If you were recently retrenched, specifically if you took a voluntary retrenchment package over the last year to 18 months, you may have been overtaxed.
Patricia Williams, a tax dispute expert at Bowmans and chair of the South African Institute of Tax Practitioners (SAIT) tax administration work group, says severance benefits received on retrenchment typically qualify for favourable tax treatment: there is a once-off exemption for R500 000, and lower tax rates for the balance.
Williams says that in about July last year, the South African Revenue Service (Sars) issued a completion guide for IRP3(a) and IRP3(s) forms, in which there was an implicit legal interpretation that “voluntary retrenchment” did not qualify for this favourable tax treatment.
SAIT, with input from law firm Bowmans, then approached Sars, to reclassify “voluntary retrenchments” as “involuntary”, as they believed the practice was incorrect and unfair. SARS accepted the submission and indicated that the changes would be spelt out in a new tax completion guide.
Says Williams: “The problem for an employee is that the employer is responsible for classifying the payments made, both in the application to Sars for a tax directive and in the source code that is put on the employee’s tax certificate (IRP5). As an individual, when you submit your tax return, your IRP5 is usually pre-populated on the return, and the source code applied by your employer tells Sars how you must be taxed. If your employer put the wrong code on your IRP5, you may end up being incorrectly taxed.”
This means, she says, that if you were retrenched within the past year to 18 months, there is a real possibility that the tax codes on your tax return that tell SARS how to tax you, might have been incorrect, resulting in significant overtaxation.
Williams says you should check on the following to see if you were overtaxed:
- If you were retrenched not as one person with a “mutual separation” agreement but as part of the overall retrenchment of a group of people.
- The payout you received should be reflected with source code 3901, and the employees’ tax (PAYE) deducted should be reflected with source code 4115. If these are the codes on your IRP5, you were probably correctly taxed. If, however, the payout you received was reflected with source code 3907, and your tax was reflected with source code 4102, then you were probably overtaxed.
Williams says: “If you have not submitted your income tax return for the period when you received your severance benefit, then the problem can be fixed during the tax return submission process, either when submitting your return or objecting against the assessment as soon as the return has been submitted (ideally incorporating a formal request for a reduced assessment).
“If you have already submitted your tax return for the period in which you were retrenched (it could have been in the 2016/2017 tax year), you would need to object against your assessment, preferably including a formal request for a reduced assessment. Sars has guides explaining how to object against an assessment. It would be a good idea to get help from a registered tax practitioner for this specific objection.”