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Thread: TAX on retrenchment payments

  1. #1

    Default TAX on retrenchment payments

    Hi guys, anyone know how a retrenchment package payout should be taxed?

  2. #2
    Grandmaster web's Avatar
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    Your company must inform SARS you are getting retrenched and you get a tax directive so that tax is minimal on the package but not if you cash in any provident funds etc. It just effects the tax on your package. If your company is not doing it phone SARS they will help you make sure your company complies as well as help you with the forms.
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  3. #3

    Default

    From the SARS practice notes:

    12.2 GRATUITIES ON TERMINATION, IMPENDING TERMINATION OF SERVICES OR RETRENCHMENT

    EFFECTIVE DATE
    2012.10.01

    Meaning
    A gratuity is an amount, voluntary or otherwise, paid to an employee by an employer in respect of the termination of service.
    The most common examples are —
     Normal termination of service as a result of resignation or discharge;
     Retirement or death; and
     Termination of service as a result of retrenchment.

    Exemption
    The R30 000 exemptions that previously applied to gratuity lump sums has been repealed with effect from 1 March 2011. The same tax rates applicable to retirement fund lump sum benefits are also applicable to tax the severance benefit.
     the person to whom it is paid has attained the age of 55; or
     the termination or impending termination of such person’s services is due to superannuation, ill-health or other infirmity; or
     the termination of the person’s services is as a result of the employer having ceased trading or where he/she has affected a general reduction in personnel or a reduction in personnel of a particular class.

    The retirement fund lump sum benefits rates of tax does not apply where the employer is a company and the employee concerned was at any time a director of the company or at any time held more than 5% of the company’s issued share capital.

    Note: Where, on dismissal or retrenchment, an employee is entitled to an amount which refers to the period that the employer is obliged to give the employee notice of such termination of service (e.g. the employer pays the employee an amount equal to the salary the employee would have earned if such employee had worked for the full notice period), the amount (notice pay) must not be entered on the IRP3 (a) application form as part of the gratuity amount.
    Simple English - It is taxed as per the retirement lump sum tables. First R315000 is tax free, next R315000 taxed at 18%, next R315000 taxed at 27% and the remainder taxed at 36%.

    Bear in mind that the R315000 tax free portion is once off so if it is used for your retrenchment package you will not get it for retirement monies later. All amounts are cumulative.

  4. #4
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    So do you have a choice to forgo the tax benefit on retrenchment package so that you can still use it at retirement?

  5. #5

    Default

    Quote Originally Posted by Hendrix View Post
    So do you have a choice to forgo the tax benefit on retrenchment package so that you can still use it at retirement?
    I wouldn't think so, but that is just my feeling and not based on fact. I suppose it is a bit like requesting to pay 30% income tax when the tax table shows you are only liable for 20%.

    Not sure why you would do that either though. I cannot think of a specific benefit to not taking it now but at retirement. Perhaps you can share your view on this?

    Remember too that tax legislation changes so maybe take it now as it might be changed before you reach retirement

  6. #6
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    I do know that if you resign or are retrenched, you can use that tax advantage if you pay out your pension, but then lose the tax free portion once you retire (I don't recommend this to anyone)

    I doubt this applies to a retrenchment package, it should just be added to your earnings for the applicable tax year, and taxed as usual.

    Any comments guys?

  7. #7

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    I quoted the relevant SARS practice notes above.

  8. #8
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    The way i understand it is like this:
    With regards to Retrenchment Packages, you get the same tax rates applicable to Retrirement Lump sum withdrawals.
    But this does not mean its once off, you should get this benefit every time you are retrenched.

  9. #9
    Super Grandmaster supersunbird's Avatar
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    Question, are you taxed payments recieved from a retrenchment protection cover plan?
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  10. #10

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    Quote Originally Posted by Hendrix View Post
    The way i understand it is like this:
    With regards to Retrenchment Packages, you get the same tax rates applicable to Retrirement Lump sum withdrawals.
    But this does not mean its once off, you should get this benefit every time you are retrenched.
    That is not the way I understand it. I see it as a once off over your life time. Google lead me to another site that confirmed this:

    The R30 000 exemption that previously applied to retrenchment gratuity lump sums has been repealed with effect from 1 March 2011. “Severance benefit” payments will now be taxable in terms of the retirement fund lump sum benefits tax rates with effect from 1 March 2011.

    In terms of the new regulations the first 300 000 in an employee’s lifetime will be seen as tax Exempt. This amount includes all retrenchments payouts over the employees lifetime as well as payments made when retiring. Thereafter a sliding scale of taxation is introduced.
    http://www.paymaster.co.za/News/84/r...the-retrenched

  11. #11
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    That makes more sense, thanx!
    Its a pity one affects the other, as they are different events in ones life...

  12. #12
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    Keep in mind SARS needs to be informed whether it's voluntary or involuntary retrenchment. To gain the greatest tax free amount the best option to stipulate is involuntary. Your company needs to inform your employee benefits administrator of this.
    shubz

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