It is an unfortunate reality that marriages may after many years end up in divorce. When this happens the parties either have to agree on how assets are to be split between themselves, or a court would order a certain division of assets to apply. One such asset which is often involved is the accumulated pension fund of one of the parties. Not only is it then a matter of how much is to be paid out to the non-member spouse, but also what the tax implications of such a payment is, as well as who is responsible for bearing the tax cost involved.
A withdrawal from a pension fund, even if in terms of a divorce order, is considered a “retirement fund lump sum withdrawal benefit” for purposes of paragraph 2(1)(b)(iA) of the Second Schedule to the Income Tax Act, 58 of 1962. The amount received by the non-member spouse is included in his or her gross income and it is therefore the recipient spouse that will be taxed on the withdrawal (and not the member spouse). Such tax will however not be calculated in terms of the “normal” sliding scale tax rates as applied to individuals. Lump sums received from retirement funds are taxed in terms of separately promulgated tax tables, depending on whether the lump sum received is a “retirement fund lump sum benefit” (typically where a member has died or retired) or a “retirement fund lump sum withdrawal benefit” (typically where the fund benefits are accessed prior to retirement). The latter is taxed in terms of the by far more onerous of the two tax tables. It is therefore significant that paragraph 2 of the Second Schedule referred to above classifies amounts paid out as part of divorce settlements as “withdrawal benefits” specifically, and the implication of which is that such amounts are subject to an increased rate of tax than it would have been had the member e.g. only accessed the funds upon retirement.
Lump sum amounts paid out as part of divorce settlements (and other pre-retirement or death withdrawals) are taxed in accordance with the below table:
|Taxable income (R)||Rate of tax (R)|
|0 – 25 000||0%|
|25 001 – 660 000||18% of taxable income above 25 000|
|660 001 – 990 000||114 300 + 27% of taxable income above 660 000|
|990 001 and above||203 400 + 36% of taxable income above 990 000|
It should be noted that the table operates cumulatively and takes all previous lump sum amounts received by a person also into account. If for example a non-member spouse receives R400,000 as a divorce settlement from his/her former spouse’s pension fund, and the recipient spouse has also previously received R500,000 as a withdrawal benefit from his/her own fund, R160,000 of the pension fund proceeds will be taxed at 18% and the remaining R240,000 at 27%.
The tax consequences of any divorce settlement is therefore obviously significant and should be kept in mind when engaging in settlement negotiations, also considering that the recipient non-member spouse will ultimately be liable for the tax of the receipt which also is often required to be factored in when negotiating the amount of benefits to which the non-member is entitled.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)