I have a new client who is facing retrenchment. I am not sure of all the tax implications. The Company is offering him two options: 1 3 x months notice pay and 1 ½ weeks for the completed years worked as well as leave pay.
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
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.
I am aware that SARS Completion Guide for IRP3(a) and IRP3(s) Forms introduces a new classification between a “Severance benefit – Voluntary retrenchment” and a “Severance benefit – Involuntary retrenchment” which must be used by an employer when indicating the reason(s) for submitting a Tax Directive Application.
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,
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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.
This issue is of course only relevant where the employee has not reached the age of 55 yet or did not become incapable of holding the employment.
All that the recipient will have to prove, in other cases, is that the termination (or loss) of employment was due to the employer having ceased to carry on (or intending to) the trade or that he or she has become redundant in consequence of a reduction in personnel. The fact that the recipient accepts the termination voluntarily is irrelevant as this provision doesn’t make that distinction.
In the SARS guide, the following is stated:
Under Severance benefit – Involuntary retrenchment:
This reason cannot be used for dismissals or restructuring.
Under Severance benefit – Voluntary retrenchment
The reason ‘Severance Benefit – Voluntary Retrenched’ must only be used where a lump sum is paid as a result of restructuring or other termination of employment;
This tax directive reason can be used if a retrenchment lump sum is payable but not in terms of the requirements of section 1(1) “severance benefit” paragraph (c) of the Act.
The first point is that, with regard to the directive obtained, see paragraph 9(3)(a) of the Fourth Schedule to the Income Tax Act, 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.”
This, the fact that it is final, means that the taxpayer can’t object to the amount ascertained. Of course, a section 9, of the Tax Administration Act, request can be made, but it may be a waste of time if the IRP5 was already issued and the employer reconciliation submitted. The employee can, on assessment get the amount assessed correctly, if the amount was an amount as envisaged in paragraph (c) of the definition of ‘severance benefit’ in section 1(1) of the Income Tax Act. But that would require the employer to amend the IRP5 and that would be correct to get that changed by the employer now. This would apply even if the assessment is disputed by way of an objection.