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Severance benefit incorrectly taxed as ordinary income – how do I fix it?

17 April 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Regarding severance benefits. In the 2014 tax year my client offered an employee voluntary severance benefits which he accepted. The amount, however, was taxed in the payroll system as ordinary income. I would like to know if there is a way to retrospectively revise the taxation of this amount since we didn't apply for a tax directive before the severance was paid.

A: Severance benefit

Our guidance accepts that the severance benefit was paid out is a lump sum.  As such it would be a lump sum to which paragraph (d) of the definition of ‘gross income’ in section 1(1) applies and the employer had to ascertained the amount to be deducted or withheld in respect of employees’ tax from any lump sum from SARS before paying out such lump sum.  We assume that the exception provided for in paragraph 3(b) of the Fourth Schedule does not apply in this instance.

The failure to apply to SARS is in itself is not an offence, refer to paragraph 30 of the Fourth Schedule, but it is clear that the correct amount of employees’ tax was not withheld and that the IRP 5 will then not be correct.  It may well meet the requirements for valid voluntary disclosure. 

It is possible to do a request correction and re-submit the relevant EMP201 and to issue a correct IRP5, but we are not sure if a late request to SARS can be made. 

If the employees’ tax for the relevant period was underpaid there is a late payment penalty that will apply. 

We suggest that the employer approaches SARS to determine from them how the matter should be rectified.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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