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Was the tax calculation on my pension withdrawal correct?

You need to determine whether you've made any previous withdrawals that would have impacted how you've been taxed.

I was recently retrenched and wanted to purchase a property. I need your advice: my pension holdings were R2 752 000, I also had a retirement annuity amounting to R281 000 of which I took R94 000, the third. I requested R900 000 of my pension fund to purchase the property. I received R1 281 000. Please advise what the tax implications should have been. The remaining difference of my pension fund is invested in a parking preservation fund. 

After reflecting on the taxable part of my pension, I feel that I have been taxed more than what is stipulated. Please see below if it is correct and what the tax implications are. 

If we take the R286 000 retrenchment package minus the R500 000 which is a tax-free portion. I was left with R124 000 still tax-free, minus R94 000 and my request for R900 000 cash withdrawal of which I received R901 000, tax of R381 997 is this correct? According to the tax law, any amount over [R1 050 001] gets taxed at 36%. Please advise how they got to this amount. I feel I paid R104 677 extra. 

Tax Table

Pension: R2 752 000

Severance retrench package: R286 000

Cash withdrawal request: R900 000

Retirement annuity: R94 000

Total cash: R1 281 000

 

R1 281 000 minus R500 000 tax free portion

Total R781 x 36 % = R277 320

Tax should have been R287 320 and not R381 997. That is a difference of R104 000 extra

Please advise if this is correct.

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In order to ensure that we have understood your situation correctly, we have assumed that you received total pay-outs next of tax in the amount of R1 281 000. We have further assumed that Sars withheld tax in the amount of R381 997. It, therefore, follows that the pre-tax benefits would have been the sum of the two amounts, in other words, R1 662 997.

Using the tax tables applicable to severance benefits and lump sum benefits on retirement, your tax would have been as follows:

  • The first R500 000 is tax-free
  • R500 001 – R700 000 is taxed at 18%
  • R700 000 to R1 050 000 is taxed at 27%
  • R1 050 001 and above is taxed at 36%

Taking these tax tables into account, the tax on the first R1 050 000 is R130 500. You should, therefore, be taxed R130 500 on the first R1 050 000, and 36% on the balance (being R1 662 997). The total tax payable should, therefore, equate to R130 500 plus R220 678, bringing your total tax liability to R351 178.

You have indicated that you were taxed in the amount of R381 997 which, as you have pointed out, is R104 677 more than the calculation above. The only explanation for having been taxed more is that you may have previously cashed in part of a retirement fund at some point prior to receiving a severance package and retirement lump sum.

When calculating the tax on severance and retirement benefits, it is important to note that these tax tables apply on a cumulative basis. This means that any previous withdrawals, while not necessarily having been taxed at the time, may have had the effect of using up part of your tax-free portion. Our advice is to check through your records to determine whether you have made any previous withdrawals that would have impacted on how you have been taxed.

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