Retrenchment: What are the tax implications on your severance package?
In many instances, employees are left dismayed when they receive less than they anticipated, mostly because they did not fully understand the taxation requirements attached to their final pay-outs.
While lockdowns were implemented across the world to curb the spread of Covid-19, these have also destroyed many businesses, and will undoubtedly continue to do so.
Retrenchments are inevitable, and bring with them not only the devastation of losing a job, but also a plethora legalities, paperwork and tax implications.
“A critical part of retrenchment discussions should focus on the tax consequences on the final payments,” said remuneration and employee benefit consulting services, Remuneration Consultants (RC), adding that failure to do so could result in severe financial implications for employees.
According to RC, while retrenchment is an extremely sensitive matter, a high level of discernment, accuracy and professionalism would go a long way in ensuring that the best tax outcome was achieved.
They advised all employees facing retrenchment to ask about the tax costs and for a very basic calculation to see what the impact of their tax liability would be.
Some key points to bear in mind, said the firm, included:
Previous severance payments Employees are strongly advised to remind their current employer of any previous severance payments or retirement lump sums that were paid to them. The employer’s tax calculation will be wrong if they are not made aware of the amounts received previously.
Tax directives The employer must apply for a tax directive from the South African Revenue Service (SARS) to set out the tax obligation in terms of the severance payment once they have reached an agreement with the employee. The employer will deduct the tax as indicated in the directive and pay it to SARS before the retrenchment package is paid to the employee. In many instances, employees are left dismayed because they received less than they anticipated, mostly because they did not fully understand the tax consequences.
Tax debt The debt which may have arisen as employees neglected to file returns when they were obliged to do so might also become a deduction in their final pay-out. Once the directive has been issued and the payment made to the retrenched employee, their only remedy is to lodge an objection when there is a dispute. Only the employer can request the cancellation of a directive when there are errors.
Talk first, pay later Employers are encouraged to have a discussion with retrenched employees once the tax directive has been issued and before the final payment is made. This enables the two parties to address and cancel any disputed directive and reapply with the correct information. Employees are reminded that they are not obliged to accept a voluntary retrenchment offer if the payment terms are not acceptable. Employees run the risk of only receiving a statutory minimum if they choose not to accept the involuntary retrenchment packages offered to them.
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