Severance Pay & Tax

[brown]

Please help with regards to retrenchments. I am not too sure if my calculations are correct. Here's what I included: Notice Pay
Severance Pay- 1 wk for each completed year of service right? If employee worked less than a year this should be company discretion right?

Then there's this point in the consultation letter
"Severance package issues – 1 week per yr. completed service; Accrued leave; no need to work notice; no taxation if less than R10,000, tax directive if more than R 10,000"

Do I choose not to tax the employee or is this done when the tax returns are filed? I don't wanna take a chance and not pay the tax and then later be hit with penalties. Please advice on how I should treat the tax issue?

One more thing, what is the acceptable(reasonable) time-frame between giving notice and the actual retrenchment? I have a bad feeling about being faced with the CCMA. We only gave the employees notice Mid November, and their termination date is 15 January.

[sterne.law@gmail.com]

Severance - 1 week per completed year. A non complete year need not be paid. If you do pay must be the same for everyone.
there is no specific time frame. Part of the consultation process is to address the timing of the dismissals. Your time period is quite good. Remember where a company has financial difficulties the process neeeds to be completed as quickly a spossible.

In terms of tax the fisrt R30 000 of retrenchment is Tax Free.

[Dave A]

Do I choose not to tax the employee or is this done when the tax returns are filed? I don't wanna take a chance and not pay the tax and then later be hit with penalties. Please advice on how I should treat the tax issue?

Getting a tax directive shouldn't take long - a matter of days, normally.

If you're faced with paying the settlement before the tax directives arrive, perhaps hold back sufficient to cover for the worst case scenario, and pay out the balance once the tax position is clarified.

Sidenote: When I did our retrenchments in 2008, the whole deal was done in under 10 days from notices, consultation, selection to payout. The relevant bargaining council squealed afterwards that we hadn't consulted them, but in the end they actually couldn't fault the process we'd gone through (other than leaving them out of it, of course) and that all fizzled away.

In terms of their "rules," I'd actually been gently generous with the settlement packages. But my view was rather be gently generous and get the job done quick (start saving money for the company asap) than get the bargaining council involved and risk delays.

Every day's delay was costing money and my first priority as a director was to stop the bleeding. One of those times when it's more prudent to ask forgiveness than to ask for permission.

Please don't consider this sidenote as legal advice - just food for thought.

[brown]

In terms of tax the fisrt R30 000 of retrenchment is Tax Free.

Thanks Anthony, I know about the R30,000 and that it is a once in a lifetime exemption, what I need to know though is the application. For the amounts above R10,000 as per our HR consultant, I can get a directive, but if anyone is receiving less than R10,000 it says No tax is deductible. Am I the one to decide or will the tax break be given by SARS at submission? I don't wanna have to pay penalties at a later date.

[brown]

Thanks Dave

I'll keep the time-frames in mind. That is the problem with legislation... They never say what "reasonable" is. I will hope for the best.

[sterne.law@gmail.com]

By saying no tax is deductible that has become a term of settlement and YOUR problem -possibly a poor choice of words, so you may want to get onto the tax directive as quickly as possible.

[gary27]

Hi there Mr Sterne I think you the guy that could help me I just googled and found this website and I registered.I have been retrenched for 3 months now and I did not receive my severence pay everytime I questioned the lady at payroll she said she is waiting a tax directive number.I only worked there for 3 full years which I'm entitled to 3 weeks severance pay,in this thread I noticed you advised to the other person that it does not take long to get a tax directive number and the first R30000 is not taxed so my three weeks willl work out to under R10000 can company tax it .thank you Gary

[Dave A]

Always the possibility that the company is slowing things down for cash flow reasons rather than SARS being the problem...

As the taxpayer involved, and if you've got the time, it might be an idea to go into SARS yourself and query the status of the application for the tax directive. If there has been no application for a directive and you know the value involved, make the application for a tax directive yourself.