By Anja van den Berg
If you have been retrenched over the past year-and-a-half, there is a good chance you may have paid too much tax on your severance pay, according to tax law experts.
Employees who have been retrenched over the past 12 to 18 months are specifically at risk of having been incorrectly treated for tax purposes, particularly voluntary retrenchments.
The law makes no distinction between voluntary and involuntary retrenchment. However, in a response to a guide issued by the South African Revenue Service (SARS) in July 2018, members of the SA Institute of Tax Practitioners (SAITP) requested a review of this taxation.
According to Patricia Williams, tax dispute expert at Bowmans and SAITP chair, employees who have accepted a voluntary retrenchment package should be taxed differently to employees who have not been given the option of retrenchment.
Williams says retrenched employees who were overtaxed can get their overpaid taxes back – providing they know what to look for and how to go about it:
- The pay-out you received should be reflected with source code 3901, and the employees’ tax deducted should be reflected with source code 4115. If these are the codes on your IRP5, you were probably correctly taxed.
- However, if the pay-out you received was reflected with source code 3907, and the employees’ tax was reflected with source code 4102, you were probably overtaxed.
- If you have not yet submitted the income tax return on which these severance benefits are declared, you can fix this when you submit the return and a tax practitioner can help you to do this.
- Alternatively, you can submit the return with incorrect source codes on it and then lodge an objection to the assessment. If you have already submitted your tax return, SARS would normally have issued an assessment already.
- To claim back the tax, you will now need to object to that assessment, preferably including a formal request for a reduced assessment. Use a tax practitioner to help you do this or follow one of the SARS guides that explains how to object against an assessment.
- The grounds for your objection would be that the relevant amount is a “severance benefit”, source code 3901, and not an “other lump sum”, source code 3907; and that the employees’ tax paid should be reflected with source code 4115, being tax on a severance benefit lump sum and not “normal” employees’ tax (source code 4102).
- Include a supporting letter with your objection, explaining that the amount you received is a severance benefit for tax purposes. Give the reason (for example, that your employer reduced staff in general), and explain that you are accordingly entitled to the tax exemption and special tax tables applicable to severance benefits.
- You are normally only allowed to object within 30 business days of the tax assessment. Your objection to the tax on your severance benefit may well be late and you should explain that you only realised the mistake in your tax assessment now. You can cite the exceptional circumstances as being an incorrect classification of the severance benefit by your employer on your IRP5 and that this information was automatically captured on your tax return.
Given the financial hardship and vulnerability of retrenched employees and their dependents, getting any overpaid taxes refunded is of great importance.
HR Future: https://hrfuture.net/articles/strategy/finance/how-to-get-your-taxes-back-if-you-have-been-overtaxed-on-retrenchment
Sowetan Live: https://www.sowetanlive.co.za/business/money/2018-05-31-retrenched-check-if-the-payout-was-not-overtaxed/