation fund (assuming the
Transnet Fund allows for this) but he would not be able to take a portion in cash (the full
amount would then have to be transferred) or make a withdrawal from the preservation
fund prior to retirement.
1.4 Joe has been informed that it is also allowable for him to opt for early retirement from the
Transnet Retirement Fund. Joe wants to know what the maximum amount is that he would be able
to take as a lump sum without paying any tax thereon, should he opt to retire from the Transnet
Retirement Fund (early retirement). Calculate the maximum amount that Joe will be able to take as
a lump sum without paying any tax thereon if he opts to retire from the Transnet Retirement Fund.
Round off all your answers to the closest Rand.
30/22 x R500 000 = R681 818
Question 2:
Jabu is the CEO of a company. He is currently 42 years old.
His wishes are as follows:
• He wants to retire at age 65.
• He wants to earn an annual income equal to R1 000 000 in today’s terms, which income
must escalate at the rate of inflation.
• He also wants to purchase a new motor vehicle at retirement equal to a current value of
R700 000.
• He wants this income to last until age 90.
He has made the following provision:
• He is a member of a pension fund. He contributes 8% and his employer contributes 8% of his
annual salary (currently R1 000 000) to the pension fund. Of these contributions 2% is paid
towards his risk benefits and costs related to the fund. The current fund value is R2 500 000.
The contributions to this fund annually escalate in line with his annual salary increases which
are usually in line with inflation.
• He is also a member to a retirement annuity fund. The current value of this fund is R800 000
and he makes level contributions of R50 000 per year.
• He also plans to sell his share investments at age 65 and use the proceeds to supplement his
retirement income. The current value of his shares are R300 000. The base cost in respect of
these shares in Jabu’s hands is R120 000 and Jabu is not going to purchase any additional
shares.
Assumptions and guidelines:
• You can assume a 5% per annum inflation rate throughout the period.
• Growth in the pension fund and retirement annuity fund is 9% per annum throughout.
• The market value of shares increase with 9% per year.
• Growth on investments made after retirement is 9% per annum throughout.
• Capital gains tax implications, where applicable, will remain unchanged in terms of the
relevant current legislative provisions until retirement. You can assume that the marginal
rate of tax applicable to Jabu on retirement is 45%.
• (vi) Any investments made to cover a possible shortfall will have an investment growth rate
of 9% per annum.
• (vii) The value of new motor vehicles will escalate at the inflation rate.
• (viii) When calculating a resultant rate, use 5 decimals.
• (ix) Round all your answers to the nearest Rand.
Required:
Calculate the shortfall and current annual premium that needs to be made by Jabu to make
provision for any calculated shortfall:
• if an annual level premium is paid to fund the shortfall; and
• if an annual premium that will escalate in line with the annual inflation rate (5%) is paid to
fund the shortfall.
The amount needed:
1 000 000 PV
23 N
5 I/YR
FV 3 071 524 (amount needed in year 1 after retirement)
RR = (1.09 / 1.05 – )1 x 100
= 3.80952% (resultant rate)
3 071 524 PMT
25 N
3.80952 I/YR
PV 50 829 748 (amount needed at age 65)
Amount needed in respect of new vehicle:
700 000 PV
23 N
5 I/YR
FV = 2 150 067
Total amount needed at age 60:
R50 829 748 + R2 150 067 = R52 979 815
Provisions made for retirement:
Pension Fund
R2 500 000 PV
9 I/YR
23 N
FV 18 144 686 (future value of current fund value)
1.09/1.05 – 1 x 100
= 3.80952% (resultant rate)
140 000 PMT (current contribution to pension fund: 1 000 000 x 14%)
3.80952 I/YR (resultant rate)
23 N
PV 2 200 497
2 200 497 PV
9 I/YR
23 N
FV 15 970 931
The total fund value at retirement is thus:
R18 144 686 + R15 970 931
= R34 115 617
Retirement Annuity Fund:
800 000 PV
50 000 PMT
9 I/YR
23 N
FV = 9 595 790
Sale of Unit Trust Investment
R300 000 PV
9 I/YR
23 N
FV 2 177 362
R2 177 362 – R120 000 (base cost)
= R2 057 362 – R40 000 annual exclusion
= R2 017 362 x 40% inclusion rate x 45% marginal tax rate
= R363 125 (capital gains tax payable)
The amount received after payment of capital gains tax is thus
R2 177 362 – R363 125
= R1 814 237
Therefore: Total provision for retirement:
R34 115 617 + R9 595 790 + R1 814 237
= R45 525 644
The shortfall is thus:
R52 979 815 – R45 525 644= R7 454 171
Level Premium to Cover Shortfall
7 454 171 FV
23 N
9 I/YR
PMT 98 353
Escalating Premiums to Cover Shortfall
7 454 171 FV
23 N
9 I/YR
PV 1 027 046
RR = 1.09 / 1.05 – 1 x 100
= 3.80952%
1 027 046 PV
23 N
3.80952 I/YR
PMT = 65 343
Question 3:
Johan (aged 59) has earned the following income in the 2020/2021 year of assessment:
• Salary: R700 000
• Employment bonus: R250 000
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He also receives a travel allowance in the amount of R60 000. R25 000 of this travel
allowance was calculated to be taxable in Johan’s hands. His employer was not satisfied that
at least 80% of the use of the motor vehicle will be for business purposes.
