My question relates to voluntary retrenchment and the tax implications thereof. I am aware of the circumstances where SARS allows the reduced tax rates per lump sum tables and the R500 000 exemption on involuntary retrenchment. However I had a question fr
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
I have not seen, or read, the article that you refer to, but there is no incentive for voluntary retrenchments. It is however correct that a ‘severance benefit’ is taxed according to a different tax table. See paragraph 9(c) of the Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2018 (Act No. 21 of 2018).
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.
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. This would require an objection to the assessment. But we understand that SARS would require the employer to amend the IRP5. We suggest that it would be better to get the IRP5 changed by the employer before the return is filed – if the amount was in fact a severance benefit.