Question 7

Basil Bartie is employed by HerbieN (a company that operates nurseries around Cape Town) and he is unmarried. He is approaching retirement and has consulted a friend who is an accountant, as to his options with regard to funding his retirement. He would like to know what the tax implications of the following would be: Basil must retire at the end of December 2020 when he reaches the mandatory retirement age of his pension fund of 65. Basil has been employed by HerbieN for 20 years and is a member of its pension fund and is expecting a lump sum pay-out of R750 000 in December 2020. The balance of the pension fund benefit will be utilised to provide an annuity payment to Basil of R16 500 per month (payable at the end of each month starting on 31 January 2021). All contributions to the pension fund had previously qualified for a deduction in terms of either section 11(k) or section 11F of the Income Tax Act. Basil has only one other asset and possible income source, namely a house that he inherited from his mother. His accountant friend has recommended that Basil subdivide his home into two semi-detached flats as a means of generating income to supplement his pension. Basil has obtained permission from his local municipality for the subdivision of his house and has established that the subdivision can be completed at a cost of R275 000. He needs to raise the necessary finance to undertake the required alterations to subdivide his home into two flats as suggested by his friend. Basil plans to live in the smaller flat and rent out the larger flat for R10 500 a month. Basil is expecting a lump sum payment of R125 000 in respect of accumulated leave pay from his employer when he retires in December 2020. The company has a policy that enables employees to accumulate up to 50 days leave to be paid out as a lump sum benefit when they retire or otherwise terminate their employment. The directors of HerbieN have agreed to pay the lump sum in October 2020 to assist Basil with completing his alterations prior to retirement. Basil has also found out that HerbieN has a company policy permitting the provision of interestfree loans to employees (which are waived upon retirement). HerbieN approved a loan of R150 000 in terms of this policy and agreed to pay the amount to Basil on 31 October 2020, with no repayment requirements.

REQUIRED:

Assuming that Basil approaches you in May 2020, discuss the normal tax implications of the above information for his 2021 year of assessment. Support your discussion with all relevant calculations. You are not required to discuss any court cases or principles. Ignore any capital gains tax implications. References to legislation are not required