Taxation of withdrawals from retirement funds

[JDJoburg]

The National Treasury is proposing a new method of taxing withdrawals (pre-retirement age) from retirement funds, to be implemented as from 1 March 2009.

The current system allows for:

1. R1800 tax-free

2. The balance taxed at the highest of your average tax rate in the year of the withdrawal, or the average rate in the preceding year. Most people's average rate is somewhere between 20% and 30% (don't confuse this with your "marginal" rate.)

The new proposals will closely resemble the recently-introduced method of taxing lump-sum benefits at retirement, and are as follows:

1. No tax-free amount

2. 18% on the first R600 000

3. 27% on the next R300 000

4. the balance taxed at 36%

Depending on your average rate and the total amount that you will be withdrawing, you may or may not be better off waiting for the new proposals to be implemented. Do the calculation, or ask your financial planner or accountant to run the sums for you - the new proposal could make a huge difference in your case.

Remember, this is still at proposal stage; however, past experience tells me that you can pretty much bargain on this being implemented.

[Karen-in-Brisbane]

The National Treasury is proposing a new method of taxing withdrawals (pre-retirement age) from retirement funds, to be implemented as from 1 March 2009.

The current system allows for:

1. R1800 tax-free

2. The balance taxed at the highest of your average tax rate in the year of the withdrawal, or the average rate in the preceding year. Most people's average rate is somewhere between 20% and 30% (don't confuse this with your "marginal" rate.)

The new proposals will closely resemble the recently-introduced method of taxing lump-sum benefits at retirement, and are as follows:

1. No tax-free amount

2. 18% on the first R600 000

3. 27% on the next R300 000

4. the balance taxed at 36%

Depending on your average rate and the total amount that you will be withdrawing, you may or may not be better off waiting for the new proposals to be implemented. Do the calculation, or ask your financial planner or accountant to run the sums for you - the new proposal could make a huge difference in your case.

Remember, this is still at proposal stage; however, past experience tells me that you can pretty much bargain on this being implemented.

How does one work out the average rate of tax???

Is there a simple method to help determine what option is best???

[JDJoburg]

How does one work out the average rate of tax???

Is there a simple method to help determine what option is best???

Average rate is simply total tax paid as a percentage of total pre-tax income. Look at your last tax return and do the sum, it's simple.

Ave tax rate = (total tax paid / total pre-tax income * 100)

[Karen-in-Brisbane]

Average rate is simply total tax paid as a percentage of total pre-tax income. Look at your last tax return and do the sum, it's simple.

Ave tax rate = (total tax paid / total pre-tax income * 100)

Thanks - I will do the maths and see what works out best...

[xy16644]

JD,

You said:

2. The balance taxed at the highest of your average tax rate in the year of the withdrawal, or the average rate in the preceding year. Most people's average rate is somewhere between 20% and 30% (don't confuse this with your "marginal" rate.)

What happens if ones average tax rate is ZERO for the past two or three years?

[JDJoburg]

What happens if ones average tax rate is ZERO for the past two or three years?

I believe you'll be taxed at 18%.

[xy16644]

JD,

I am in the middle of discussing this with my tax guy and he has told me that I will be taxed in the tax year I officially emigrate as though the whole amount is income. So if your RA is worth R500 000, it will be taxed at the income tax rate for that amount. There was no mention of 18%.

Having said that, lets wait and see unil he comes back to me with the "official" figures for tax and penalties.

[Tex]

Having said that, lets wait and see unil he comes back to me with the "official" figures for tax and penalties.

I am in a position where, having worked outside the country for the last 6 years, my SA income is 0 - and therefore have a 0 tax rate. I also have an RA + provident fund that I plan on withdrawing from SA, so will be watching this space with interest!

Tex

[JDJoburg]

JD,

I am in the middle of discussing this with my tax guy and he has told me that I will be taxed in the tax year I officially emigrate as though the whole amount is income. So if your RA is worth R500 000, it will be taxed at the income tax rate for that amount. There was no mention of 18%.

Having said that, lets wait and see unil he comes back to me with the "official" figures for tax and penalties.

No, you're definitely not taxed on the withdrawal " as though the whole amount is income ". Retirement fund withdrawals are taxed separately at your average tax rate, as I explained, and the withdrawal is not added to all your other income for the year, for tax purposes. The 18% that I mentioned would be the rate used if you had no taxable income in the year of withdrawal or in the preceding year - SARS will not use an average rate lower than 18%.

Your tax guy might not be explaining himself properly. Or perhaps the taxation of retirement fund benefits is not his field of expertise.

[JDJoburg]

With the new budget, it has been confirmed that withdrawal benefits will, as from 1 March, be taxed as follows:

The first R22 500 tax free (cumulative for all withdrawals, not per withdrawal)

then, up to R300 000: 18% of each R1

R300 001 - R600 000: R54 000 + 27% of the amount above 300 000

R600 001 and above: 135 000 + 36% of the amount above 600 000

So, Treasury hasn't been quite as generous as they initially suggested, but this is still likely to be better for many people, depending on your fund balance. However, if your fund balance is very large and your taxable income not in the upper tax brackets, you may have been better off under the old rules - the old rules with "average rate" taxation has now been confined to history.

These new withdrawal taxation rules should of course apply to retirement annuity emigration withdrawals as well.

[Karen-in-Brisbane]

Thanks JD Joburg.

Pity they are not as generous as originally proposed.

Hubby resigned so last day is 28th Feb. Are we correct in presuming he will benefit from old rules according to ave rate of tax..... HOPE SO!!!!

