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Dear reader,
Thank you for your question.
For general information, I am quoting Law Insider’s definition of what being medically boarded means:
“Medically boarded is the inability of an insured to continue working for any form of an income due to poor medical health that will continue and be irreversible, regardless of any treatment or medication and will continue for the rest of the insured’s life.”
To qualify for the special tax rates applicable to severance benefits due to retrenchment, your employer must have paid you a lump sum as a result of your employment having been, among other things, terminated or lost.
In addition to the above, you will also only qualify for the tax incentive if:
- You have attained the age of 55 years at the time you are retrenched; or
- Your retrenchment or loss of employment is as a result of you having become permanently incapable of holding an office or employment due to, for example, sickness, accident or injury; or
- Your employment has been terminated or lost due to your employer having stopped (or intending to stop) trading, or as a result of your employer embarking on a general reduction in personnel.
- You will not qualify for the tax concession in respect of severance benefits if you at any time held more than 5% of the issued shares or member’s interest in the company paying you the severance benefit.
Being medically boarded requires various medical evaluations followed by a specialist report confirming that the insured will no longer be fit to perform their daily work.
The Income Tax Act 58 of 1962 Section 12M Note 121 states:
“In the absence of policies and procedures specifying the circumstances under which an employee may qualify for retirement on the grounds of ill health or infirmity, the specific medical condition affecting the employee must be considered objectively.
“The medical condition will be assessed in relation to the type of work the employee is required to perform, for example, if an employee, who is required to operate heavy machinery as a requirement of the employment, suffered a stroke and loses the use of his or her limbs, they may be able to retire due to ill-health or infirmity depending on the detailed policies and procedures.
“It should be noted that ill health is not only confined to a physical disability but can also be the result of a mental condition,” according to the note.
“The employee must have retired due to old age, ill health or infirmity. This requirement will not be met if, for example, the employee is granted extended sick leave but returns to work after that extended sick leave or if the employee for some reason resigns from the taxpayer’s employment.”
Taxable in certain instances
This lump sum payment is however taxable in certain instances. It depends on the type of fund the monthly contributions were made to – an approved or an unapproved fund.
An approved benefit is one that is provided by the fund and is paid out together with the member’s savings in the fund. An unapproved or self-standing benefit is provided through an insurance policy issued to the employer and does not form part of the fund benefits.
It ultimately all comes down to the contributions.
With unapproved group risk funds, contributions are not tax-deductible, and the benefit payout is tax-free, so in a way, you will still save on tax in the end.
With approved risk funds the contributions are tax-deductible, therefore the lump sum payments are fully taxable.
Assuming you have not received any other cash lump sums from previous withdrawals, the estimated tax (using the retirement tax table) will be in the region of R117 000, but this is not definite.
You may contact Sars or your HR department to assist with a simulation calculation that is done against your income tax number and historical data to be more accurate.
Wishing you all the best and hope I answered your question.
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