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As fund administrators one of the more complex issues we have to deal with is the determination of the tax that is to be deducted from a member's benefit, where the member has an outstanding housing loan. This could be an amount owed to the fund where the fund advanced the loan, or a loan guaranteed by the fund where a bank granted the loan. It is the administrators obligation to determine the taxable amount, and to obtain a 'tax directive' from Inland Revenue that indicates the amount of tax to be withheld, where the taxable amount exceeds N$ 40,000.

The matter becomes complex as the result of a practice note issued by Inland Revenue, PN 5/2003, that defines how the taxable amount of a lump sum death benefit from a pension fund is to be determined. It becomes even more tricky should Inland Revenue appoint the administrator as agent to collect arrears tax owed by the taxpayer who is due a benefit. A final complexity is that a lump sum death benefit from a pension fund is taxed in the hands of the beneficiaries rather than the deceased, unlike provident fund death benefits that are explicitly taxable in the hands of the deceased.

The essence of PN 5/2003 is that 34% of a lump sum death benefit from a pension fund is taxable if the pension fund does not pay any dependants' pensions. The capital value of any dependants' pension payable can be offset against the 34% of the lump sum and the net amount if positive will be taxable. If negative the full lump sum will be tax exempt.

The essence of a Notice to Appoint Agent is that it can only be issued in respect of any moneys held by the administrator for payment of a benefit to the taxpayer in respect of whom the notice is issued. How would Inland Revenue know of the administrator holding money of a delinquent taxpayer for payment of a benefit. As pointed out above, the Income Tax Act requires the administrator to obtain a tax directive on any taxable benefit in excess of N$ 40,000. Where a benefit is not taxable, no directive needs to be obtained and Inland Revenue would not be aware of an opportunity to seize on moneys held by the administrator for payment of a benefit to a delinquent taxpayer.

Coming to the matter of benefits and housing loans, a housing loan guarantee, is a liability of the fund in the first instance and the fund is obliged to meet this liability in accordance with its agreement with the holder of the guarantee. Section 37D allows the fund to deduct a loan or a loan guarantee from the benefit due by the member. This means that the administrator would be required to redeem any outstanding housing loan or housing loan guarantee from the gross benefit due in accordance with the agreement between the bank and the fund, usually immediately upon termination of membership.

Once the administrator has redeemed a housing loan guarantee or has deducted the outstanding loan by the fund to the member, from the benefit, Inland Revenue can collect arrears tax via the administrator, maximum arrears equal to the net benefit due to the taxpayer concerned, after PAYE, and after the outstanding loan has been deducted from the benefit.

Inland Revenue's claim for arrears has precedence over the fund's claim against the member's benefit for an outstanding housing loan. The administrator though, as deemed employer, holds for the taxpayer only the net amount due in terms of the rules, which is gross benefit after deducting the outstanding loan balance and PAYE and that is all the administrator can be obliged to pay to Inland Revenue.

Inland Revenue would now have to take on the fund for any shortfall as the result of the fund's claim against the taxpayer having been redeemed prior to Inland Revenue's preferent claim. Effectively, the fund would have to stand in for the smaller of Inland Revenue's claim and the amount it recovered from the taxpayer in respect of the outstanding housing loan. The administrator is not a party to such a process. This is between the fund and Inland Revenue. If PAYE on the gross benefit exceeds the net benefit due to the taxpayer after deducting the outstanding housing loan, the fund would have to stand in for the difference and would have to try recover this from the member.

Here are 3 scenarios of a death benefit from a pension fund where the deceased has an outstanding housing loan and how these are to be dealt with by the administrator for tax purposed:

Scenario 1:

  • Total net death capital - N$ 1,400,000
  • Housing loan balance - N$ 100,000
  • Total gross benefit/death capital - N$ 1,500,000 (100%)
  • Capital applied to purchase pensions - N$ 600,000
  • Capital paid as lump sum - N$ 900,000 (60%)
  • Taxable portion of death benefit (N$ 1,500,000) - N$ nil (less than 66% paid as a lump sum)
  • Housing loan (N$ 100,000) redeemed from benefit, no tax consequence
  • No directive required as there is no taxable benefit.
  • No arrears tax of deceased can be claimed by Inland Revenue as no money is due to the deceased, but arrears tax of beneficiary can be claimed.

Scenario 2:

  • Total net death capital - N$ 1,400,000
  • Housing loan balance - N$ 100,000
  • Total gross benefit/death capital - N$ 1,500,000 (100%)
  • Capital applied to purchase dependants pensions - N$ nil
  • Capital paid as lump sum - N$ 1,500,000 (100%)
  • Taxable portion of death benefit (N$ 1,500,000) - N$ 510,000 (more than 66% paid as a lump sum, maximum of 34% deemed to be a cash withdrawal benefit)
  • Housing loan (N$ 100,000) redeemed from benefit, no tax consequence
  • Net death lump sum (N$ 1,400,000) -N$ 510,000 taxable in the hands of beneficiaries, i.e. 36.4% of each beneficiary's benefit is taxable in the hands of each beneficiary.
  • Tax directive to be obtained for each beneficiary who is due a benefit in excess of N$ 40,000.
  • No arrears tax of deceased can be claimed by Inland Revenue as no money is due to the deceased, but arrears tax of beneficiary can be claimed.

Scenario 3:

  • Total net death capital - N$ 1,460,000
  • Housing loan balance - N$ 40,000
  • Total gross death capital - N$ 1,500,000 (100%)
  • Capital applied to purchase dependants pensions - N$ nil
  • Capital paid as lump sum - N$ 1,500,000 (100%)
  • Taxable portion of death benefit (N$ 1,500,000) - N$ 510,000 (more than 66% paid as a lump sum, minimum of 34% deemed to be a cash withdrawal benefit)
  • Housing loan (N$ 40,000) redeemed from benefit, no tax consequence.
  • and no directive required
  • Gross death lump sum (N$ 1,500,000) - N$ 510,000 taxable in hands of beneficiaries, i.e. 34.9% of each beneficiary's net benefit (in total N$ 1,460,000) is taxable in the hands of each beneficiary.
  • Tax directive to be obtained for each beneficiary who is due a benefit in excess of N$ 40,000.
  • No arrears tax of deceased can be claimed by Inland Revenue as no money is due to the deceased, but arrears tax of beneficiary can be claimed.

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.

 

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