UNIT 12

PENSIONS AND BENEFIT FUNDS CONTRIBUTIONS AND RECEIPTS

( 1st and 6th Schedule)

12.0 Introduction

The 6th schedule of the ITA deals with the taxpayer’s deductions in respect of contributions to a
pension fund and contributions to a retirement annuity fund. It also addresses employer’s
deductions in respect of contributions to a benefit fund. In this unit, we also discuss the
taxation of lump sum payments received from pension and benefit funds.

Amounts received in the ordinary course of events from the above funds comprise the benefits
envisaged by the fund that is pensions in the case of pension fund; sickness, accident or
unemployment benefits in the case of a benefit fund; and annuities in the case of a retirement
annuity fund. In some cases an employee’s membership is terminated before the envisaged
benefits, for example;

 when an employee resigns or

 the fund is wound up

and in both cases the employee receives a terminal benefit from which a lump sum payment is
calculated in terms of the 1st Schedule for taxation purposes.

12.1 Unit Objectives

After studying this unit, you should be able to:-

 describe tax treatment of contributions to various funds
 explain the tax treatment of amounts received from various funds
 advise business people whether or not to use “approved” or “unapproved funds”
 give tax planning advise related to pensions in general

12.2 Definition of a fund

For contributions, and so on. to qualify for the treatments to be discussed below, a pension
fund must either be established by law in Zimbabwe, such as the NSSA Act or be registered
under the Pension and Provident Funds Act and a Retirement Annuity Fund (RAF) must also
be registered. A RAF is basically a contract between an insurance company and an individual,
whether an employee or not, whereby the later contributes in order to draw an annuity in due
course.

Contributions to a benefit fund are meant to cushion the member or dependents in the event of
sickness, injury or even death.

12.3 Contributions to Pension Fund

Both employees and employers can make contributions to pension fund. The Act authorizes
and places limitations on the deductions of the amount of contributions by both employers and
employees to the same pension fund.
12.4 Employers Contributions to Pension Fund

The Act stipulates that for a member of the fund who joined on or after 1 July 1960, the
employer’s annual deduction is restricted to $5 400 per member with effect from 1 December
2010.Such contributions are not taxed in the hands of the employee at the time of contribution.
They are taxed in later years when the employee start to benefit from the contributions at
retirement.

12.5 Employer’s Lump Sum Contributions

Lump sum contribution usually result from a need by employer to make up a shortfall, within
the pension fund, as disclosed by actuarial valuation. Lump sum contributions are allowed in
full, but the Commissioner may direct that the deduction be spread over a number of years
determined by him to avoid a drain on the fiscus as this reduces tax payable.

Activity 12.1
A local company employs 500 employees. The employer makes contributions to the pension
fund for the benefit of his employees. The amounts contributed are $3 500 per employee per
year
a) how are the contributions treated for tax purposes
b) what if the contributions were $6 000 per employee per year, would the tax
treatment in (i) above differ?

12.6 Members Contributions to Pension Fund

For members who joined the fund on or after 1 July 1960, deduction is restricted to $5 400 per
year, with effect from 1 January 2010. If the person is a member of more than one pension
fund, the restriction is applied to the aggregate contributions, this includes contribution to
NSSA.

If a person is a member of his employer’s pension fund and makes his own contributions to a
retirement annuity fund, the $5 400 restriction still applies on the aggregate contribution.
Contributions by members who joined before 1 July 1960 are allowed as tax deductions in full
if the rules remained unchanged.

12.7 Arrear Contributions (S 15(2)(i))

These are payments made in respect of past service (when one decides to join the pension fund
well after being employed). The contributions may be allowed up to a maximum of $1800 per
annum. Any interest content is not allowable as a deduction.

12.8 Benefits from Funds

12.8.1 Sums received from pension and benefit funds

 A retired employee’s pension from a source or deemed source in Zimbabwe is taxable
in terms of Section 8(1)a
 Where the retiree exercises a commutation election, the commutated amount is usually
not taxable as long as it does not exceed one-third of the pension.
  With effect from 1st January 2006 a pension paid from a Pension or the Consolidated
Revenue Fund(Government pension) to a taxpayer who attained the age of 55 years
before beginning of the tax year is exempt from tax.
 Benefits paid by a benefit fund in respect of injury, sickness or death are exempt.

