We have a client that has retrenched a person that was a director of the company and held more than 5% of the share capital. they have asked us to apply for a tax directive on this amount, which will be paid over a period of R 24 month (gross about R 96 0
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
For the purposes of the Income Tax Act (see section 1(1)), “severance benefit” means “any amount (other than a lump sum benefit or an amount contemplated in paragraph (d)(ii) or (iii) of the definition of 'gross income') received by or accrued to a person by way of a lump sum from or by arrangement with the person's employer or an associated institution in relation to that employer in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person's office or employment or of the person's appointment (or right or claim to be appointed) to any office or employment, if
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such person has attained the age of 55 years;
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such relinquishment, termination, loss, repudiation, cancellation or variation is due to the person becoming permanently incapable of holding the person's office or employment due to sickness, accident, injury or incapacity through infirmity of mind or body; 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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the person having become redundant in consequence of a general reduction in personnel or a reduction in personnel of a particular class by the person's employer,
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 …”
If we accept that the other requirements apply, the words relevant to your request are the ones in the last sentence (above) after “unless”. If the person therefore held more than 5% of the issued shares in the company, and at any time before the accrual of the lump sum, the lump sum would not be a ‘severance benefit’. It would indeed then be a lumpsum on termination or loss of employment, as envisaged in paragraph (d)(i) of the definition of gross income in section 1(1) of the Act. As such the amount of and would not be taxed in accordance with the tax table that applies to severance benefits.
The obligation, of the employer, to withhold employees’ tax, arises when the employer pays or becomes liable to pay the amount of the lump sum. The repayment, over a period of time, of an amount which the employer was liable to pay when the employment contract was terminated, would not allow for the employees’ tax to be split over the period of 24 months.