Retrenched? Check if the payout was not overtaxed
If you have been retrenched over the past 12 to 18 months, there is a good chance you may have paid too much tax on your severance pay, according to tax law experts.
This is because the SA Revenue Service previously did not allow severance benefits paid for voluntary retrenchments to be treated favourably in the same way as severance benefits paid after involuntary retrenchments.
Voluntary retrenchment occurs when a company calls on employees to take a retrenchment package and you agree to do so, while involuntary retrenchment occurs when the company decides who to let go.
Under the Income Tax Act, severance benefits are treated like lump sums paid to you on retirement - you get the first R500000 tax-free and the balance is taxed at rates of 18%, 27% and 36% depending on the amount.
To qualify for the benefit, your employer must be letting you go because it has stopped carrying out an area of its business, or because it is generally reducing staff or a certain class of staff.
The law makes no distinction between voluntary and involuntary retrenchment.
But in July last year, SARS issued a guide for employers on how to complete the tax directive forms declaring the severance benefits so that SARS can apply the tax.
In this guide it asked employers to indicate if the benefits were from voluntary or involuntary retrenchment.
If employers indicated voluntary retrenchment, the severance benefits were taxed as normal income according to the normal tax tables - at rates of 18% to 45%.
Members of the SA Institute of Tax Practitioners (SAITP) then made submissions to SARS. According to Patricia Williams, tax dispute expert at Bowmans and the SAITP chair, SARS accepted these submissions, and indicated that "voluntary retrenchments" should be classified as "involuntary" on applications for tax directives, and that it would issue a new guide for employers on how to complete these forms.
Williams says retrenched employees who were overtaxed can get their overpaid taxes back - providing they know what to look for and how to go about it.
The payout you received should be reflected with source code 3901, and the employees' tax deducted should be reflected with source code 4115.
If these are the codes on your IRP5, you were probably correctly taxed.
However, if the payout you received was reflected with source code 3907, and the employees' tax was reflected with source code 4102, then you were probably overtaxed, Williams says.
If you have not yet submitted the income tax return on which these severance benefits are declared, you can fix this when you submit the return and a tax practitioner can help you to do this.
Alternatively, you can submit the return with incorrect source codes on it and then lodge an objection to the assessment, Williams says.
If you have already submitted your tax return, SARS would normally have issued an assessment already.
Williams says to claim back the tax you will now need to object to that assessment, preferably including a formal request for a reduced assessment. Use a tax practitioner to help you do this or follow one of the SARS guides that explain how to object against an assessment.
The grounds for your objection would be that the relevant amount is a "severance benefit", source code 3901, and not an "other lump sum", source code 3907; and that the employees' tax paid should be reflected with source code 4115, being tax on a severance benefit lump sum and not "normal" employees' tax (source code 4102).
Williams suggests including a supporting letter to your objection explaining that the amount you received is a severance benefit for tax purposes, give the reason (for example, that your employer reduced staff in general), and explain that you are accordingly entitled to the tax exemption and special tax tables applicable to severance benefits.
Williams says you are normally only allowed to object within 30 business days of the tax assessment.
Your objection to the tax on your severance benefit may well be late and you should explain that you only realised the mistake in your tax assessment now. You can cite the exceptional circumstances as being an incorrect classification of the severance benefit by your employer on your IRP5 and that this information was automatically captured on your tax return.