I have a client who is shutting down the business effective the end of July. This process will result in their staff being retrenched. Payroll pay out will be as follows: 1. Notice pay of 4 weeks 2. Top up Wages to July to have a full salary 3. Severance
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Leave pay and notice pay accrue in respect of services rendered and fall with paragraph (c) of the definition of “gross income”, in section 1(1) of the Income Tax Act. They don’t constitute a severance benefit to be included in the tax directive application form. Leave pay is “variable remuneration”, as defined in section 7B, and is deemed to accrue to the employee on the date during the year of assessment on which the amount is paid to the employee by the employer – see section 7B(2) of the Act. In respect of the other amounts, the obligation to withhold employees’ tax arises when the employer “pays or becomes liable to pay any amount by way of remuneration to any employee” – see paragraph 2(1) of the Fourth Schedule.
The term “severance benefit” is defined in section 1(1) of the Income Tax Act,1962 and means any amount that is received by or accrued to a person in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s … employment or of the person’s appointment to any office or employment, if-
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such person has attained the age of 55 years;
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…; or
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such termination or loss is due to-
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the person's employer having ceased to carry on or intending to cease carrying on the trade in respect of which the person was employed or appointed; or
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…,
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unless, where the person's employer is a company, the person at any time held more than five per cent of the issued shares or members' interest in the company.
Under paragraph 9(3)(a) of the Fourth Schedule “the amount to be deducted or withheld in respect of employees’ tax from any lump sum to which paragraph (d) … of the definition of ‘gross income’ in section 1 …, shall be ascertained by the employer from the Commissioner before paying out such lump sum…” The point is that it is essentially the duty of the employer to obtain the directive. Its purpose is not to waive any tax (as you indicated).
Under paragraph 9(c), of Schedule I to the Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2019 (currently still a Bill), “if a severance benefit accrues to a person in any year of assessment commencing on or after 1 March 2018, the rate of tax … to be levied on that person in respect of” that amount is set out in the table at the end of paragraph 9(c).
You need to determine the country of residence of the director before you can correctly advise the individual. From the information provided it doesn’t appear to be “directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.” It is more likely than not “salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment” in the RSA. The RSA would then get a right to tax the amounts if the recipient is present in the RSA.