12.8.2 Annuity from a retirement annuity fund

Generally, the annuity received is taxable in the hands of the taxpayer if the
contributions where allowed as a deduction. If the contributions to the RAF
commenced prior to 1st August 1970, the commutation, even if it relates to the entire
annuity, is excluded from gross income and thus not taxable.

If the contributions commenced after that date then only one-third of a full
commutation escapes taxation.

12.9 Lump Sum Payments

An employee may receive an amount on termination of his membership of a pension fund if he

decides to withdraw before he reaches retirement or when a fund is wound up for some reason.
The amount he gets is referred to as a “terminal benefit”. For tax purposes the terminal benefit
is apportioned in the ratio of the employee’s employment inside and outside Zimbabwe in
respect of which contributions were made, the Zimbabwean portion is referred to as a “lump
sum payment” (LSP). Taxation of the LSP depends on the date of joining the fund as well as
the type and other factors which are stated below.

 A fund with unchanged rules is one established prior to 1 July 1960 whose rules were not
changed.

 A fund with changed rules is one which was established before 1 st July 1960 the rules of
which were changed to increase the percentage of the contributions thereby increase the
future benefits.

 A new fund is one established on or after 1 July 1960 .

12.10 Pension Fund

L S P from fund with unchanged rules: member joined before 1 July 1960
The whole amount is not taxable.

L S P from fund with changed rules: member joined on or after 1 July 1960

a) If the lump sum payment is $1 800 or less, whole amount is not taxable.
b) if the lump sum payment exceeds $1 800
i) reduce the amount by amounts previously disallowed as a deduction in previous
years.
ii) reduce the LSP by the amount he would have received had the rules remained
unchanged.
iii) reduce balance by any amount used to purchase an annuity on retirement
iv) reduce the balance further by any amount transferred to another pension fund
 L S P from new funds, funds with changed or unchanged rules: member joined on or after 1
July 1960

a) if the lump sum payment is $1 800 or less, whole amount is not taxable.
b) if the lump sum payment exceeds $1 800

i) reduce the amount by amounts previously disallowed as a deduction in previous

years.
ii) reduce the LSP by the amount he would have received had the rules remained
unchanged.
iii) reduce balance by any amount used to purchase an annuity on retirement
iii) reduce the balance further by any amount transferred to another pension
fund

12.11 Benefit Funds

If a member who joined prior to 1 July 1960 receives lump sum from a fund with changed
rules, the lump sum is reduced by what he would have received had rules not changed or $1800
whichever is greater.

Example
Panashe joined a benefit fund on 1 January 1956 and fund rules changed on 1 July 1960.
Lump sum payment received by Panashe was $29 000. Panashe could have received $15 000
if the rules had not changed. The amount transferred to acquire the annuity on retirement was
$3 500. To establish taxable amount the calculation goes thus:-
$
Lump sum 29 000
Less $15 000 or 1800 (the greater of the two) 15 000
Total 14 000
Less amount used to acquire annuity 3 500
Taxable portion 10 500

Section 8(1)(c) brings lump sum payments into gross income. The first schedule details the
amounts to be excluded from a lump sum payment in order to arrive at the taxable portion of
such payment.

LSP from fund with changed rules: member joined before 1 July 1960
The whole amount is not taxable

LSP from fund with changed rules: member joined on or after 1 July 1960
a) reduce LSP by the amount the taxpayer would have received had the rules remained
unchanged or by $1 800, whichever is the greater
b) reduce the balance by any amount used to acquire an annuity on retirement
c) reduce the balance further by any amount which is transferred to another benefit fund
or pension fund

12.12 Lump Sum Payments from Unapproved Fund

 Reduce the L.S.P by the member’s own contributions. The taxable portion of the lump sum
payment is taxed at the marginal rate of tax.

12.13 Members Contribution to Benefit Fund

Contributions to benefit fund by members are not allowed as a deduction.

12.13.1 Medical aid societies

The amount of any contributions paid to a medical aid society by an employer in respect of his
employees or their dependents is allowable as deduction in terms of Section 15 (2)(j). Third
Schedule paragraph 8(2) allows the exemption from tax on the amount of any contributions
paid to a medical aid society by an employer on behalf of his employees. The amount is
exempt in the employee’s hands.

Contributions by an employee to medical aid society qualify for a credit in his hands at 50% of
the expenditure.

An amount accruing by way of a benefit in respect of the injury, sickness or death, paid to the
person or his dependents by a medical aid society is exempt in full, according to Third
Schedule paragraph 7(d).

