The Taxation Laws Amendment Act 2009, passed in September, introduced some tax relief for taxpayers who were retrenched from employment.

The stand-alone tax tables

Retirement fund lump sum benefits are now taxed in accordance with two different stand alone tax tables.
In terms of the tables, a taxpayer who receives a withdrawal or resignation lump sum benefit will enjoy a tax free portion of R22 500.  The balance of the benefit will thereafter be taxed as follows:

A taxpayer in receipt of a retirement or retrenchment benefit will enjoy a tax free portion of R300 000.  The balance of the benefit will thereafter be taxed as follows:

It is important to note the following:

• These tax tables are stand-alone.  This means that no account is taken of any of the taxpayer’s other income, or any losses or expenses from other sources.
• The tables are cumulative.  This means that in order to determine the rate at which the amount is taxed, the taxpayer must add together all lumps sums previously received, excluding those amounts taxed received under the previous tax formula dispensation.
• If the lump sum benefit is transferred to another approved fund, it will not be taxed, except if the transfer is from an approved pension fund to an approved provident fund.

Retirement fund lump sum benefit upon retrenchment

The tax changes provide some relief for persons who have been retrenched from employment, and who may be reliant on their retirement fund lump sum benefit for financial support.

It is important however, to note that this tax relief is only available to the taxpayer if the retrenchment was involuntary, due to:

• The employer ceasing to continue trading, or
• The taxpayer becoming redundant as a result of the employer reducing personnel.

The tax relief is not available to a taxpayer who was, at any time, a director of the employer company, or at time held more than 5% of the issued share capital or member’s interest in that company.

Example 1:

ABC Traders retrenches 15 staff due to it closing off one of its branches. Joe Jackson is entitled to receive a sum of R500 000 from the retirement fund upon termination of employment.  Joe was a director of the company for two years when it was formed, but sold his 10% shareholding in the company in 2007. 

Sue Smith is entitled to receive R250 000 from the retirement fund, and as the sole provider in her home, requires these funds to make ends meet, until she secures further employment.

Joe Jackson does not qualify for the tax relief, as he was, at a point in time, a director of the company, and held more than 5% of the issued share capital.  Therefore, if he takes his benefit as a lump sum, it will be taxed in accordance with the withdrawal stand alone table.  He will receive R22 500 tax free.  He will then be taxed at 18% on the balance.  If he transfers his full benefit to a preservation fund, he will not be taxed.

Sue Smith will be taxed in accordance with the retirement stand alone tax table, and her entire benefit will be tax free, as it is below R300 000. 

If they do elect to receive lump sums instead of transferring to other approved funds, these amounts will have an impact on the taxation of their benefits upon retirement.

Example 2:

ABC Traders offer employees the opportunity to accept voluntary retrenchment packages.  Cassie Cane accepts such a package.  Her retirement fund lump sum benefit is R500 000. 

Cassie Cane will be taxed in accordance with the withdrawal stand alone tax table, as her retrenchment was not due to the employer ceasing trade, nor due to her employer reducing personnel.  R22 500 will be tax free, and the balance will be taxed at 18%.

Information required by Liberty Corporate in respect of retirement fund lump sum benefits arising from retrenchment:

Member to provide

• The member must indicate whether he or she was retrenched, and whether this was voluntary or involuntary.
• The member must indicate whether he or she was ever a director of the company, or whether he or she held more than 5% share capital in the company, at any time.

Employer to provide

• The employer must provide proof of the member’s voluntary or involuntary retrenchment.  Where the retrenchment was involuntary, the employer should indicate the reason for such retrenchment, ie retrenchment due to operational reasons, or if the company if ceasing to trade.
• The employer must provide confirmation of whether the member was ever a director of the company or held greater than 5% of share capital at any time.

These additional requirements are vital to ensure that members are correctly taxed, and to further ensure that Liberty Corporate comply with their obligations in terms of the Income Tax Act.