Dividends from South African shares: R30 000.
Annuity income (from a retirement annuity fund that he retired from 3 years ago) in the
amount of R80 000.
Johan also sold listed shares in the 2020-2021 year of assessment and made a taxable capital
gain of R200 000.
His employer is contributing R35 000 per annum to his pension fund and Johan is also
contributing R35 000 per annum to this fund.
Johan is worried that he is not saving enough towards retirement and wants to start
contributing to a retirement annuity fund.
There are no contributions to retirement funds that were disallowed as a tax deduction that
are carried over from previous years of assessment.
Required:
Calculate the maximum amount that Johan would be able to contribute to a retirement annuity fund
in the 2020/2021 year of assessment that would be fully deductible for income tax purposes.
Step 1.
His remuneration is: R700 000 (salary) + R35 000 (employer contribution to pension fund) + R250
000 (bonus) + R48 000 (80% of travel allowance) + R80 000 (annuity) = R1 113 000
Step 2.
The taxable income for purposes of calculating the section 11F deduction of Johan is:
R700 000 (salary) + R35 000 (employer contribution to pension fund) + R250 000 (bonus) + R80 000
(annuity) + R30 000 (dividends)
= R1 095 000 (gross income) – R30 000 (local dividend exemption)
= R1 065 000 (income) – R0 (deductions) + R25 000 (taxable travel allowance) + R200 000 (taxable
capital gain)
= R1 290 000 (taxable income)
Step 3.
His taxable income is thus higher than his remuneration in this instance. The amount potentially
deductible under section 11(k) will thus be:
R1 290 000 x 27.5% = R354 750.
As this amount is bigger than R350 000 the amount potentially deductible under section 11F is
limited to R350 000.
Step 4.
The taxable income of Johan before adding the taxable capital gain is:
R700 000 (salary) + R35 000 (employer contribution to pension fund) + R250 000 (bonus) + R80 000
(annuity) + R30 000 (dividends)
= R1 095 000 (gross income) – R30 000 (local dividend exemption)
= R1 065 000 (income) – R0 (deductions) + R25 000 (taxable travel allowance)
= R1 090 000 (taxable income)
Step 5.
As the amount in 3 (R350 000) is smaller than the answer in 4 (R1 090 000), the amount calculated in
3, i.e., R350 000 is the maximum amount deductible under section 11F.
Step 6.
Johan is currently contributing R70 000 to his pension fund (employee and employer contributions)
so he can contribute an additional amount of R280 000 (R350 000 – R70 000) to a retirement annuity
fund, which amount will be fully tax-deducible.
Question 4:
Greg (aged 65), a South African resident, is employed by A-Xpress, a multinational company, with its
head office based in Guernsey, from 1 January 2001 to 31 December 2020. Greg contributed to the
retirement fund of A-Xpress in Guernsey from 1 January 2001 to 31 December 2010. During the
period that Greg was a member of the retirement fund in Guernsey, he rendered service in South
Africa for four years and thereafter he rendered service in Guernsey for six years.
From 1 January 2011, Greg was transferred to the South African branch of A-Xpress and chose to
transfer the full value of R13 million (at that stage) in the retirement fund in Guernsey to the South
African pension fund of A-Xpress.
