You are facing a setback in your career and may be retrenched; to give you support, we answer the questions you have on how retrenchment could affect your tax affairs.
How do I benefit?
When you are retrenched, your employer may pay you a lump sum for the termination of your services, and this lump sum may qualify as a severance benefit. From 1 March 2011, special tax rates applicable to severance benefits were implemented, where the first R315,000 of the severance benefit was not subject to tax. From 1 March 2014, the first R500,000 is not subject to tax. The R315,000 and R500,000, whichever is applicable, could however be reduced as a result of various retirement fund lump sum benefits or severance benefits having been received in the past.
Top Tip: Leave pay and pro-rata bonuses that are paid at the time of the termination of employment do not form part of a severance benefit and are subject to tax at normal rates applicable to individuals.
Who is it for?
To qualify for the special tax rates applicable to severance benefits due to retrenchment, your employer must have paid you a lump sum as a result of your employment having been, amongst other things, terminated or lost.
In addition to the above, you will also only qualify for the tax incentive if:
- you have attained the age of 55 years at the time you are retrenched; or
- your retrenchment or loss of employment is as a result of you having become permanently incapable of holding an office or employment due to, for example, sickness, accident or injury; or
- your employment has been terminated or lost due to your employer having stopped (or intending to stop) trading, or as a result of your employer embarking on a general reduction in personnel.
You will not qualify for the tax incentives in respect of severance benefits if you at any time held more than 5% of the issued shares or member’s interest in the company paying you the severance benefit.
How do I declare the lump sum payment?
Your employer will submit a tax directive application to SARS before the lump sum amount is paid to you. Your employer will apply for a tax directive by filling in an IRP3(a) form, and sending it to SARS. Upon receipt of this form, SARS will work out the correct amount of employees’ tax that your employer must withhold on the severance benefit, and you will receive that benefit net of tax from your employer.
Your employer will issue you with an IRP5 tax certificate reflecting the gross amount of the benefit and the employees’ tax that was deducted. You will need to declare this in your annual income tax return.