30 July 2010
Posted by: Author: Steven Jones
You may receive a payout apart from your retirement fund—and SARS wants its share of that, too
In addition to the payout received from a retirement fund,many employees also receive payouts from their employers.This article touches on those lump sum amounts that are paid by an employer upon termination of employment.
Apart from people who work in a factory environment that has an annual shutdown, very few take all of their annual leave entitlement in one go.Add to this the fact that it is illegal in terms of South African labour legislation to commute leave days for cash other than on termination of employment, and it is perhaps unsurprising that many people receive a welcome windfall when leaving their current employer.But SARS is ever-present with its hand outstretched for its share,with such payments being subject to tax.
If you are resigning or have been dismissed, the calculation is simple for the payroll department (and expensive for you): leave pay is treated as ordinary income which is simply added to your salary for that month.Tax is paid according to the normal income scales, which means that such payments are effectively taxed at your marginal rate unless the amount pushes you up into the next bracket.
However, if you are retrenched or retiring (whether normally or due to ill-health), such amounts are taxed at preferential rates.At the moment the tax is calculated according to the higher of your average rate of tax for the current and previous tax year, but proposals are in the pipeline (courtesy of the recently-released draft Taxation Laws Amendment Bill) to use the scales for retirement fund withdrawal/retirement lump sums instead.For this reason, many employers choose to pay out accumulated leave pay on resignation /retirement as a gratuity instead.
Many employers provide for a retrenchment gratuity based on years of service and multiples of earnings at the time of retrenchment.Such gratuities are treated in the same manner as outlined for leave pay above.
Long service awards Any award made to recognise long service is tax-exempt provided that all of the following conditions are met:
• The award is not paid in cash,i.e. it must be in the form of a gift or an award. Gift vouchers or cards pre-loaded with a specific value are regarded as cash in this case;
• The value of the award does not exceed R5 000; and
• The award must be made for uninterrupted service of an initial period of 15 years and subsequent periods of ten years.
Basic exemption on employer paid gratuities
Another factor to take into account is the R30 000 tax exemption provided for in terms of Section 10 (1)(x) of the Income Tax Act.This is a "once-in-a-lifetime” exemption,which means that if you were previously retrenched and you received a gratuity of (for example)R 25 000, only R 5 000 of any gratuity subsequently paid to you will be exempt from tax.The non-exempt portion of the gratuity is subject to average rates (current rules) or the sliding scale applicable to withdrawals/retirement (proposed rules).
The draft Bill proposes to repeal Section 10(1)(x) as a result of such gratuities being included as part of the tax regime applicable to retirement fund lump-sum payments.However, retrenchment and retirement gratuities paid by employers prior to the date upon which the Bill is enacted will still be taxed according to the current rules.
Long service awards are not subject to any exemption other than that outlined above, nor is any taxable portion thereof subject to any preferential tax treatment. Any gift value exceeding R5 000, as well as any cash award, is fully taxable.
Source: By Steven Jones (Tax breaks)