Thanks K

[JDJoburg]

If he only becomes entitled to the withdrawal after his employment ceases, then it's possible that the withdrawal may be taxable in the 2010 tax year - but rather check with the fund to be sure...

Are we correct in presuming he will benefit from old rules according to ave rate of tax..... HOPE SO!!!!

[JDJoburg]

It now seems that there is a discrepancy between the information on SARS's website (and their published tax guide) and the draft amendment bill published on Treasury's website. The amendment bill is intended to give effect to Trevor Manuel's latest budget proposals.

SARS's published information says:

The first R22 500 tax free (cumulative for all withdrawals, not per withdrawal)

then, up to R300 000: 18% of each R1

R300 001 - R600 000: R54 000 + 27% of the amount above 300 000

R600 001 and above: 135 000 + 36% of the amount above 600 000

As you can see, SARS's website says that the first R300 000 of your withdrawal benefit is taxed at 18%;

However, the amendment bill says that the first R600 000 is taxed at 18% (this was Treasury's initial intention, see my first post). All the brackets are then moved up - for instance, R600 000 to R900 000 is taxed at 27% and only the amount in excess of R900 000 is taxed at 36%.

At this stage it seems that the amendment bill is more likely to contain the correct information (I sure hope so!) but we'll have to wait for clarification. Let's hope that the amendment bill will end up being enacted. As you can see from the above, it can make a big difference to your withdrawal benefit.

[Karen-in-Brisbane]

Thanks JD. That looks a bit better!!!

[Tex]

Hi JD, thanks for all the useful info. And (by the way) CONGRATS on getting your visa!

Tex

[JDJoburg]

Hi JD, thanks for all the useful info. And (by the way) CONGRATS on getting your visa!

Tex

Thanks Tex - and the same to you! Where are you headed?

[billabong]

Ok can someone please help me, because I'm VERY bad with these things. I thought they took off the tax before they pay you out? Do you get your full amount and then you must "pay it back" in your next tax return?

AND, from when is this - 1 March?

Thanks...baby steps.....

[JDJoburg]

Ok can someone please help me, because I'm VERY bad with these things. I thought they took off the tax before they pay you out? Do you get your full amount and then you must "pay it back" in your next tax return?

AND, from when is this - 1 March?

Thanks...baby steps.....

From 1 March. The fund wil get a tax directive from SARS and will thus deduct the tax before paying the proceeds out to you.

[billabong]

Thanks!

[Tex]

Thanks Tex - and the same to you! Where are you headed?

Thanks JD,

Not sure where we are headed for (don't have a job yet) but seems that most of the jobs are in NSW. We're flying into Sydney in early May to validate the visas and take a look around at homes / schools etc. Plan is to move over later in the year.

Tex

[IamInACT]

The National Treasury is proposing a new method of taxing withdrawals (pre-retirement age) from retirement funds, to be implemented as from 1 March 2009.

The current system allows for:

1. R1800 tax-free

2. The balance taxed at the highest of your average tax rate in the year of the withdrawal, or the average rate in the preceding year. Most people's average rate is somewhere between 20% and 30% (don't confuse this with your "marginal" rate.)

The new proposals will closely resemble the recently-introduced method of taxing lump-sum benefits at retirement, and are as follows:

1. No tax-free amount

2. 18% on the first R600 000

3. 27% on the next R300 000

4. the balance taxed at 36%

Depending on your average rate and the total amount that you will be withdrawing, you may or may not be better off waiting for the new proposals to be implemented. Do the calculation, or ask your financial planner or accountant to run the sums for you - the new proposal could make a huge difference in your case.

Remember, this is still at proposal stage; however, past experience tells me that you can pretty much bargain on this being implemented.

Hi Any news on this one?

Thanks T

[JDJoburg]

It has been confirmed that the withdrawal taxation will be as per the amendment bill, and not as per SARS' initially published tax guide (see my previous posts in this thread). The amendment bill still needs to be promulgated, but you can safely assume that withdrawals made during the 2010 tax year (the year ending 28 Feb 2010) will be taxed as follows:

The first R22 500 tax free (cumulative for all withdrawals, not per withdrawal)

then, up to R600 000: 18% of each R1

R600 001 - R900 000: R103 950 + 27% of the amount above R600 000

R900 001 and above: R184,950 + 36% of the amount above R900 000

The amendment act should be promulgated within the next month or two. Until this is done, SARS will continue to tax withdrawals using the existing "average rate" method. However, the amendment will apply retrospectively to all withdrawals made during the current tax year, which means that fund members might be due a refund from SARS at the end of the tax year, if the withdrawal was made prior to the amendment act being promulgated. Of course, it's also possible that some members may have to pay in additional tax, depending on the size of the withdrawal and their average rate of tax, but that's unlikely to be a problem for most people.

Hi Any news on this one?

Thanks T

[Jill]

Please excuse my ignorance, does this now mean if we no longer live in SA we can cash up our RA policies,, we have one with Sanlam that we had to leave. Can we get that cashed now?

Thanks. Jill

[worth the wait]

Please excuse my ignorance, does this now mean if we no longer live in SA we can cash up our RA policies,, we have one with Sanlam that we had to leave. Can we get that cashed now?

Thanks. Jill

You sure can if you have a PR visa, I just phoned Sanlam last week and they are sending me the forms that need to be completed.

[JDJoburg]

Having a PR visa is not sufficient - you must have "formally emigrated" via Reserve Bank clearance in order to qualify for a withdrawal.

You sure can if you have a PR visa, I just phoned Sanlam last week and they are sending me the forms that need to be completed.