DEPARTMENT OF FINANCE: INLAND REVENUE
OFFICE OF THE COMMISSIONER FOR INLAND REVENUE
PRACTICE NOTE: NO 40
DATE: 19 JUNE 1995

INCOME TAX: LUMP SUM BENEFITS DERIVED FROM A PENSION OR PROVIDENT FUND ON RETIREMENT

1. The purpose of this practice note is to provide clarity with regard to employees who, as a result of the proposed change in the method of calculating the average rate of tax at which lump sum benefits as defined in the Second Schedule to the Income Ta x Act (the Act) payable by pension and provident funds are taxable with effect from 1 September 1995, retire from employment on or before 31 August 1995, but who will then provide their knowledge and skills to their former employers in a different capacity.

2. The definitions in the Act of "pension fund" and "provident fund" require, in the case of a pension fund, that the fund be established for the purpose of providing annuities for employees on retirement and, in the case of a provident fund, that it be established for the purpose of providing benefits for employees on retirement.

3. The word "retire" is defined in the Second Schedule to the Act and means, in relation to a member of a pension fund, to retire from employment and become entitled to the payment of an annuity from the fund; and in relation to a member of a provident fund, to retire from employment and become entitled to the payment of full benefits in terms of the rules of the fund.

4. Where an employee who retires from employment and becomes in terms of the rules of the relevant fund entitled to an annuity or other retirement benefit, but who continues to provide his or her knowledge or skills to the former employer in a different capacity, he or she will be accepted as having retired for purposes of the Second Schedule to the Act provided he or she no longer qualifies for membership of the employer's pension and or provident fund.

5. Such a person's retirement from employment must, moreover, coincide with the payment of all other retirement benefits as provided for in a contract of employment or according to the general employment policy of the employer, including deferred compensation benefits and accumulated leave gratuities.

6. It should be noted that in accordance with current practice a person who is a member of a pension as well as a provident fund is required to retire simultaneously from both funds and receive retirement benefits from each fund.