Bachelor of Commerce (Accounting)

Taxation 3B – 2023
Weekly Objective Sheet
Week number: 1
Week beginning: 24 July 2023 Topic: Lump Sums

Topic: Lump Sums

Topic overview

A person may receive a lump sum amount due to retirement or another reason. An employer will often
award a lump sum to an employee on retirement/retrenchment, or a person may receive a lump sum
from a pension, provident or retirement annuity fund. This lecture examines the tax treatment of these
types of lump sums received and how this is incorporated into the normal tax model. Lump sums
received by or accrued to a taxpayer from an employer are specifically included in gross income. The
Second Schedule to the Act specifically deals with the treatment of lump sums received from pension,
provident and retirement annuity funds. An overview of retirement lump sums is given in Notes on
South African Income Tax 2023.
Severance benefits
The term ‘severance benefit’ is defined in section 1 of the Income Tax Act and is included in an
employee’s gross income and taxable income. No expenses are deductible from these lump sums.
Lump sums received as a severance benefit are taxed in terms of its own table as follows:

Taxable income from severance benefits Rate of tax

0 - R500 000 0% of taxable income
R500 001 - R700 000 18% of taxable income exceeding R500 000
R700 001 - R1 050 000 R36 000 + 27% of taxable income exceeding R700 000
R1 050 001 + R130 500 + 36% of taxable income exceeding R1 050 000

The above table is applied cumulatively (refer to Notes on South African Income Tax 2023 for a step-
by-step guideline of how this is done). This is also explained further below.
If an employee has been retrenched due to the employer ceasing trade or due to a reduction in
personnel, and such employee held more than 5% of the issued share capital or members’ interest in the
employer, any lump sum received by such employee will NOT be regarded as a severance benefit.
Retirement lump sums
‘Retirement fund lump sum benefit’ and ‘retirement fund lump sum withdrawal benefit’ are defined
terms in section 1 of the Income Tax Act and the definitions refer to paragraph 2 of the Second
Schedule. Paragraphs 5 and 6 of the Second Schedule allow deductions against such lump sum benefits.
The following tables apply to these lump sums:
Retirement benefits

Taxable income from lump sum benefits Rate of tax

0 - R500 000 0% of taxable income
R500 001 - R700 000 18% of taxable income exceeding R500 000
R700 001 - R1 050 000 R36 000 + 27% of taxable income exceeding R700 000
R1 050 001 + R130 500 + 36% of taxable income exceeding R1 050 000

1
Bachelor of Commerce (Accounting)
Taxation 3B – 2023
Weekly Objective Sheet
Week number: 1
Week beginning: 24 July 2023 Topic: Lump Sums

Withdrawal benefits

Taxable income from lump sum benefits Rate of tax

0 – R25 000 0% of taxable income
R25 001 – R660 000 18% of taxable income exceeding R25 000
R660 001 – R990 000 R114 300 + 27% of taxable income exceeding R660 000
R990 001 + R203 400 + 36% of taxable income exceeding R990 000

All of the above tables are to be applied on a cumulative basis – i.e. the amount of tax on a benefit is
calculated as follows:
Step 1: Start with the current lump sum benefit
Step 2: Add the following benefits received by/accrued to the person before the date of accrual of the
current benefit: Retirement fund lump sum benefits received/accrued on or after 1 October
2007 + Retirement fund lump sum withdrawal benefits received/accrued on or after 1 March
2009 + Severance benefits received/accrued on or after 1 March 2011 before the receipt of the
current benefit
Step 3: Add the lump sum (step 1) to the earlier benefits (step 2)
Step 4: Calculate the tax using the relevant table above (severance/retirement/withdrawal) on the
amount calculated per step 3
Step 5: Calculate the tax using the relevant table above (severance/retirement/withdrawal) on the earlier
benefits calculated in step 2
Step 6: Tax on current benefit = tax calculated in step 4 less tax calculated in step 5
Note that in applying the steps above, only the earlier benefits are considered and the actual tax paid on
those benefits are not considered. The current benefit will however have the paragraph 5 or paragraph 6
deductions offset against it if applicable. No rebates or assessed losses are allowed to be offset in
calculating the tax payable on the lump sum.

Aims
At the completion of this lecture you should be able to:
• determine the tax treatment of annuities and lump–sums received as a result of retirement from an
employer, and
• determine the tax treatment of annuities and lump–sums from a pension, provident
or retirement annuity fund.

Study references

SAICA Legislation Handbook – Income Tax Act Section

From employment
• Paragraph (d) of the definition of ‘gross income’.
• Second schedule of the Income Tax Act.

2
Bachelor of Commerce (Accounting)
Taxation 3B – 2023
Weekly Objective Sheet
Week number: 1
Week beginning: 24 July 2023 Topic: Lump Sums

From pension, provident and retirement annuity funds

• Definitions.
• Allowable deductions.
• Taxation of benefits.
• Taxable portion of lump sum benefits (Second Schedule).
• Paragraph (e) of the definition of ‘gross income’.

Notes on South African Income Tax 2023

• From Chapter 14 ‘Retirement Benefits and Planning’.

Tax Workbook 2023

To assist you with your studies in this lecture you should attempt the following tutorial questions
and then mark your attempts against the suggested solutions that have been provided.
Homework:
Examples 16.1; 16.2; 16.3; 16.4; 16.6
Question 16.2
Tutorial: Question 16.3