-Tax talk –

Taxation of pension fund payouts In this series of articles, Cameron Kotzé, the Tax Partner at Ernst and Young, discusses some topical tax issues for our readers.

The Income Tax Act contains provisions that determine how payouts from a pension fund will be taxed. The amount a member of a Namibian pension fund receives on retirement or death, commonly referred to as a lump sum, is exempt from income tax.Where a member of a pension fund withdraws from the pension fund for whatever reason (resignation from employment or being retrenched) the payout is taxable unless the member transfers the pension payout to another approved retirement fund (approved by the Namibian Receiver of Revenue).Similarly, where a pension fund is wound up and members receive an amount from the fund, the payout is taxable unless the amount is transferred to another approved retirement fund.The fact that a member of such a fund may have worked in Namibia and in another country complicates the taxation of the payouts to the member of the fund.Pensions or annuities from private institutions where services were rendered in Namibia for at least two of the last 10 years of the taxpayer’s relevant employment period is deemed to be from a Namibian source.The pension is taxable in the proportion Namibian service bears to the total pensionable services.In terms of this provision of the Income Tax Act, an apportionment of the pension or annuity for income tax purposes is only required if the taxpayer worked within and outside Namibia during the last 10 years of his or her work life.The double tax agreement signed between Namibia and South Africa also provides that, where a resident of Namibia receives a pension or annuity from a South African fund and the amount received or part thereof is taxed in Namibia, the South African Revenue Service may not tax the amount that is taxed in Namibia.Where a Namibian resident has worked in South Africa and Namibia and has contributed to a South African pension fund but services were rendered in Namibia during the last 10 years of his or her work life, the whole pension or annuity will be taxable in Namibia.Similarly, if the last 10 years of work was all rendered in South Africa, the whole pension or annuity will be taxable in South Africa.The only time an apportionment of the pension or annuity is required is where some services were rendered within and outside Namibia during the last 10 years of the taxpayer’s work life.If a member withdraws his or her entitlement from a pension fund, the tax rules set out above do apply because they only apply to pensions and annuities.Withdrawals will include transferring from a South African pension fund to a Namibian pension fund because South Africa will not recognise a Namibian pension as an approved fund for purposes of the South African Income Tax Act (approved by the South African Revenue Services as a pension).Transfers between South African-approved pension funds in South Africa are exempt from income tax.Namibian residents who have contributed to South African pension funds for historical and practical reasons therefore find themselves between a rock and a hard place as far as their pension contributions in South Africa are concerned.They have to leave the member’s entitlement in South Africa until such time as they retire to benefit from being taxed in Namibia.This seems rather unfair because historically these individuals had no choice but to contribute to a South African pension fund.It seems reasonable to me that all Namibian members of South African-based pension funds should be allowed to transfer their retirement entitlement to a Namibian-approved pension fund without incurring the penalty of South African income tax.After all being said, a tax deduction in Namibia was taken for the contribution to determine the taxable income of the member and South Africa would not be entitled to any income tax on the pension if all services were rendered by the taxpayer in Namibia.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.comThe amount a member of a Namibian pension fund receives on retirement or death, commonly referred to as a lump sum, is exempt from income tax.Where a member of a pension fund withdraws from the pension fund for whatever reason (resignation from employment or being retrenched) the payout is taxable unless the member transfers the pension payout to another approved retirement fund (approved by the Namibian Receiver of Revenue).Similarly, where a pension fund is wound up and members receive an amount from the fund, the payout is taxable unless the amount is transferred to another approved retirement fund.The fact that a member of such a fund may have worked in Namibia and in another country complicates the taxation of the payouts to the member of the fund.Pensions or annuities from private institutions where services were rendered in Namibia for at least two of the last 10 years of the taxpayer’s relevant employment period is deemed to be from a Namibian source.The pension is taxable in the proportion Namibian service bears to the total pensionable services. In terms of this provision of the Income Tax Act, an apportionment of the pension or annuity for income tax purposes is only required if the taxpayer worked within and outside Namibia during the last 10 years of his or her work life.The double tax agreement signed between Namibia and South Africa also provides that, where a resident of Namibia receives a pension or annuity from a South African fund and the amount received or part thereof is taxed in Namibia, the South African Revenue Service may not tax the amount that is taxed in Namibia.Where a Namibian resident has worked in South Africa and Namibia and has contributed to a South African pension fund but services were rendered in Namibia during the last 10 years of his or her work life, the whole pension or annuity will be taxable in Namibia.Similarly, if the last 10 years of work was all rendered in South Africa, the whole pension or annuity will be taxable in South Africa.The only time an apportionment of the pension or annuity is required is where some services were rendered within and outside Namibia during the last 10 years of the taxpayer’s work life.If a member withdraws his or her entitlement from a pension fund, the tax rules set out above do apply because they only apply to pensions and annuities.Withdrawals will include transferring from a South African pension fund to a Namibian pension fund because South Africa will not recognise a Namibian pension as an approved fund for purposes of the South African Income Tax Act (approved by the South African Revenue Services as a pension).Transfers between South African-approved pension funds in South Africa are exempt from income tax.Namibian residents who have contributed to South African pension funds for historical and practical reasons therefore find themselves between a rock and a hard place as far as their pension contributions in South Africa are concerned.They have to leave the member’s entitlement in South Africa until such time as they retire to benefit from being taxed in Namibia.This seems rather unfair because historically these individuals had no choice but to contribute to a South African pension fund.It seems reasonable to me that all Namibian members of South African-based pension funds should be allowed to transfer their retirement entitlement to a Namibian-approved pension fund without incurring the penalty of South African income tax. After all being said, a tax deduction in Namibia was taken for the contribution to determine the taxable income of the member and South Africa would not be entitled to any income tax on the pension if all services were rendered by the taxpayer in Namibia.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com