It is important for all employees who are subject to a retrenchment and receive severance benefits to understand that the first R500,000-00 is not subject to tax in certain circumstances. If your employer has stopped or is intending to stop trading, or if the employer is embarking on a general reduction in personnel, then the employee will qualify for a tax incentive in respect of severance benefits. The leave pay and pro-rata bonuses do not form part of the severance benefit, and are therefore subject to normal tax rates.

The employer must submit a tax directive application to SARS before the lump sum is paid out to the employee. Furthermore, the employer must complete an IRP3(a) form. SARS will work out the correct amount on the employee’s tax, and thereafter the employer will issue you with an IRP5 tax certificate reflecting the gross amount of the benefit and the employee’s tax that has been deducted.

It is vital for the employer to apply prior to the payment, so that the employee can have the benefit. It has been brought to my attention that it is incredibly difficult, if not impossible, to try and claim the tax benefit if the tax directive was not obtained beforehand.

MICHAEL BAGRAIM
BAGRAIMS ATTORNEYS
15 JULY 2015