Page 383 - SAIT Compendium 2016 Volume2

IN 26
Income Tax acT: InTeRPReTaTIon noTes IN 26
In taking all of the relevant speci c inclusions of ‘gross income’ into account, the purpose for which the payment is received must be established eg is the payment in respect of services rendered [paragraph (c)], or is it for the termination of employment [paragraph (d)], or is it for breach of contract of employment [paragraph (f)].
‘Remuneration’ as de ned in paragraph 1 of the Fourth Schedule
CCMA and Labour Court awards, which are taxable either under paragraph (c), (d), or (f) of the de nition of ‘gross income’, will constitute ‘remuneration’ as de ned in paragraph 1 of the Fourth Schedule to the Income Tax Act. These amounts will, therefore, be subject to the withholding of employees’ tax by the employer.
In this regard, the case of NC Wentzel v SARS, Case Number 26697/02, heard in the Transvaal Provincial Division, held that the amount awarded by the company’s major shareholder as compensation for breach of contract signed between the company’s employee and the company’s major shareholder, constituted’remuneration’, as de ned in paragraph 1 of the Fourth Schedule to the Income Tax Act. The major shareholder had effectively, by virtue of its obligations in terms of the contract that it had signed with the company’s employee, become the ‘employer’ of the affected employee and had to withhold employees’ tax from the ‘remuneration’ that was payable to the employee.
The applicability of section 11 (c) – deduction of legal costs
In circumstances where an employee incurs legal costs in bringing a dispute to Court, section 11 (c) of the Income Tax Act permits the employee to claim a deduction of such costs actually incurred in relation to the amount of the award that will be included in his or her income for income tax purposes.
However, where these legal costs are subsequently recovered, as part of the award by the CCMA or the Labour Court, they will be taxed in terms of the recoupment provisions of section 8 (4) (a) of the Income Tax Act.
The applicability of section 10 (1) (x) – R30 000 exemption
CCMA and Labour Court awards that fall within the ambit of paragraph (d) of ‘gross income’, may be subject to an exemption of up to R30 000 in terms of section 10 (1) (x) of the Income Tax Act, provided that the requirements of this section are met.
In this regard, the following requirements have to be taken into account for the exemption to apply:
• the employee or former employee must have attained the age of 55 years; or.
• the termination must be due to superannuation, ill health or other in rmity; or
• the termination must be due to the employer having ceased or intending to cease to carry on trade,
or due to the employee becoming redundant in consequence of a general reduction in personnel or a reduction in personnel of a particular class. If the employer is a company, then this exemption will not apply to any person who, at any time, was a director of that company and that at any time held more than 5% of its issued share capital or its member’s interest.
The applicability of section 7A(4A) – tax rate concession
CCMA and Labour Court amounts awarded in respect of compensation because of termination of services or impending termination of services within ve years (or any longer period as the Commissioner may approve), and which are taxable under paragraph (d) of ‘gross income’, may be subject to the ‘rating concession’ in terms of section 7A (4A) of the Income Tax Act, provided that the requirements of this section are met.
In this regard, the following requirements have to be taken into account for the ‘rating concession’ to apply:
• The taxpayer has attained the age of 55 years; or
• The termination of the taxpayer’s services is due to superannuation, ill-health or other in rmity; or
• The Commissioner must be satis ed that the termination or impending termination of the taxpayer’s services is due to the employer’s ceasing or intending to cease to carry on the trade in respect of which the taxpayer was employed; or
• The Commissioner must be satis ed that the taxpayer’s having become redundant is in consequence of his employer having effected a general reduction in staff or staff of a particular class; and
• The Commissioner must be satis ed that the circumstances of the case warrant the concession provided by section 7A (4A).
• • •
The application form, IRP3(a) must include the following information:
The year of assessment in which the labour court award accrued;
The actual remuneration last received for the year of assessment; and
A breakdown of the amount received eg loss of income, legal costs, damages, etc.
4.2.2
4.2.3
4.2.4
4.2.5
5. Tax administrative procedures
An application for a tax directive must be completed and submitted by the employer for all amounts paid to employees or former employees in respect of CCMA and labour court awards. The application form, IRP3(a), is available on the SARS website (www.sars.gov.za) under ‘Income Tax’, ‘IT Forms’. The completed form must be submitted by the employer to the local SARS branch of ce where the employee or former employee is registered for income tax purposes. Where applicable, the court judgment or settlement must be submitted with the application.
6. Conclusion
Amounts awarded either by the CCMA, Labour Court, or the Labour Court of Appeal in respect of labour disputes will be examined closely by the South African Revenue Service in light of the speci c facts of each case.
These amounts will, in most cases, be taxed in terms of the general provisions of the de nition of ‘gross income’ in section 1 of the Income Tax Act, or in terms of the provisions of paragraph (d), paragraph (f), or paragraph (c) of that
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