Applying for a tax directive for a mutual separation agreement do you add in the notice pay to the lump sum or do you tax it as per normal on the payroll? We have offered a mutual separation package to an employee of 3 months, plus notice pay and bonus a
Important:
This answer is based on tax law for the tax year ending 28 Ferbuary 2020.
Answer:
The employer that has to apply for a directive – see paragraph 9(3)(a) – with regard to 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 or section 7A applies, shall be ascertained by the employer from the Commissioner before paying out such lump sum, and the Commissioner's determination of the amount to be deducted or withheld shall be final.”
We don’t know if the lump sum (the ‘mutual separation pack’ that you refer to) is a severance benefit (as defined) or merely a paragraph (d) amount. Both of them requires a directive from SARS and we submit that they must be applied separately. If it does constitute a severance benefit, a different (or special) tax table will apply.
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 office of 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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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.
Leave pay and bonuses are received in respect of services rendered and fall with paragraph (c) or (d) of “gross income” and they don’t constitute a severance benefit to be included in the tax directive application form. Leave pay and bonuses are also variable remuneration as defined in section 7B.