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FAQ - 2 October 2014

Wednesday, 01 October 2014   (2 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Tax directives in respect of retrenchment packages for multiple dismissed striking workers

Q: We have a client who had dismissed striking workers and after a lengthy legal process has reached a settlement with the workers’ union. In terms of the settlement agreement, each of the employees will get a retrenchment package. This package contains an initial lump sum followed by monthly payments over a two year period. Will we have to apply for tax directives for each of the employees for the total payout as per the settlement agreement or do we apply for a directive for the amount receivable in year one and another directive for the amount receivable in year 2?

A: The treatment depends on the time of accrual of the amounts (lump sum and monthly amounts).  We submit that the procedure would be the same as for other settlement awards.  In this regard SARS’s Interpretation Note 26 explains it as follows:

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 ( under "Income Tax”, "IT Forms”. The completed form must be submitted by the employer to the local SARS branch office 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.

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 e.g. loss of income, legal costs, damages, etc.  

2. PAYE, UIF and SDL withholding from the remuneration of an employee subject to the section 10(1)(o)(ii) exemption on income from services rendered outside South Africa

Q: Even though an employee will be exempt from income tax according to section 10(1)(o)(ii) of the Income Tax Act, must the employer still deduct PAYE, UIF and SDL? Furthermore, must the employer deduct UIF and SDL in respect of this employee?

A: Employees’ tax

SARS deals with this issue in Interpretation Note 16.  In paragraph 4.7 it is stated:

"The potential for an exemption under section 10(1)(o)(ii) of the Act does not automatically waive the liability of an employer to deduct employees’ tax in terms of the Fourth Schedule to the Act. An employer that is satisfied that the provisions of section 10(1)(o)(ii) will apply in a particular case may, however, elect not to deduct employees’ tax in a particular case. Where it is found that the exemption was not applicable the employer would be held liable for the employees’ tax not deducted as well as the concomitant interest and penalties.”  

The guide for employers states that "the question of whether an employee will qualify for the exemption or not is a question of fact that can only be answered once the requisite number of days has been met. Directives are therefore not issued for such taxpayers. Where the employer is satisfied that the employee will meet the necessary criteria for the exemption to be granted, the employer is at liberty not to deduct Employees’ Tax provided that a copy of each page of the employee’s passport and a copy of the relevant contract for the services to be rendered in a foreign country are kept. Should it transpire that the employee does not qualify for the exemption; the employer will be held personally liable for any losses that SARS may suffer due to the non-deduction of the full amount of Employees’ Tax.” 


The Unemployment Insurance Contributions Act (hereafter ‘the Act’) applies to all employers and employees (refer to section 4).  We accept that none of the exclusions in section 4 applies in your case.  Section 5 of the Act refers to every employer and employee – see also section 8.  The Notice issued by the Minister (determination of limit on amount of remuneration for purposes of determination of contribution) also refers to "... an employer to an employee ...”  The Act then states that "remuneration" means "remuneration" as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act. To the extent that the section 10(1)(ii) exemption applies it will not be income, not remuneration and consequently not subject to UIF.  

The Skills Development Levies Act also provides that the leviable amount means the total amount of remuneration, paid or payable, or deemed to be paid or payable, by an employer to its employees during any month, as determined in accordance with the provisions of the Fourth Schedule to the Income Tax Act for the purposes of determining the employer’s liability for any employees’ tax in terms of that Schedule, whether or not such employer is liable to deduct or withhold such employees’ tax. We submit that the same principle as explained above applies.  


Christo Strydom says...
Posted Friday, 03 October 2014
If the employee is fired, retrenched or contract ends while providing the services abroad he will not be entitled to claim UIF benefits if he did not contribute UIF, if he contributed UIF he will be able to claim benefits.
Daniel P. Foster says...
Posted Thursday, 02 October 2014
The definition of "remuneration" in para. 1 of the Fourth Schedule does indeed begin with the words "any amount of income...". Even if we accept that "income" here takes its defined meaning and that the context does not indicate otherwise, the first clause of the definition goes on to specifically include "and amount referred to in paragraph (a), (c)... of the definition of "gross income". In the specific inclusion, the word "amount" rather than "income" is used. This would indicate that the gross amount is included in remuneration (not the amount after exemptions). This would make sense, given that the exemption is with respect to assessed tax. SARS also make it clear in IN 16 that they are of the view that s 10(1)(o)(ii) does not apply to UIF. It is an interesting debate. The sooner that the rules for PAYE, UIF and SDL are aligned, the better!



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