FAQ: How do I calculate the tax-free portion of a lump sum received or accrued on or after 1 October 2007 on retirement?

With effect 1 October 2007, Formula A was repealed.
The definition of formula B has been amended and the symbols in Formula B (Z=C+E-D) represent the following:
Z= is the deduction to be determined;
C= represents an amount of R300 000;
E= is the sum of the members own contributions to the fund that were not allowed as a deduction and any other amounts in respect of which Formula C applies (when employed by a Public Sector Fund and you exclude the years of service prior to 1 March 1998);
D= is the sum of deductions already allowed to the member under paragraph 5(1) of the Second Schedule in previous years of assessment.

Example: Mr Taxpayer retires from his pension fund on 1 November 2007 and receives a retirement fund lump sum benefit of R1 200 000(one third). He was a member of the fund for a period of 21 years. His highest annual salary during five consecutive years was R300 000(maximum R60 000 used). Two years ago he retired from a retirement annuity fund and received a tax-free lump sum of R65 000.
Solution: Z=C+E-D
Z= R300 000 + R0 – R65 000
Z=R235 000

Therefore, the tax-free portion is R235 000 and the taxable amount will be R965 000(R1 200 000 – R235 000).

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