I was overtaxed on my provident fund by SARS. What can I do?

The long answer

First, if you are retrenched, the rate of tax is lower than if you are dismissed or resign:

From 1 March 2011, the first R315 000 of the retrenchment benefit was not taxed. From 1 March 2014, the first R500 000 was not taxed. The amount over R500 000 up to R700 000 is taxed at 18%. From R701 000 to R1 050 000, the tax is 27%.

But if you have ever received any retrenchment or withdrawal payments from your provident or pension fund before – even if it was from a different employer – that R500 000 tax-free benefit would be reduced, because it is calculated over your lifetime. 

If you resigned or were dismissed, only the first R25 000 of the lump sum is tax-free, and after that the first tax is 18%.

From an online tax calculator, it seems that you if were retrenched this is how your tax should have been calculated, provided that you had not received any retrenchment or withdrawal benefits before:

Lump sum amount: R788 649.72
Less: Tax on lump sum: R59 935.42 (27% of lump sum exceeding R700,000 + R36,000)
Equals: R728 714.30  after retirement, retrenchment or death

And if you resigned or were dismissed:

Lump sum amount: R788 649.72
Less: Tax on lump sum: R149 035.42 (27% of lump sum exceeding R660,000 + R114,300)
Equals: R639 614.30 before retirement, retrenchment or death

This is quite a lot less than you received (R575 618.86), if you hadn’t received any retrenchment benefits before.

Another possibility is that if you accepted voluntary retrenchment  in the last 12 to 18 months, you may have been overtaxed by SARS: Voluntary retrenchment means agreeing to take a voluntary retrenchment package when requested by your employer because staff were being reduced or your line of work was being discontinued, rather than being told you were being retrenched.

According to an article by Laura du Preez in the Sowetan of 31 May 2018, SARS told employers in 2017 to state whether the retrenchments were voluntary or involuntary. If they were voluntary, benefits were taxed as normal income from 18% to 45%. That means that the first R500 000 of the lump sum benefit would not have been tax-free for voluntary retrenchments.

But because the law doesn’t distinguish between voluntary and involuntary retrenchment, the tax practitioners’ organisations objected, and SARS accepted their objections and issued employers with new codes.

Patricia Williams, the tax dispute expert at Bow, says that this is how you can check if you were overtaxed because of the incorrect distinction between voluntary and involuntary retrenchment:     

The payout you received should be reflected with source code 3901, and the employees' tax deducted should be reflected with source code 4115.

If these are the codes on your IRP5, you were probably correctly taxed.

However, if the payout you received was reflected with source code 3907, and the employees' tax was reflected with source code 4102, then you were probably overtaxed.

Williams says you can get your overpaid taxes back by submitting your return with the incorrect source codes and lodging an objection to the assessment. The grounds for your objection would be that the relevant amount is a "severance benefit", source code 3901, and not an "other lump sum", source code 3907; and that the employees' tax paid should be reflected with source code 4115, being tax on a severance benefit lump sum and not "normal" employees' tax (source code 4102).

She says you might need a tax practitioner to help you make a formal request for a reduced assessment. Normally you are only allowed 30 days to lodge an objection but this was an exceptional circumstance.