Greg retires from employment and from the pension fund of A-Xpress on 31 December 2020. The
member’s fund value on retirement date is R30 million. Greg takes R10 million as a lump sum and
the remaining R20 million is used to purchase a living annuity from a South African insurer.
Greg also received a lump sum payment of R500 000 from his employer as a result of ceasing his
employment after so many years, and accumulated leave pay in the amount of R200 000.
There is no double tax agreement between South Africa and Guernsey, and you may further assume
that no tax is payable in Guernsey in respect of the benefits received.
Greg is also planning on retiring from his retirement annuity fund policy at the same time. When
Greg resigned from his previous employer in December 2000, the retirement interest in the pension
fund of the previous employer was R1 000 000. He took an amount of R500 000 in cash and
transferred the balance of R500 000 to this retirement annuity policy. The value of the retirement
annuity policy is R3 000 000 and he plans to take the maximum allowable lump sum.
Greg has not previously retired from any other retirement funds.
Greg pays normal tax at a rate of 45%.
Required:
Calculate the tax that Greg will pay in the 2020-2021 year of assessment in respect of all the above
amounts accruing to him
Step 1: Calculate the taxable lump sum for the current year of assessment
Step 1(a)
The portion of the lump sum payable to Greg which relates to the amount transferred from the fund
in Isle of Man to the South African pension fund will be calculated as follows:
The amount transferred × Amount received or accrued
Total retirement interest
=R13 million × R10 million
R30 million
= R4 333 333 Not with error
This means that R5 666 667 of the lump sum is attributable to the local South African pension fund.
Step 1(b)
Only the portion of the amount transferred that relates to foreign services will qualify for exemption,
and the following formula must be applied:
Foreign services rendered × Amount calculated in Step 1
Total services rendered
=6 years × R5 666 667
20 years
= R1 700 000 With error method, but apportionment of period (6/20) must be correct
An amount of R1 700 000 qualifies for exemption from normal tax in the Republic. Of the total lump
sum of R10 000 000, R8 300 000 (½) (R10 000 000 less the R1 700 000 exemption) will therefore be
subject to tax as per the rates of tax applicable to retirement fund lump sum benefits on retirement.
His taxable lump sums that he receives in the 2020/2021 year of assessment is thus:
Taxable lump sum from the pension fund 8 300 000 plus the lump sum of R1 000 000 (R3000 000 ÷
3) from the retirement annuity fund plus the severance benefit of R500 000 = R9 800 00.
Step 2: Identify and add previous taxable amounts from Retirement (as from 1 October 2007) and
Withdrawal (as from 1 March 2009) and Severance Payments (as from 1 March 2011):
R0
ignore R1 000 000 withdrawal lump sum received from previous pension fund as it was before 1
March 2009.
Step3: Add Step 1 + Step 2:
R9 800 000 + R0
= R9 800 000 (½) mark with error – adding amount in step 1 and 2.
Step 4: Calculate the tax payable on the total amount calculated in Step 3 – using the Withdrawal
Table (withdrawals other than on retrenchment) or the Retirement Tax Table (retirement lump sums
received on retirement, death or withdrawal on retrenchment or severance benefit received)
Tax on R9 800 000
= R130 500 + 36% of the taxable income above R1 050 000
= R130 500 + 36% of (R9 800 000 – R1 050 000)
= R130 500 + 36% of R8 750 000
= R130 500 + R3 150 000
= R3 280 500
Step5: Calculate the tax payable on the previous amounts received – thus the amounts calculated in
Step 2 – using the same tax table used in step 4. This amount is referred to as the “hypothetical tax”.
R0 (½) mark with error for using correct tax rates applicable to answer in step 2.
Step 6: Tax Payable: Tax calculated in Step 4, less Hypothetical tax calculated in Step 5 = Tax Payable
R3 280 500 – R0
= R3 280 500
Leave pay: R200 000 x 45% = R90 000
Question 5:
Phindi died on 1 September 2019. At the time of her death there were contributions made to her
retirement annuity fund in the amount of R1 000 000 that had not previously been allowed as a tax
deduction or exemption. The retirement interest in the retirement annuity fund at the time of
Phindi’s death was R5 000 000. Her husband is the only beneficiary and opts to take a lump sum on
the amount of R500 000, and use the balance to purchase a living annuity.
