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Latest SARS Guide: Tax treatment of retrenchment benefits

In the past, taxpayers who received a severance payment benefitted from the favourable tax treatment applied to it. It didn’t matter if the retrenchment was ‘voluntary’ or ‘involuntary’ (i.e. forced). If it was their first such lump sum, R500,000 was exempt from tax and the balance was taxed according to special tax tables.

For the first time last year, SARS issued a guide on Tax Directives, which distinguished, between ‘voluntary’ and ‘involuntary’ retrenchments as follows:

‘Voluntary’: a lump sum paid as a result of restructuring or other termination of employment,

‘Involuntary’: a lump sum payment due to the fact that the employer is planning to stop trading, or due to a general reduction of staff.

Based on this guide, it appears that SARS is of the view that voluntary retrenchment payments should be taxed per the table applicable to retirement lump sum withdrawal benefits whereby the first R25,000 is exempt. This means that such lump sums should not qualify for the more favourable tax treatment applicable to ‘severance benefits’ (whereby the first R500,000 is exempt).

Industry Professional bodies have reacted to this guide.

SAIT (South African Institute of Tax Professionals)

They don't agree that a voluntary retrenchment package isn't a ‘severance benefit’. They also go on to state that the Income Tax Act doesn’t distinguish between voluntary and forced retrenchment and that the termination of office (for whatever reason) falls within the definition of a severance benefit and should therefore be taxed accordingly.

They propose that the SARS guide should be amended so that it doesn't differentiate between ‘voluntary’ and ‘involuntary’ retrenchments.

SAICA (South African Institute of Chartered Accountants)

They also hold the view that SARS is incorrect to distinguish between these two types of retrenchment payments and that this distinction isn't in line with tax legislation. They are of the opinion that should an amount meet the legislative requirement to be considered a severance benefit, then the tax treatment should be the same regardless of whether it is ‘voluntary’ or ‘involuntary’.

SARS feedback

SARS is reconsidering their position and have conceded that regardless of whether the lump sum is ‘voluntary’ or ‘involuntary’ the tax benefit should be the same. Since it will take time for their guide to be updated, SARS has advised that ‘voluntary’ retrenchment severance benefits should in the meantime be disclosed as ‘involuntary’ retrenchment severance benefits to ensure the same favourable tax treatment is applied.

If you’re negotiating a severance payment with your employer, or have received one already, let TaxTim assist you to prepare your tax return so that it’s reflected correctly, and you receive the tax benefit to which you are entitled.

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