It has recently come to CEO’s attention that queries regarding whether a settlement agreement (or an award in favour of the applicant (employee)) in the CCMA/Council should be taxed or not, are starting to increase.
The answer lies in the following explanations, in which case law and legislation will be considered.
The Labour Court concluded in Penny v 600 SA Holdings (Pty) Ltd (2003) 24 ILJ 967 (LC) the following, which extracts I quote, as well as extracts from the Income Tax Act 58 of 1962 (hereafter referred to as the “Income Tax Act”):
“An employer has a statutory obligation in terms of the Income Tax Act to deduct the required tax from any remuneration which it pays to an employee.”
In terms of schedule 4 item 2(1) of the Income Tax Act, an employer who:
“pay or becomes liable to pay any amount by way of remuneration to an employee shall, unless the Commissioner (SARS) has granted authority to the contrary, deduct or withhold from that amount by way of employee’s tax an amount which shall be determined as provided in paragraphs 9, 10 and 12 whichever is applicable, in respect of liability for normal tax of that employee.”
It is a valid deduction that all settlement agreements (or awards in favour of an applicant) are subject to lawful tax deductions, unless the directive from SARS indicates otherwise. This principle was also confirmed by the Labour Court in the case of Motor Industry Staff Association and Another v Club Motors, A Division of Barlow Motor Investments (Pty) Ltd (2003) 24 ILJ 421 (LC).
If the settlement agreement or award in favour of the applicant is silent on above mentioned (see also the Labour Court’s decision in AL SHA Trading Pty Ltd vs Neil Harrison, the CCMA and the Sheriff of the High Court, Germiston, J235/15 confirming this position that awards in favour of applicants are subject to lawful tax deductions), it is accepted then that the amount will be gross tax and will be subject to lawful tax deductions in the hands of the applicant.
Article by: MJ van Dyk (LL.B, attorney)
CEO Dispute Offical – Gauteng