[FAQ] Retrospective application for a severance tax directive

[FAQ] Retrospective application for a severance tax directive

• 29 July 2021
• Payroll
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

A taxpayer paid a sum to an employee who left their employment in July 2020. This was regarded as a bonus payment. The employee left due to illness, but it was recorded as a normal resignation. The ex-employee only became aware of this when he was looking to file his 2021 income tax return and has requested that a severance tax directive be applied for as he left due to illness.

Please advise on the following:

1. The 2021 EMP501 return was filed in May 2021. Is it possible to request a severance tax directive retrospectively?
2. The employee left due to illness. Can a severance benefit tax directive be requested in this situation?

Answer

The Income Tax Act

Yes, a tax directive must be requested in terms of paragraph 9(3) of the Fourth Schedule for severance packages.

Due to the fact that the income accrued in a previous tax year (2021), the employer needs to correct the IRP5 issued with the correct values as soon as SARS issue the tax directive.

If the PAYE deductible on the severance package (according to the tax directive) is more than the PAYE which was deducted when it was calculated as a bonus:

• The transaction year of the certificate with the severance package (tax directive) details must be 2022; the assessment year must be 2021; and the additional PAYE must be paid over in the current month during which the tax directive is issued.
• The incorrect income amount must be removed from the previous IRP5 with the 2021 transaction year.

The above scenario will not be likely as the severance benefit calculation will be less PAYE than the bonus PAYE calculation.

If the PAYE deductible on the severance package (according to the tax directive) is LESS than the PAYE which was deducted when it was calculated as a bonus:

• The IRP5 for 2021 must be revised to show the correct income amounts, the tax directive number and the severance package.
• The PAYE on the IRP5 will have to be split; tax directive PAYE will have to be reported to code 4115 and the balance on 4102 (PAYE).
• The over-deducted PAYE on the IRP5 may not be reduced as the individual will get the refund of this additional PAYE on assessment.

Webinar Commentary

Refer to the following webinar: Current Tax Issues for Individual Taxpayers 2021 here.

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