Tax directive have been applied for a CCMA settlement, for two employees who earn below the threshold. However the approved directive from SARS reflect tax to be deducted from them. Please advise why?
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
This is a complex issue and you are reminded that our services are limited to guidance only. For purposes of the guidance that follows, we accept that there is no dispute that the amount (or amounts) in question should be included in gross income irrespective of its capital nature. This would be because it is “in respect of services rendered”; “in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of any office or employment or of any appointment (or right or claim to be appointed) to any office or employment”; or “in commutation of amounts due under any contract of employment or service”.
The taxpayer of course bears the onus to proof that the lump sum was not one of these. Interpretation note 26 (the current practice prevailing) confirms this and states that “these amounts will, in most cases, be taxed in terms of the general provisions of the definition 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 definition. Applications for directives, to determine the amount of employees’ tax to be deducted from the awards, must be submitted by the employer to the relevant SARS branch office.”
We understand that the SARS practice is to not issue a directive for less than 18%, but it may well be that the effective tax rate in this instance should be below 18% - that of course is after taking rebates into account. Paragraph 9 of the Fourth Schedule to the Income Tax Act doesn’t deal with this. It may well be that the rate of 18% is correct – where the taxable income after the award exceeds the tax threshold.
The problem that the taxpayer face here is that a directive issued by SARS may not be objected to. Paragraph 9(3)(a) of the Fourth Schedule states that SARS’s determination of the amount to be deducted is final. The taxpayer can also bring a review application under section 9 of the Tax Administration Act.