The loss of employment through retrenchment (forced or voluntary) is a reality many employees face in the current economic climate. Over the last number of years, various tax concessions have been made to ease the financial burden on employees facing retrenchment, mainly in the form of tax free thresholds which apply to certain lump sum employer payments.

Currently, the Income Tax Act, No 58 of 1962 (Act) provides for a R 500,000 lifetime exemption (effective 1 March 2014) in respect of a “severance benefit”. A “severance benefit” for the purposes of the Act is, essentially, any employer paid amount (excluding retirement fund lump sums) received by or accrued to a person by way of a lump sum in respect of the relinquishment, termination, loss, repudiation, cancellation, or variation of office or employment, provided at least one of the following requirements is satisfied:

  • the person has attained the age of 55;
  • the termination or relinquishment of office is due to sickness, accident, injury, or incapacity through infirmity of mind or body;
  • the termination or loss is due to the employer having ceased, or intending to cease, carrying on the trade in respect of which the person was employer; or
  • the termination or loss is due to the person having become redundant in consequence of a general reduction in personnel or a reduction in personnel of a particular class.