Question:
I have taken my provident fund of R918 000 last year after resigning. They taxed me R185 000 and I used most of the balance to cover debt. I only earned around R35 000 during the tax year 2007/2008. I had medical expenses of about R47 000.

I asked an accountant to calculate my return and he gave me a shocking figure of R129 000 that I have to pay in. He has taken the full payout (before tax) and added it as an income then took the total and deducted the tax paid.

How is this possible? I did not have any other income and the bit I had left from the fund was used to pay my rent and live on for the year. Does this figure sound correct to you?

Answer:
Well I can certainly imagine the shock at being faced with such a huge amount potentially owing to SARS! But let?s take a step back and look at how the tax is supposed to be calculated:

Let us first consider your income. You mention a figure of R35 000. It?s not quite clear to me whether this was a monthly income amount or your total for the tax-year. Very basically though, all sources of income are added together as constituting 'gross income' for calculation purposes. These sources do not include any lump sums, like your withdrawal lump sum. You are allowed to deduct certain allowable deductions from the total of your gross income. Certain fixed amounts may be deducted in respect of actual medical scheme contributions and in certain instances some of the additional medical expenditure may also be deducted. Once all deductions have been subtracted, you are left with an amount of taxable income. The marginal tax table published by SARS per tax year is then applied to the taxable amount. An actual Rand amount of income tax payable is arrived at from which each taxpayer under 65 may then deduct a rebate of R8280 (for the current tax year).

If your total income for the year was R35 000 (without even deducting your potential deduction for medical expenses/contributions), there will effectively be no tax payable on the income portion considering the rebate available.

If your monthly income was R35 000, your annual total would amount to R420 000 and obviously tax will be payable. Bear in mind though that your employer deducts tax on a monthly basis before paying your salary to you.

Secondly, there is your provident fund lump sum withdrawal benefit. This lump sum amount is taxed in a specific way as prescribed by the Income Tax Act. If you take the full amount as cash, a portion will be tax free. The amount is usually R1800, but could be more depending on contributions made that may not have been tax-deductible if made by the employee. Let us be conservative and assume you only qualified for R1800 tax free. The balance of the benefit is taxable at your average rate of tax. As a rule, your average rate is slightly lower than your marginal rate of tax. From your information you were taxed at just over 20 percent on your withdrawal benefit which doesn?t sound unusual.

What practically happens is that before paying your benefit to you your fund requests a tax directive from SARS who then instructs the fund on what amount of tax will be payable on the benefit. The fund then pays you what is left while paying the tax over to SARS. The tax on your lump sum has therefore already been paid on specific instruction from SARS.

To answer your question then: No, I actually cannot see that any amount of tax should be owed to SARS:

• On your income portion, there will either be no tax payable (total income of R35 000) or the tax will already have been paid to SARS by your employer (monthly income of R35 000).

• On your lump sum, you should not owe any money as the fund already paid the tax to SARS on their specific instruction.

Your income tax return should be pre-populated when you receive it from SARS with your income details as well as the lump sum details, via separate IRP5 certificates ? the one supplied to SARS by your employer and the other by the administrators of the provident fund. If you are registered on the SARS e-filing system you will notice a handy tax calculator on your login page. If it will provide you with absolute peace of mind you should visit your tax office where a tax consultant will be able to assist you in ensuring you submit your return correctly.

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