Navigating the complexities of taxation on severance packages can be a daunting task for both employers and employees. The purpose of this resource is to shed light on the intricacies of the tax implications related to severance payments, especially in the context of "voluntary severance."
Eligibility Criteria for Special Tax Rates on Severance Benefits
To access the specialized tax rates for severance payouts, a company must issue a lump sum payment to an employee due to employment termination or loss.
Additional qualifying factors include:
The employee being at least 55 years old at the time of retrenchment.
The employee becoming permanently incapacitated, for reasons such as illness, accident, or injury, rendering them unable to hold their position.
The termination or loss of employment occurring because the company is ceasing, or plans to cease, its operations, or is engaging in a general workforce reduction.
Note that if an employee has ever held more than 5% of the issued shares or membership interest in the company, they are not eligible for these specialized tax rates on their severance package.
What About Voluntary Severance?
If the company has decided to initiate retrenchments for operational reasons (such as cost-cutting, restructuring, or automation), employees may choose a Voluntary Severance Package (VSP). If the employee accepted a VSP following the company's operational downsizing decision, the severance could qualify for special tax benefits similar to those in mandatory retrenchments.
What are the Severance Pay Special Tax Rates?
See the latest tax rates on SARS website for "Retirement fund lump sum benefits or severance benefits".
Conclusion
Determining the tax liability on severance payments hinges on several variables, including the reason for termination and the way the severance package is structured. Employers need to apply for a tax directive from SARS to ensure the correct PAYE is withheld.