Tax implications of voluntary and involuntary retrenchment will now be the same
The South African Institute of Tax Professionals (SAIT) recently made submissions to the South African Revenue Service (SARS) regarding the tax treatment of amounts received in consequence of voluntary retrenchments. Voluntary and involuntary retrenchments are usually a result of a general reduction of staff, reduction of staff in a particular class or the employer ceasing or planning to cease trading.
Prior to the SAIT's submissions, the SARS Completion Guide appeared to adopt the view that only involuntary severance payments qualified for the preferential tax treatment of “severance benefits” and not voluntary severance packages.
If an employee had agreed to a voluntary severance package and the employer elected “severance benefits — voluntary retrenchment” on the IRP3(a) form, the application was thus previously processed by SARS according to the normal tax tables, and not the favourable tax table for severance benefits.
But SARS agreed with the submission that a voluntary severance package usually meets all the requirements for a "severance benefit" in terms of the Income Tax Act 58 of 1962 (the Act) and should accordingly be granted the same tax treatment as involuntary severance packages. The Sars Completion Guide is now to be updated to remove the distinction between "voluntary" and "involuntary" retrenchments as this distinction does not exist in the definition of "severance benefit" in the Act.
In terms of the current tax tables, the first R500 000 of a severance benefit (excluding leave and notice payments) received in the lifetime of an individual will, therefore, be exempt from normal tax, with the remainder taxed at increasing marginal rates with 36% being the maximum rate.
