To qualify for this special “severance” tax rate, the employer must pay you a lump sum as a result of your employment having been, amongst other things, terminated or lost, for example if:
- the employer stops (or intends to stop) trading; or
- the employer embarks on a general reduction in personnel (not applicable to restructuring of employees).
You will also qualify for this tax incentive if you have attained the age of 55 years at the time you are retrenched or if your retrenchment or loss of employment is as a result of you having become permanently incapable of holding an office or employment due to, for example, sickness, accident or injury.
It is important to understand that this severance benefit is, for tax purposes, treated as a retirement lump sum payment. This has the following consequences:
- The employer must submit a tax directive application to SARS before the lump sum amount can be paid
- The amount taxed in terms of the retirement lump sum tax table is reduced by previous lump sum benefits received
- The lump sum benefit received reduces the lump sum tax benefit available to you at a subsequent withdrawal or at retirement from a retirement fund
Although your severance benefit is taxed as a retirement fund lump sum, you cannot preserve your severance benefit in your employer’s retirement fund or in a preservation fund. However, you can invest your (after-tax) pay-out in a retirement annuity fund.
Retrenchment benefitsThe retrenchment benefit refers to the withdrawal from your employer’s retirement fund at retrenchment (as per the above criteria). Such a retrenchment benefit is also taxed per the retirement lump sum tax table, again subject to the cumulative value of any previous retirement fund withdrawals made.
Important caveat: You can transfer this benefit to a preservation fund, but if you do, it loses its “identity” as a retrenchment benefit. Although you will be entitled to make one full or partial withdrawal from the preservation fund before retirement (earliest age 55), this will be taxed as a normal withdrawal from the preservation fund, per the withdrawal lump sum tax table: the first R25 000 is not taxed, the balance to R660 000 is taxed at 18%, the balance to R990 000 at 27% and the remainder at 36%.
This is an important consideration! If you choose to preserve your retrenchment benefit with the intention of accessing this money before retirement, you lose out on the-tax free benefit you could have enjoyed, either at the time of retrenchment or at retirement.
