My client is being retrenched. He has never been retrenched before. A directive was applied for under severance benefit - Involuntary Retrenchment. The full amount was taxed per the directive. Does the R500,000 lifetime exclusion apply to retrenchment
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
There is no R500 000 lifetime exclusion, or R25 000 exemption. In terms of the tables, see paragraph 9 of the and Monetary Amounts and Amendment of Revenue Laws Act, 2019 (same for 2020), the “rate of tax is … 0 per cent of taxable income”. The R500 000 applies where the amount in question is a retirement fund lump sum withdrawal benefit, and is indeed a lifetime amount. The lifetime principle arises from the fact that the tables applies to the cumulative value of lumpsum benefits. If no previous lump sums or severance benefits accrued, it should be available.
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.
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The SARS directives, in these instances are normally correct. It may be possible that the employer incorrectly identified the lumpsum on the application.
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.
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.