Section 12M contributions in terms of the Income Tax Act No. 58 of 1962: Normal tax implications for the retired employee

Abstract

Section 12M of the Income Tax Act No. 58 of 1962 allows a normal tax deduction for employers who pay the post-retirement medical contributions by way of lump sum payments on behalf of retired employees. Although a full deduction is granted to the employer for a contribution in terms of section 12M, an area of uncertainty has been identified by the authors of this paper. This area of uncertainty involves the income tax implications for the retired employee upon receipt of such contribution or upon receipt of a benefit regarding such contribution from the former employer. Possible tax implications were considered in terms of paragraphs (a), (c), (d), (f) and (i) of the gross income definition, as well as in terms of paragraphs 2(i) read with 12A of the Seventh Schedule to the Act. A number of binding class rulings and one binding private ruling published by SARS were investigated, supported by a scrutiny of the relevant provisions of the Act. It is concluded that a contribution in terms of section12M(2)(b) will be regarded as a fringe benefit in terms of paragraph 2(i) read with paragraph 12A of the Seventh Schedule to the Act, whilst a section 12M(2)(a) contribution might be a paragraph (c) paragraph (d) or paragraph (f) inclusion in gross income. The latter two might qualify as severance benefits. Lastly, the employee will be entitled to a section 6A(2)(a) medical scheme fees tax credit should the amount be applied for medical contributions.

Keywords:

• South African Income Tax Act NO. 58 of 1962
• section 12M
• post-retirement medical contributions
• post-retirement medical benefits, fringe benefit
• special inclusion in gross income
• severance benefits
• section 6A(2)(a) medical scheme fees tax credit