Thousands of people have lost their jobs as a result of the Covid-19 pandemic and the nationwide lockdown to slow the spread of the disease.
It’s not surprising that retrenchment packages, and how they work for tax purposes, is a common theme on our Helpdesk right now. We’ve picked out a few questions (which together with our expert answers) will hopefully clear up any confusion you may have on the subject.
1. Which supporting documents do I need to send SARS if I was retrenched during the tax year?
If SARS requests your supporting documents, you will need to submit the IRP5 reflecting the lumpsum as well as the tax directive. You can ask your employer for a copy of the tax directive.
2. I was retrenched in April 2020 and based on the current economic climate it is unlikely that will find work again any time soon. If I don’t work for the rest of the tax year will I still need to file a tax return for 2021?
Yes, you should definitely file a tax return as it is likely that you may even be due some tax back. This is because your tax is calculated based on the assumption that you worked a full tax year. If you only worked for two months of the tax year, then you would have overpaid tax and would be eligible to claim a tax refund when you file your 2021 return.,
3. My employer has sent me a contract to sign, which states that I am being ‘voluntarily’ retrenched. I am 60 years old and have not withdrawn any lumpsums before. Would I qualify for the R500 000 tax free exemption?
Yes, the R500 000 tax free portion would be applied to your severance package. If it is less than R500 000, you should not pay any tax on the lumpsum. For more on voluntary retrenchments, please read our blog here.
4. How soon after being retrenched should one apply for Unemployment Insurance Fund (UIF)?
The sooner you begin the process to claim your unemployment benefit the better, as it can be a complicated process to gather all the documents the Department of Labour might want from you.
5. How will my retrenchment package be taxed?
The first R500,000 of the severance pay will be tax-free; thereafter it will be taxed according to the special tax tables for retirement lumpsums. However, for it to be regarded as severance pay it must be paid for termination of service due to:
You will also qualify for the tax incentive if you have attained the age of 55 years at the time you are retrenched.
6. How do I declare the retrenchment lump sum payment on my tax return?
Your employer must submit a tax directive application to SARS before the lump sum amount is paid to you. 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 an IRP5 certificate reflecting the gross amount of the benefit and the employees’ tax that was deducted. This IRP5 will be included in your tax return that you must submit to SARS.
7. I was recently retrenched and my leave pay and bonus were taxed. I thought that my entire package was supposed to be tax-free. Can this be correct?
Unfortunately, your leave pay and bonus do not form part of the severance package and are taxed according to normal income tax rates (just like your salary).
8. My employer has called us in and briefed us on the current financial position, disclosed the value of our severance packages to us and have closed the office doors already, but we have still not received our severance packages - they say that there is a backlog at SARS? How can I check this?
You can call the SARS office and check if any tax directive applications have been submitted on your ID / tax number yet. Tax directives are an electronic process and it usually takes SARS 24 to 48 hours to issue it, so if there is any hold up the call centre should know about it.
9. I want to reinvest my severance package. if I decide to invest it in a 5-year fixed deposit account, when I withdraw it, will I be taxed on this amount again?
You won’t be taxed on the lump sum again, however you will be liable to pay tax on the interest that you earn on this investment if your total local interest exceeds the annual tax free threshold (which is R23800 if you are younger than 65 years and R34500 if you are older than 65 years of age).
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