UPDATE: TAX ON VOLUNTARY SEVERANCE PACKAGES
On 19 January 2018 we sent a newsflash to inform our clients of SARS’ change in approach towards tax on voluntary severance packages and the new category of “severance benefits – voluntary” on the application for an income tax directive.
In essence employees who volunteered to be retrenched did not get the ZAR 500 000 tax exemption provided for in the Income Tax Act. We did not believe this to be correct and requested the South African Institute of Tax Practitioners to raise the issue with SARS and assisted with drafting the tax and legal submissions to SARS.
SARS has responded to say that it agrees with the submissions that voluntary severance benefits ought to be treated as a ”severance benefit” as defined in section 1 of the Income Tax Act and that the ZAR 500 000 tax exemption ought to apply to voluntary severance packages. SARS says that it will take some time to update the guides and the application for an income tax directive form but in the interim employers ought to tick the “severance benefits – involuntary retrenchment” box on the application for an income tax directive.
Please note that these provisions do not apply to separation payments and are only applicable where the termination is as a result of a proper operational requirement.