There is no \u201cvoluntary\u201d aspect to retrenchment, and this phase should not be used as it is unhelpful when considering the tax treatment of severance packages and retirement fund benefits, says Jenny Gordon, head of Alexander Forbes Retail Legal.<\/p>\n
“Retrenchment is a form of dismissal due to no fault of the employee. It is a process where the employer reviews its business needs in order to increase profits or limit losses, which leads to reducing its employees.”<\/p>\n
The Labour Relations Act permits employers to dismiss employees for operational requirements and provides that an employer must pay an employee dismissed for operational requirements \u201cseverance pay\u201d equal to at least one week\u2019s remuneration for each completed year of service with that employer.<\/p>\n
In the first stage of a retrenchment process, it is acceptable for an employer to offer employees who might otherwise be selected by the employer, a sweetened retrenchment package to opt to be one of the selected employees to go first, said Gordon. This is in advance of the employer making the actual and difficult selection of the remaining employees.<\/p>\n
“This is part of the retrenchment process and does not make this first stage of retrenchment into a resignation, which would be a voluntary act of terminating service. It is the first stage of the retrenchment process and qualifies as retrenchment.<\/p>\n
“There is no difference in law between \u201cvoluntary retrenchment\u201d and \u201cinvoluntary retrenchment\u201d. The employee has been retrenched.”<\/p>\n
Alexander Forbes said that questions always arise in connection with the tax treatment of a severance benefit paid by an employer or a retirement fund upon retrenchment. “It is important to note that the Income Tax Act does not use the word \u201cretrenchment\u201d at all. The word \u201cretrenchment\u201d is a labour law term,” Gordon said.<\/p>\n
Although there are no distinctions between \u201cvoluntary retrenchment\u201d and \u201cinvoluntary retrenchment\u201d, the words \u201cqualifying retrenchment\u201d or \u201cnon-qualifying\u201d retrenchment\u201d in withdrawal claim forms do make a difference, the legal head stressed.<\/p>\n
If the employee owns more than 5% of the member\u2019s interest or share capital of the company, the employee will not qualify for the more favourable tax table.<\/p>\n
The South African Revenue Service taxes retirement benefits on retrenchments as follows:<\/p>\n
“It is important for employers to understand the importance of ticking the correct blocks when completing tax and claim forms as the incorrect box can have a significant effect on the way the benefits are taxed.<\/p>\n
“Retrenchment is a difficult time for employees and their families and it is important to be able to give clarity on the tax treatment of their hard earned benefits at this critical juncture in so many lives. The above are merely guidelines and it is best to consult with a qualified financial adviser who can help make decisions on the available options,” Gordon said.<\/p>\n