With the economic ups and downs we`ve experienced over the past few years
- and the consequent downsizing, mergers and acquisition - retrenchment
has, unfortunately, become a fairly common event.
Because of the manner in which retrenchments tend to take place, the shock
of suddenly finding yourself out of work can be harsh.
It is a shock, though, that can be eased a little by the promise of a
lump-sum payment, which will be made to you - usually calculated based on
your years of service - to keep you going over that period of your looking
for another position.
However, the comfort that you might feel when you hear the lump-sum
figure, might be somewhat diminished when you hear that the precious sum
will be taxed!
But the taxman realises the strain that retrenchment imposes on the
taxpayer, and has also done his bit to ease the tax shock a little. If you
have been earning at a level at which you have been paying tax on the top
part of your income for the year (that is, over R120 000 taxable income
for the year), at a rate of 45 percent, you are not going to suddenly find
yourself with only 55 percent of the figure discussed with you when your
retrenchment was made known to you.
Hopefully, you`ll walk away with somewhat more than that.
Why?
Because the tax legislation contains special provisions which relate to
retrenchment.
The first of these relates to an amount of up to R30 000, which may be
received tax-free, but only under certain circumstances. These are:
* That you have not used up the tax fee amount of R30 000 before. This is
a cumulative amount for your lifetime, so if you have been retrenched
before, you may already have used a portion, or all of the exemption. In
addition, if you use it up now, it will not again be available for you to
use when you retire;
* That you are being retrenched in the true sense of the word. That is,
that it is occurring because your employer has ceased to carry on, or
intends to cease to carry on the trade in respect of which you were
employed, or because you have become redundant as a consequence of your
employer effecting a general reduction in personnel or personnel of a
particular class; and
* That you were not at any time a director of your employer company or
close corporation (CC) nor did you hold more than five percent of the
issued share capital or member`s interest in the company of CC.
If, after taking the R30 000 exempt amount into account, there is a
balance to be paid to you, you may qualify for a further dispensation
relating to that balance.
This involves the balance being taxed in terms of a formula.
The effect of the formula is to calculate your average rate of tax in the
year preceding your retrenchment, and the average rate in the year in
which you are retrenched.
You will be taxed on the higher of the two average rates.
The reason why this is beneficial is that, if the marginal tax rate
(highest) at which your income is being taxed in the current year is, for
example, 45 percent, the balance of your retrenchment package will not be
taxed at that rate, but at a lower rate, being the average rate of tax
calculated on your total income, excluding the retrenchment payment.
Of interest is that you do not cease to qualify for this dispensation
regarding the average rate, if you have been a director with more than a
five percent shareholding in your employer company or CC.
So while it may not be all that much, at least the South African Revenue
Service is showing some sympathy for your situation, if ever you are
retrenched.