12.13.2 Unapproved funds

Contributions to “unapproved fund” are not allowed as deduction. Therefore, a refund of the
employees’ contributions is not taxed to the extent of the contribution. The employee is taxed
on amounts that exceed his contributions.

Activity 12.2
R. Chitate is an employee at the University of Zimbabwe. During the tax year ending 31
December 2016, she had the following contributions made to various funds:
Approved pension fund $6 000
Benefit fund $ 800
Unapproved benefit fund $3 000
Medical aid (by employer) $ 650
Total $10 450
Mrs. Chitate has come to you for advise regarding her contributions and the tax treatment
on the above contributions. Advise her appropriately in terms of the Act.

12.14 Recovery by Employer – Section 8(i)(j)

If an employer recoups (recovers) any of the amounts contributed to funds for any reason such
as:
 winding up of the fund
 liquidation on the part of the employer
 withdrawal from the fund by employees
the amounts recovered constitute “gross income” and, therefore, taxable in his hands.
12.15 Summary

This unit covered tax treatment of contributions to various funds such as the pension and
benefit funds. Contributions by employers for the benefit of their employees is limited to $5
400 per person per year and is allowed in the hands of the employers. Contributions by
employees are also restricted to $5 400 per year for tax purposes, any excess contribution is
taxed. Contributions to an unapproved fund are not allowed as deduction and therefore taxed.
A refund from such contributions is not taxed to the extent of the contribution. The following
tables summarizes this unit:
 Employee’s Ordinary Contributions to a Pension Fund – Maximum Deduction Allowable
S. 15(2) (h) and 6TH Schedule

A B C D E

Member joined Member of fund Member of R. A Member of un-

Member joined on or after 1/7/60 with changed rules. Fund (s) only approved fund
before 1/7/60 Members joined
before 1/7/60

Deductible in full
if rules unchanged
7½% of annual emolument
and USD$5 400 whichever
is the greater
Maximum is amount
that would have been
Maximum deduction allowed had rules Deduction
Lower of 7½% of remained unchanged prohibited
annual emolument OR current ordinary
and USD$5 400 Contributions up to Lower of

Maximum deduction
USD$5 400

(PARA.13) (PARA. 15) (PARA. 14) (PARA.16) (S. 16(1)(g))

Taxable Portion of Member’s Lump Sum Payments – S. 8(1) (C) And The 1st Schedule

EX PENSION FUND EX BENEFIT FUND

A B C D A B C D

Member joined Member of fund Member joined Member of fund

Member joined on or after with changed rules Member of before 1/7/60 with changed
before 1/7/60 1/7/60 Member joined before unapproved rules. Members Members
of 1/7/60 fund Member joined on joined before unapproved
or after 1/7/60 1/7/60 fund
Taxable in
full
Nil taxable if Reduce L.S.P by Nil taxable if Reduce L.S.P by
fund not fund amount he would have fund not a fund amount he would
with changed got had rules remained Reduce by with changed have got had rules
rules unchanged. amount of rules remained unchanged
own contributions Reduce L.S.P or $1800 whichever
by $1800 is the greater.
Reduce
by
Amount of
own
Contributions
(PARA. 6) (PARA.8) (PARA.7) (PARA.10) (PARA.2) (PARA.4)
(PARA.3) (PARA.10)
NOTES:

1. These paragraphs of the 1st Schedule provide further reductions for the cost of an “annuity on
retirement” as defined, and for amounts transferred to other approved funds. Note however that
the latter reduction is not permitted if the amount transferred is deductible under S.15(2) (h) or S.
15(2) (i), and that paragraphs 7 and 8 (from pension funds) allow only for transfers to approved
pension funds whilst paragraphs 3 and 4 (from benefitfund) allow for transfers to both approved
pension and beneft funds.

2. See C above. If the terminal benefit is reduced in terms of paragraph (c) of the definition of
“Lump sum payment”. “The amount he would have got had the rules remained unchanged” is
reduced in the same proportion. But the statutory $1 800 in respect of a benefit fund cannot be
reduced.

3. See C above. If the terminal benefit is reduced in terms of paragraph (d) of the definition of
“Lump sum payment”, the “amount of own contributions” is the amount contributed by the
member whilst serving in Zimbabwe.

4. The taxable portion of a L.S.P. is chargeable at a special rate of tax.

5. An amount not allowed as pension contribution deductions further reduces the taxable amount of
the lump sum payment (LSP).

6. If the LSP is $1800 or less, the whole amount is not taxable.