Section 10C of the Income Tax Act

Section 10C of the Income Tax Act, 58 of 1962 (ITA) came into effect on 1 March 2014.

Previously, at retirement, any disallowed contributions that did not rank for deduction in terms of section 11 of the ITA could be set off against any taxable lump sum taken at retirement. However, members that elected to use their entire benefit to purchase a compulsory annuity and receive a monthly income, did not benefit from this exemption. Section 10C was promulgated to rectify this and to encourage members not to take a lump sum, or to take a smaller lump sum, at retirement.

Section 10C states the following:

1. For the purposes of this section –

‘compulsory annuity’ means the amount of the remainder of the retirement interest of a person payable in the form of an annuity as contemplated in –

a. annuity from pension fund; or
b. annuity from pension preservation fund; or
c. annuity from retirement annuity fund

2. There shall be exempt from normal tax in respect of the aggregate of compulsory annuities payable to a person an amount equal to so much of the person’s own contributions to any pension fund, provident fund and retirement annuity fund that did not rank for a deduction against the person’s income in terms of section 11(k) or (n) as has not previously been –

a. allowed to the person as a deduction in the 2nd schedule; or
b. exempted from normal tax in this section

– in respect of any year of assessment.

Accordingly, any disallowed contributions that did not previously rank for deduction in terms of section 11(k) or 11(n) of the ITA may be set off against any income earned from compulsory annuities.

Note that the definition of ‘compulsory annuity’ currently does not include a compulsory annuity payable by a provident fund or a provident preservation fund. However, this has been rectified to include a compulsory annuity payable by a provident fund or a provident preservation fund with effect from 1 March 2015.

The exemption applies to that portion of the total of compulsory annuities payable to a person. Non-deductible contributions are aggregated and will be applied against the retirement interest, regardless of which fund it was withdrawn from, on a ‘first come, first served basis’. The exemption further only applies to that portion of so much of the person’s own contributions to any pension fund, provident fund and retirement annuity fund that did not rank for deduction in terms of section 11 of the ITA. No exemption is available to subsequent holders of that compulsory annuity.

Section 10C Income Tax Act example

The below example illustrates how section 10C operates:

Mark retires from his pension fund on 31 March 2014. He elects to take a 1/3rd lump sum amounting to R2,500,000. He also contributes to a retirement annuity fund. Mark has had contributions amounting to R4,000,000 that were previously disallowed. The remaining 2/3rds have been used to purchase a compulsory annuity which will be generating an annuity (income) of R900,000.

Lump sum taxation:

  • 1/3rd received as lump sum
R2,500,000
  • Less previously disallowed contributions limited to lump sum amount
(R2,500,000)
  • Taxable amount
R0
Therefore not necessary to apply retirement tax table
Unused deductions (R4,000,000 – R2,500,000) R1,500,000
2014/2015 year of assessment
  • Annuity received
R900,000
  • Section 10C exemption limited to annuity
(R900,000)
  • Taxable income
R0
Unused deductions remaining (R1,500,000 – R900,000) R600,000
During the 2015/2016 year of assessment, Mark decides to retire from his retirement annuity fund and takes a lump sum of R500,000.
Lump sum taxation:
  • Lump sum
R500,000
  • Less previously disallowed contributions limited to lump sum amount
(R500,000)
  • Taxable amount
R0
  • Therefore not necessary to apply retirement tax table
Unused deductions remaining (R600,000 – R500,000) R100,000
2015/2016 year of assessment:
  • Annuity received (taking into account increase in inflation)
R1,000,000
  • Section 10C exemption
(R100,000)
  • Taxable income
R900,000
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