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Should a retrenchment package received while out of RSA be exempt from tax?

30 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: I would like to find out how the taxpayer should be taxed on foreign employment income if:

He is a SA resident, he worked for an SA company in Namibia. The SA company has a branch in Namibia so they have sent him to do some project. He last worked in the SA offices in 2011.

For the 2014 year of assessment he worked for this SA company for 60 days, then he was retrenched because he was done with his projects and the SA company did not have any projects available for him to do in Namibia so they gave him his salary and a retrenchment package (a gratuity).

He then found another job in Namibia (from a Namibian company) and worked there for the remaining days in the year of assessment. His salary will be exempt.

The taxpayer can prove that he was outside the SA for more than 183 days and 60 continuous period.

The SA company did not withhold PAYE on the taxpayer’s other income except for the gratuity, but they recorded in the taxpayer’s IRP5 that he received a taxable income, and now the taxpayer has a huge liability.

I have requested the employer to correct the taxpayer’s IRP5 and record his income as ‘foreign income – non-taxable’. And the employer has corrected foreign income as non-taxable but the issue now is that they are refusing to correct gratuities and other allowances to be foreign but non-taxable.

They are saying the gratuity the taxpayer received was a retrenchment package and it should be taxable. And I am asking why they withhold so little tax on that gratuity? And all his income should be exempt, because section 10(1)(0)ii says: "any amount received by or accrued  to any employee during any year of assessment by way  of any salary, leave pay, wage, over time, bonus, gratuity, commission, fee, emolument or allowance, including  any amount referred  to in paragraph (i) of the definition  of gross income in section 1 or any amount  referred to in s8, 8B or 8C in respect of services rendered  outside  the Republic  by that employee  for or on behalf  of any employer, if that employee was outside  the republic-

(a) for a period or periods exceeding 1863 full days in aggregate during  any period  of 12 months

(b) for a continuous period exceeding 60 full days in aggregate  during  any period of 12 months”

And I am saying that if the remuneration can be exempt and taxable so as the gratuities because they fall under the definition of remuneration (Fourth Schedule).

A: In terms of article 15 of the RSA /Namibia treaty, Namibia obtains the right to tax "salaries, wages and other similar remuneration” after an "aggregate 183 days in any twelve-month period commencing or ending in the year of assessment concerned”.  This is so irrespective of whether or not the remuneration is borne by a permanent establishment or a fixed base which the RSA employer has in Namibia. The RSA provides the section 10(1)(o)(ii) exemption to address the double tax that arises if the person is still a resident of the RSA (ordinarily resident). 

The issue is whether or not the ‘gratuity’ qualifies.  Section 10(1)(o)(ii) refers to ‘remuneration’ and not ‘remuneration as defined in paragraph 1 of the Fourth Schedule’ (as does for instance sub-paragraph (i) and (iA)).  The section does, however, include a ‘gratuity’.   

The practice prevailing (see Interpretation note 16) is that "the services that generated the income to be considered for exemption must have been rendered during the 183 day and 60 day periods…”  It is possible that the gratuity is based on services rendered in the RSA and the exemption would only be available to the extent that the gratuity relates to the services rendered outside the RSA.  We don’t know if that applies and the client will have to confirm that from the employer. 

Q2: His IRP5 states that it’s a foreign gratuity, which means that it is a gratuity for the services he rendered outside SA. I have asked the employer and she said:

"The gratuity (retrenchment package) was for compensation for loss of employment upon his return to South Africa.

According to me, and to our Financial Controller, the retrenchment package was paid because the taxpayer would be returning to South Africa, and we didn’t have another project to place him on. As such, the retrenchment package was paid as local income, and not as foreign income. The reason it is marked on the IRP5 as 3951, is because the payroll he was paid out of is flagged as a foreign payroll, and rather than transfer him to a local payroll just to pay his package, we did it from the regular expat payroll. As such, we do not agree that the retrenchment package could/should be classified as exempt foreign income, and this was also why a tax directive was obtained, rather than just paying it out as exempt of tax.”

A2: As we indicated in our previous response the practice prevailing (see Interpretation note 16) is that "the services that generated the income to be considered for exemption must have been rendered during the 183 day and 60 day periods…” The fact that the employer marked the gratuity as foreign is irrelevant.  The determining factor is where the services were rendered that was used to calculate the retrenchment package.  By example, if the person worked for 10 years of which 2 years were outside the RSA and the retrenchment was calculated with reference to the full 10 years the full amount can’t be exempt.  The view of the financial controller seems the correct one. 

As the taxpayer bears the onus of proof in this instance he will have to prove that the retrenchment gratuity was paid in respect of the service rendered in Namibia.  If not the full amount will not qualify the exemption. 

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision. 


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