We submitted a client’s 2018 income tax using the IRP5 issued by the company he worked for (he got retrenched). On the IRP5 it showed an amount of R135 332 under code 3901 (Severance benefits/retrenchment). After submission to SARS, SARS issued an assessm
Important:
This answer is based on tax law for the tax year ending 28 February 2019.
Answer:
The first point, with regard to the directive obtained, see paragraph 9(3)(a) of the Fourth Schedule to the Income Tax Act, is that 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 could have been made, but it may be a waste of time if the IRP5 was already issued and the employer reconciliation submitted. This appears to be the case here – the return of income for the relevant year of assessment was submitted and an assessment, and now an additional assessment, was also issued.
The individual will have to, in Order to 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, have to object to the additional assessment. That could result in SARS requiring the employer to amend the IRP5.
You must remember that, if the retrenchment in fact resulted in a severance benefit, it would not be ‘non-taxable’ as you say. It is possible that the rate of 0% may apply.
We don’t know why the employer doesn’t want to amend the IRP5. According to the definition it will be a ‘severance benefit’ if the “termination or loss is due to 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.”
They don’t seem to be prepared to treat the notice pay in the same way. SARS, on their website, states the following:
“Notice pay flows from the commutation of amounts due under the contract of employment and stems from a contractual obligation between the employer and employee to remunerate the employee for services rendered. Such amount constitutes an amount received under paragraph (f) of “gross income” …”
http://www.sars.gov.za/clientsegments/businesses/government/Pages/default.aspx
On the basis of this interpretation, which I can’t really criticise, the notice pay will not be a severance benefit and will be subject to employees’ tax in the normal way. In other words, I don’t believe the employer would be incorrect if they don’t show the notice pay on the application to SARS (for the directive) as a severance benefit.