Severance and retrenchment benefits

If you lose your job, you may be eligible to receive lump sum benefits from your employer and/or your retirement fund. These benefits may qualify for special tax treatment.

A “severance benefit” is defined in the Income Tax Act (“the Act”). It is a cash payment from an employer to an employee on the loss or termination of their employment. It is important to note that this is not the same as a lump sum payment from a retirement fund on retrenchment (what we refer to as a “retrenchment benefit”, but which is defined as a “retirement fund lump sum benefit” in the Act).

A lump sum cash payment from your employer on the termination of your employment may be regarded as a severance benefit for tax purposes, provided one of the following conditions are met:

You are at least 55 years old; or
You are incapable of holding employment due to sickness, injury or incapacity; or
The termination or loss of your employment is due to one of the following reasons:

Your employer has ceased to carry on, or intends to cease carrying on the trade which you were employed or appointed to do; or
You have become redundant because of a general reduction in personnel or a reduction in personnel of a particular class by your employer (i.e. retrenchment or due to general operational requirements).
A lump sum from a retirement fund may be regarded as a retrenchment benefit if it is received due to the termination or loss of your employment as a result of one of the following reasons:

Your employer has ceased to carry on, or intends to cease carrying on the trade which you were employed or appointed to do; or
You have become redundant because of a general reduction in personnel or a reduction in personnel of a particular class by your employer (i.e. retrenchment or due to general operational requirements).
As retrenchment benefits are linked to the concept of the loss of employment, they may only be provided by occupational funds (pension or provident funds and umbrella pension or umbrella provident funds) and are not available for members of retirement annuity funds, including group retirement annuities.

If you held more than 5% of the issued shares or member’s interests in the employer company at any point in time, neither a severance nor retrenchment benefit will qualify for special tax treatment.

Read the full article: https://www.allangray.co.za/latest-insights/personal-investing/facing-the-facts-around-retrenchment/  

January 16 2020 By Carrie Furman - Allan Gray Personal Investing