As administrator of a number of pensioner payrolls, RFS is deemed by Inland Revenue to be the employer of the pensioner. For income tax purposes pensioners are treated in the same manner as employees. The employer (RFS) is required to determine the monthly income tax to be deducted, from the PAYE 10 tables issued by Inland Revenue from time to time. These tables are based on the official tax scales that require progressively higher tax percentages to be applied as the taxable income increases from one level to the next. These tables assume that the only income of the pensioner is the pension/ annuity paid by RFS to the pensioner. Very often however, pensioners earn other income that will be added to the total pensions paid by RFS, when the pensioner needs to submit his/her tax return for a tax year. RFS as pension payroll administrator is obliged by the Income Tax Act, to only take into account the pension it pays and no other income.
In the Benchtest 2017-09 newsletter we pointed out that the social old age pension of N$ 1,200 per month is taxable. Since RFS does not take this into account, a pensioner paying tax at the minimum tax rate of 18% will be required to pay up an additional amount of N$ 2,800 on or before 28 February of any year, if he/she wants to avoid paying interest and penalties. At the maximum tax rate of 37% this surprise amounts to an additional tax of N$ 5,800.
Other income that may be the reason for such a ‘tax surprise’ at the end of a tax year is any business income, rental income or any interest earned that is not subject to withholding tax. Fortunately interest earned that is subject to withholding tax can be ignored as the 10% withholding tax is a final tax.
Other income in the form of ‘remuneration’ as defined in the Income Tax Act, e.g. trustee fees or directors’ fees, is subject to PAYE. However the person paying this ‘remuneration’ is also obliged to only deduct PAYE as if this was the pensioner’s only income. When this income is added to the pension the pensioner’s total income might be in a higher tax bracket and thus means that both RFS and the other person have deducted too little tax resulting in a ‘tax surprise’ for the pensioner at tax year end.
Any pensioner who earns other taxable income may request RFS in writing to deduct PAYE at a higher rate in order to avoid a ‘tax surprise’ at the end of the tax year.
Should the converse apply to a pensioner, i.e. a pensioner incurs losses in respect of another business run by him/her, RFS will require a tax directive from Inland Revenue instructing it to deduct at a lower rate than the PAYE 10 table prescribes or to deduct no tax at all.
Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions 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 Retirement Fund Solutions.