With retrenchments reaching a 10-year high in 2014, it is likely that you, or someone close to you has been retrenched. This is undoubtedly one of life’s most stressful situations and access to short term cash becomes vital to tide you over until you find new employment. In these circumstances, it is valuable to know how your retrenchment or severance package will be taxed. Usually on retrenchment you will be given a severance benefit that will include a lump sum payment based on the months of service you provided to the employer. In this article we will look at the factors that influence the taxation of this severance benefit.

Retrenchment Tax – Special Tax Rates

Since 2011, there have been special tax rates in place that apply to severance benefits. Initially the first R315 000 of the severance benefit was not taxed but as of March 2014, this has been increased to the first R500 000.

Caveats Affecting Retrenchment Tax

It is worth noting that there are a number of caveats that may affect your eligibility for the special tax rates relating to severance benefits.

To qualify for the special tax rates, the severance lump sum that you received from your employer must be due to your employment being terminated because either your employer has stopped trading, is intending to stop trading, or is downsizing.

Your eligibility for the special tax rates could be affected if:

  • You have received lump sum payments from your employer in the past
  • You held more than 5% of issued shares in your employer’s company or member’s interest at any time in the past

Any bonuses or leave pay, as well as your outstanding salary that is received at the time of the lump sum payment is not part of the severance benefit and will be taxed at the normal tax rates for individuals.

Retrenchment Advice

Your employer will be responsible for submitting a tax directive application to SARS so that they can work out the amount of tax to be deducted from your lump sum payment before your employer processes payment. Your accountant should be able to advise you on the correct tax rate that you should of been charged and can also offer you valuable advice on your finances during this stressful time.

If you do not have an accountant, consider contacting Brett from Dirmeik Consulting on 021 421 4444.