Page 385 - SAIT Compendium 2016 Volume2

IN 26 Income Tax acT: InTeRPReTaTIon noTes IN 26 (Mahlati v SA Broadcasting Corporation 2003, 1 BLLR 33 (LC))
Reason: Payment received for the termination of employment.
Compensation paid to a prospective employee because of the failure of his prospective employer to enter into a contract of employment.
Silke on South African Income Tax
Reason: Payment received for the cancellation of employment.
Paragraph (d) of ‘gross income’
A lump sum payment received by an employee for the breach of a contract of employment by his employer based on the unexpired portion of the service agreement.
(Income Tax Case Number 222 1931, 6 SATC 148)
Reason: Payment received in commutation of breach of contract of employment.
Paragraph (f) of ‘gross income’
ANNEXURE B
Comprehensive Example
Mr X who is 42 years of age is an employee of company Z. He has been employed by the company for 8 years. Company Z is in the process of restructuring. Employees in the middle and lower management are affected by the restructuring. Mr X is employed in middle management. Employers have not consulted with employees or unions regarding the decision making process for the retrenchment and restructuring process. One of the senior managers had informed Mr X that he faces dismissal. New posts are advertised before consultation with the existing staff regarding the retrenchment and restructuring process. The company informs the affected employees that they may reapply for the positions. Mr X re- applies for his position, but he is unsuccessful. Mr X is dismissed by the company. A new person is employed in the same capacity as Mr X, however, the job title has been changed. The job description remains the same.
Mr X seeks an order against his company for compensation in terms of section 193 (1) (c) of the Labour Relations Act, 1995. The fairness of Mr X’s dismissal is in dispute. He makes application in this regard to the Labour Court. The court nds in favour of Mr X that the dismissal of Mr X was procedurally unfair. The judge makes an order for compensation to be awarded to him equivalent to twelve months remuneration which amounts to R120 000. The employer is ordered to pay the costs of the application.
Company Z is now liable to award the amount after the deduction of the applicable tax due to Mr X. Company Z must apply for a tax directive to the local SARS branch of ce where Mr X is registered. The amount of R120 000 will be reduced by the tax liability determined by SARS. A copy of the Court judgment must accompany the IRP3(a) that is submitted to the relevant SARS branch of ce. It must be determined whether the amount awarded is taxable and under which provisions of the Income Tax Act it is taxable.
The following facts must be taken into account:
• The amount awarded is in respect of termination of employment.
• It has been received in the 2004 year of assessment.
• Mr X was dismissed on 15 May 2001.
• The amount awarded is made up of the last twelve months remuneration earned by Mr X.
• The legal costs incurred by Mr X must be paid by the employer in terms of the Court order.
• Mr X’ s marginal tax rate is 30% (for illustrative purposes).
• Mr X has not yet attained the age of 55.
The amount will be taxed in terms of paragraph (d) of ‘gross income’.Itis compensation awarded for the termination of employment. Mr X had been in the employ of company Z for the last eight years. It must be established whether the award that will be taxed in terms of paragraph (d) of ‘gross income’, will be subject to the exemption of R30 000 in terms of section 10(1)(x) of the Income Tax Act. Further, it must be established whether this amount will be subject to the section 7A(4A) ‘rating concession’ generally enjoyed by amounts that fall into paragraph (d) of ‘gross income’.MrXhas not attained the age of 55 nor was his termination due to ill-health nor has the employer ceased trading. Furthermore, Mr X was made ‘redundant’. However, his position was immediately lled by a new appointee. Therefore, it is apparent that the termination of his employment was not due to redundancy. The provisions of sections 10 (1) (x) and 7A (4A) of the Income Tax Act will, therefore, not apply to the compensation award received by Mr X. This means that the award will not be subject to the ‘rating concession’ or to the exemption of R30 000. The full amount of R120 000 will be subject to tax of 30%. The tax will be withheld by Company Y and the remaining portion of the award will be paid to Mr X.
The legal costs actually incurred by Mr X, in relation to the taxable amount of the award, will be allowed as a tax deduction. However, since Company Z was ordered to pay these legal costs, the recovered amounts that were allowed as a tax deduction will be taxed in Mr X’s hands. It follows that any portion of the legal costs that was not allowed as a tax deduction will not be taxed. This effectively means that the legal costs recovered from Company Z will be tax-neutral in the hands of Mr X.
ANNEXURE C
Labour Court Judgment: Ntsabo v Real Security CC, C 259 of 2000
In this recent, landmark case, the Court was satis ed with the employee’s claim that she had been constructively dismissed. What makes this case unique is that the employee’s application for a sexual harassment claim was also successful in the same Court. In this regard, it was ruled by the Court that:
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