Page 382 - SAIT Compendium 2016 Volume2

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Income Tax acT: InTeRPReTaTIon noTes IN 26
The amounts awarded in respect of the above, including voluntary payments, in the circumstances of a claim for compensation for loss of of ce, termination of employment, or unfair dismissal, will fall within the ambit of paragraph (d) of ‘gross income’.
In terms of paragraph (d) of the de nition of ‘gross income’ any amount, including a voluntary award, received or accrued in a year or period of assessment in respect of relinquishment, termina tion, loss, repudiation, cancellation or variation of any of ce or employment or of any appointment (or right or claim to be appointed) to any of ce or employment, must be included in ‘gross income’.
The following factors will be considered in determining whether an amount will fall into paragraph (d) of ‘gross income’:
• There must be ‘employment’,or ‘of ce’ or the appointment to any ‘employment’ or ‘of ce’;
• There must be an amount (including a voluntary award) received by the employee;
• There must be termination of employment or the loss, cancellation, or variation of any of ce or employment; or
• There must be a right or claim to be appointed. In certain cases of unfair dismissal, the employee is ordered by the CCMA or the Labour Court to be reinstated within the services of the employer. The employee thereafter waives his or her right to be reinstated and receives the option of a lump sum award instead.
The following must be taken into account with regard to the meaning of ‘employment’ in paragraph (d) of ‘gross income’: The dominant distinction of a person that is in employment is that of control and supervision. The master/servant relationship is of signi cance. The power to supervise and control the type of work required to be conducted, the control of the productive capacity, and the power to dismiss employees lie in the hands of the employer. The employee is obliged to follow the instructions given by the employer.
Termination of an employment contract prior to its expiry
Where the provisions of the above-mentioned paragraph (d) are not applicable in this situation, paragraph (f) of the de nition of ‘gross income’in section 1 of the Income Tax Act may tax’any amount received or accrued in commutation of amounts due under any contract of employment or service’. Depending on the terms of a contract of employment, a breach of such contract can result in amounts ‘due’ being taxable in terms of the mentioned paragraph (f). Therefore, if an employer breaches a contract of employment by terminating the contract, prior to its expiry, the compensation paid by the employer will be taxed because the compensation will be received or accrued in commutation of amounts due under a contract of employment or service.
Amounts received or accrued by an employee in terms of a contract of employment, for services to be rendered in the future, may also fall into the mentioned paragraph (f).
In Income Tax Case Number 222 1931, 6 SATC 148, the court held that the lump sum payment received by the employee in respect of the salary due to him in respect of the remaining period of his contract was, in fact, income owing directly from a contract of service, entered into by him. The entitlement or privileges of the employee and the obligations of the employer that arise in terms of the contract of employment or service is very important when determining whether amounts fall into paragraph (f) of ‘gross income’. Unfair labour practice
Any person who is the victim of unfair labour practice is entitled to legal protection in terms of the Constitution. The Labour Relations Act, 1995 does not provide for a general unfair labour practice jurisdiction. However, residual unfair labour practices may be described as unfair conduct during the employment relationship concerning promotion, demotion, training, suspension, failure for the provision of bene ts, the failure or refusal to re-instate a former employee in terms of an agreement, or variation of employment.
The following are examples of variation of employment:
• The renewal of an employee’s contract into a xed term contract.
• A temporary employee who, after a prescribed probationary period, is made permanent.
Where an employee can prove that there is reasonable expectation that a xed term contract will be renewed or that permanent employment can be attained, the employee can bring a claim under unfair labour practice to the courts. (Dierks v University of South Africa 1999 (4) BLLR 304 (LC))
If compensation is paid in a matter relating to an unfair labour practice, SARS will examine the facts of the case and the nature of the amounts awarded to determine if paragraph (d) or paragraph (f) of ‘gross income’, as discussed above, may be applied to the awards.
Examples in the broad categories of awards are listed in Annexure A.
4.2
Other applicable provisions of the Income Tax Act:
4.1.2
4.1.3
4.2.1
Paragraph (c) of ‘gross income’
Paragraph (c) of ‘gross income’ may be applied to CCMA and Labour Court awards in circumstances where it can be established that the award is actually in respect of services rendered.
Paragraph (c) of ‘gross income’ taxes any amount, including any voluntary award, received or accrued in respect of services rendered or to be rendered, or by virtue of any employment or the holding of any of ce. In order to determine whether the amount falls within the ambit of paragraph (c) of ‘gross income’, a direct link between services rendered and the payment received must be established.
Where an amount is received, in respect of past services rendered as well as for compensation for loss of of ce, the dominant purpose of the amount paid, must be determined [as was determined in ITC 1093, 28 SATC 269, 1967(16)]. If it can be established that the amount has been allocated between services rendered and compensation for loss of of ce then the former will be included in paragraph (c) and the latter in paragraph (d) of ‘gross income’.
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