16.67% OF PENSION COMMUTATIONS TAXABLE

On 11 November 2022, the Ministry of Finance and Economic Development published, through Statutory Instrument Number 147 of 2022, the Income Tax Superannuation Funds Regulations of 2022 ( Income Tax Regs) which sought to align the Income Tax Act provisions on approved pension funds with recent amendments in the Retirement Funds Act ( RFA). The RFA amendments took effect on the 14th of October 2022 triggering cascading tax implications on pension payments. Today, we aim to clarify why 16.67% of pension commutations on retirement are now taxable.

THE AMENDMENTS

Primarily, the RFA was amended to increase the commutation threshold from 33.3% to 50% of the pension entitlement. For instance, a pensioner entitled to P5m on retirement can commute, per the new RFA, 50% ( i. e., P2.5m) with the balance of P2.5m being spread monthly over a number of years.

On the other hand, the Income Tax Regs amended, among other things, the commutable amount from 33.3% to 50% of the total pension entitlement.

ENTER TAX

As alluded to above, the Income Tax regulations only amended the commutable threshold to align it with the new threshold provided for in the RFA.

However, the exempt portion of pension commutations remains at 33.3% of the pension due on retirement.

Accordingly, the absence of an amendment of the exempt portion to align it with the RFA threshold technically means that 16.67% of the total pension remains taxable. For clarity, let’s assume Tiro is entitled to a pension of P5m and he opts to exercise the commutation option and receives a lumpsum of 50% of the pension i. e., P2.5m, with the balance payable in monthly instalments.

In this case, the Income Tax Act still provides that only 33.33% of the total pension may be paid tax free i. e., P1.67m.

Therefore, based on the current law, the said exemption makes the excess over P1.67m taxable. In other words, P2.5m less P1.67m, which is P833,333 ( 16.67% of P5m) is now subject to PAYE.

Contacts for consulting only: + 267 7181 5836 or + 267 393 9435 or jhore@ aupracontax. co. bw.