We’re currently processing a lot of retrenchment directives. We have a client disputing the amount to be included for the directive application. It is our understanding that only the severance pay is taxed at special rates and that the leave pay and notic
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
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 is received in respect of services rendered, as you said, and fall within paragraph (c) or (d) of “gross income” and doesn’t constitute a severance benefit to be included in the tax directive application form. Leave pay is also variable remuneration as defined in section 7B.
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.