Implications of increased tax-free threshold

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However, this does not prohibit an employer from providing more than the statutory minimum in terms of a contract of employment, company policy, collective agreement or an agreement reached in terms of s189 of the Labour Relations Act, No. 66 of 1995 (LRA).

The Minister of Finance has increased the tax-free threshold from R315,000 to R500,000, applicable from 1 March 2014. This amount remains a lifetime exemption. Therefore, should an employee have the misfortune of being retrenched more than once in their working life, this person may continue to claim the tax exemption on the severance component, but only up to a ceiling of R500,000, after which tax will be payable. According to the South African Revenue Service (SARS), it is the responsibility of the employer to apply for a tax directive should such severance be payable.

Exceptions of benefit

It must be noted however that this benefit does not apply to pro-rata bonus, notice pay and accrued leave as these payments remain subject to tax. The circumstances under which one will be entitled to this severance benefit must comply with the definition of a 'severance benefit' as defined in the Income Tax Act, No 58 of 1962.

The Income Tax Act provides that a severance benefit means any lump sum amount received from an employer in respect of the relinquishment, termination, loss or repudiation of office or employment or of the person's appointment or a right or claim to be appointed to an office, provided one of the following requirements are met:

• the person is 55 years or older;
  
• the person is incapable of holding employment due to sickness, injury or incapacity;
  
• the termination or loss is due to one of the following:
  - the person's employer having ceased to carry on or intending to cease carrying on the trade in respect of which the person was appointed;
  or
  - the person having become redundant in consequence of a general reduction in personnel or a reduction in personnel of a particular class by the person's employer (i.e. retrenchment or due to general operational requirements).

In light of the above, in the event of an employee who is 55 years or older receiving any form of lump sum termination benefit upon the termination of their employment, regardless of the reason for the termination of employment, that employee shall be entitled to claim the exemption on the termination benefit, subject to the principles laid out above.

In conclusion, employers and employees alike should be alive to the above exemption and the obvious tax savings to the employee should they qualify for the exemption in relation to a termination benefit. Tax directives from SARS should always be applied for prior to making payment of the termination benefit in order to ensure compliance with the requirements of the Income Tax Act.