5.1 Determine the amount that will be included in the estate of Phindi as property in terms of
section 3(2)(bA) of the Estate Duty Act.
The amount to be included as property in her estate is R1 000 000.
Koos died on 3 January 2020. At the time of his death there were contributions made to his
retirement annuity fund in the amount of R2 000 000 that had not previously been allowed as a tax
deduction or exemption. The retirement interest in the retirement annuity fund at the time of Koos’
death was R9 000 000. His son is the only beneficiary and opts to take a lump sum on the amount of
R1 500 000, and use the balance to purchase a living annuity.
5.2 Determine the amount that will be included in the estate of Koos as property in terms of section
3(2)(bA) of the Estate Duty Act.
The amount to be included as property in his estate is R1 500 000.
Note:
• Sec 3(2)(bA) was amended via the 2019 Taxation Laws Amendment Act in respect of persons
dying on/after 30 October 2019.
• In essence, the amount to be included as property in the estate of a deceased in this regard
is now equal to the deduction allowed in terms of Par 5 of the Second Schedule to the
Income Tax Act in respect of lump sums paid as a result of the death.
• In this question, although the contributions not allowed as a deduction/exemption before
death is R2 000 000, the beneficiary only takes R1 500 000 as a lump sum, and the allowable
deduction in terms of Par 5 will thus only be R1 500 000, which is the amount to be included
as property for estate duty purposes
o (if the beneficiary had in this example chosen to receive the full benefit in the form
of an annuity, no amount would have been included as property in this regard, as
there would be no Par 5 deduction available).
Section C:
Question 1:
Your client, aged 42, recently returned from overseas to head up the South African operation of his
employer's business. He had enjoyed cover as dependent of a South African medical scheme from
birth to age 24.
He is applying to become a member of an open medical scheme. In his application he declared that
he underwent a hernia operation on 12 May 2019. The application was submitted to the medical
scheme on 30 March 2020.
There were some delays in issuing the letter of acceptance as the medical scheme awaited proof of
his registration as dependent. The letter of acceptance was eventually issued on 15 May 2020 with
an entry date of 1 June 2020 subject to your client accepting the conditions.
1.1 The medical scheme imposed a late joiner penalty. Illustrate how this would have been
calculated.
A = B – (35 + C)
A = 42 – (35 + 3)
A=4
The scheme can impose a LJP of 0,05 of the contribution
1.2 The medical scheme furthermore imposed a 12-month condition specific waiting period in
respect of the hernia operation. Your client wants to know what waiting periods the scheme can
impose. Please motivate your answer.
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Not a beneficiary within 90 days preceding application
A 3-month general waiting period
Also, a 12-month condition specific period but only iro of a condition for which advice etc.
was received in the 12-month period ending on the date on which application for
membership was made/cannot impose on hernia operation as occurred outside the 12month period prior to application
- i.e., the submission of the acceptance letter to the scheme
Both waiting periods also applicable to PMB's
Note:
• If a scheme makes use of an acceptance letter, they regard the receipt of the acceptance
letter as the date of application. The date of submission of the original application forms is
immaterial.
Question 2:
A medical scheme has elected a network of private hospitals and all public hospitals as designated
service providers.
REQUIRED
Explain whether (or not) the accounts of the various specialists providing services in this network of
private hospitals will be paid in full by the scheme should they render a service in respect of a
prescribed minimum benefit condition to a beneficiary. Please motivate your answer.
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No, they would not necessarily
They work independently of the hospital
They would only be paid in full if the services were involuntarily obtained or
the medical scheme does not have a DSP for the particular service
Question 3:
In completing an application for membership and registration of a dependent, your client failed to
disclose that his dependent had a coronary artery stent inserted more than ten years ago. The
scheme became aware of this non-disclosure when the dependent was admitted to hospital for an
unrelated condition.
REQUIRED
Advise your client what actions the scheme can take as a result of the non-disclosure and motivate
your answer.
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As the non-disclosure is material;
The scheme is entitled to terminate membership (and therefore registration as dependent)
ab initio;
Depending on the contract/application wording, the member may forfeit all
contributions/contributions less expenses may be refunded;
In addition, the member will be required to refund all benefits paid by the scheme.