Retrenchment pay-out tax code

[xkubr]

During the 2012 tax year I received a retrenchment pay-out. It is reflected on my IRP5 with tax code 3907. According to the tax code definition I got from the SARS website, 3907 is defined as: "Other lump sums (e.g. backdated salaries extended over previous tax years, not approved funds).". Tax code 3901 is defined as: "Gratuities (retirement / retrenchment).".

Does it matter that the code seems to be incorrect on my IRP5, is there a tax implication?

[geraldenek]

Yes, it def has an influence - the main tax benefit of a gratuity is that there is a "once-in-a-lifetime" tax-free amount of R30 000, with any balance being taxed at average rates.

The exemption is subject to the following: provided that — the person to whom it is paid has attained the age of 55; or
the termination or impending termination of such person’s services is due to superannuation, ill-health or other infirmity; or
the termination of the person’s services is as a result of the employer having ceased trading or where he / she has affected a general reduction in personnel or a reduction in personnel of a particular class.

The exemption does not apply where the employer is a company and the employee concerned was at any time a director of the company or at any time held more than 5% of the company’s issued share capital.

[CLIVE-TRIANGLE]

The exemption is now R300,000. A directive must however be obtained by the employer. Easyfile will not let you use code 3901 without a directive number, which I am guessing is why they used the wrong code.
When you complete your IT12, change the code, provided you have proof of the retrenchment, because in all likelihood SARS will "invite" you to submit supporting docs.

[geraldenek]

Thank you for the correction - I think we need to update our tax books The exemption is now R315,000 for the 2011/2012 tax year.

[CLIVE-TRIANGLE]

thanks for the correction of my correction!

[dellatjie]

I may have a related question:

A client of mine received a Retirement Fund Lump Sum Benefit during the 2011 year of assessment (He asked me to look into it, as he suspects he has been taxed twice).

He was older than 55 during the year of assessment, and the lump sum was paid out due to retirement.

I am trying to determine whether the exemption SARS allowed, is correct, and if the tax on the lump sum was correct.

As far as I understand, I am supposed to be using formula B:

“Z = C + E - D
Where:
Z = Represents the amount to be determined
C = R300 000
E = own contributions that were not permitted as a deduction, plus (if any) a
tax-free public sector portion previously transferred to the fund
D = previous deductions against lump sum benefits


Where am I supposed to get the abovementioned info from?

Further on, the tax rates are pretty straight forward, so I am sure if I solve the abovementioned mystery, I'll be fine.

Hope someone can help!

[CLIVE-TRIANGLE]

During the 2011 year of assessment, retirement lumpsums were taxed as follows:

Not exceeding R300 000 - 0% of taxable income
Exceeding R300 000 but not exceeding R600 000 - R0 plus 18% of taxable income exceeding R300 000
Exceeding R600 000 but not exceeding R900 000 - R54 000 plus 27% of taxable income exceeding R600 000
Exceeding R900 000 - R135 000 plus 36% of taxable income exceeding R900 000

[dellatjie]

Clive, I understand the tax rates, but not the exempt part.

[CLIVE-TRIANGLE]

No part of it is or was exempt exempt actually. The first R300,000 (now 315,000) attracted 0% tax.
You formula is confusing you. Just break up the lumpsum into those monetary components.