A pension fund client enquired with NAMRA if it is required to obtain tax directives on death benefits it distributed to dependants and nominees of deceased fund members. In response, a senior NAMRA official stated the following: “The Fund is obligated to request for a tax directive in terms of Schedule 2, paragraph 9. (3) of the Income Tax Act, No. 24 of 1981, as amended, read with the definitions in paragraph 1 of Schedule 2. The Fund is required by law to request a tax directive when a Lump Sum Death Benefit is payable.”
We disagree with the opinion expressed by the NAMRA official, as Schedule 2 only directs that a fund (and its administrator) must obtain a tax directive on amounts falling within the definition of gross income. Any amount not defined as gross income falls outside the reach of the Income Tax Act (ITA), and the ITA has no bearing on it.
Paragraph (d) of the definition of gross income considers all lump sum benefits from pension funds as gross income. However, it explicitly excludes certain lump sum benefits, which are thus not gross income (one-third at retirement, any disability benefits, and death benefits).
Lump sum death benefits from a pension fund are specifically excluded from gross income under paragraph (d). Section 9(3) of Schedule 2 of the ITA does not apply to such benefits. Therefore, the fund (and its administrator) does not have to apply for a tax directive. The official PAYE 10 table also explicitly excludes pension fund lumpsum payments on death and retirement.
As the fund and the administrator are directed to obtain tax directives, the fund can leave the execution to its administrator or instruct the administrator to obtain tax directives if preferred.
Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of RFS.