Clarifying the tax treatment of voluntary retrenchment benefits

EMPLOYEES taking voluntary retrenchment are entitled to the same preferential tax treatment of their retrenchment packages as employees who are forcefully retrenched receive on their severance packages.

Law firm Webber Wentzel partners Joon Chong and Dhvarsha Ramjettan and associates Nivaani Moodley and Belinda Price say that the South African Institute of Tax Professionals (SAIT) has received clarification from the South African Revenue Service (Sars) on the taxation of voluntary retrenchment packages after SAIT’s submissions to Sars in this regard.

The submissions were made in response to Sars’s recently published Completion Guide for IRP3(a) and IRP3(s) forms, which helps employers in submitting tax directives for employees, the Webber Wentzel lawyers say.

They say the Sars guide appeared to suggest that only involuntary severance payments qualified for the preferential tax treatment of severance benefits, and not voluntary severance packages.

“If an employee agrees to a voluntary severance package and the employer elects ‘severance benefits – voluntary retrenchment’ in the IRP3(a) form, the application is processed by Sars according to the normal tax tables, and not the favourable tax table for severance benefits,” Chong, Ramjettan, Moodley and Price say.

“We agree with the proposal that the Sars Completion Guide 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 [Income Tax] Act.

“As a result of the submission, Sars has accepted that voluntary severance packages on retrenchments should in the interim be disclosed under the ‘severance benefits – involuntary retrenchment’ option in the IRP3(a) form in order for the severance benefit table to apply to such lump sums. This is the position while the Sars Completion Guide and forms are updated to reflect the change in Sars practice and policy,” Chong, Ramjettan, Moodley and Price say.

In terms of current tax tables, the first R500 000 of a severance benefit (excluding leave and notice payments) received in the lifetime of the individual is exempt from normal tax, with the remainder taxed at increasing marginal rates with 36% being the maximum rate.

“The clarification that voluntary severance packages qualify as severance benefits is to be welcomed, as it has significant financial implications to employees who take voluntary retrenchment,” they say.