Reinstatement is one of the remedies where it was found that an employee was unfairly dismissed. The employee will normally receive back pay from the date dismissed, subject to employees’ tax being withheld by the employer from the amount.
Disputes relating to a dismissal of an employee on the basis that it was unfair are very common in South Africa. These disputes are often only settled following a process of arbitration by the Commission for Conciliation, Mediation and Arbitration, or by the labour court. The result of such a process may well be that the employee was correct, and it is found that his or her dismissal was substantively and procedurally unfair.
Judge Basson, in Steenkamp v Edcon Limited [2019] ZACC 17, said that the Labour Relations Act (LRA) ‘is the statute that regulates access to dispute resolution procedures and courts in labour disputes’. Section 193(1) of the LRA provides remedies for unfair dismissal and reads as follows:
If the Labour Court or an arbitrator appointed in terms of this Act finds that a dismissal is unfair, the Court or the arbitrator may −
(a) order the employer to reinstate the employee from any date not earlier than the date of dismissal;
(b) order the employer to re-employ the employee, either in the work in which the employee was employed before the dismissal or in other reasonably suitable work on any terms and from any date not earlier than the date of dismissal; or
(c) order the employer to pay compensation to the employee.
According to Judge Wagly, in Kemp t/a Centralmed v Rawlins (JA 11/06) [2009] ZALAC 8, ‘once a finding is made that a dismissal is unfair an arbitrator … must exercise a discretion as provided in s 193(1)’. From a reading of section 193(1), an arbitrator can make one of the following two orders, namely that:
- The employer reinstates (or re-employs) the employee, or that
- The employer pays compensation to the employee
An award by an arbitrator
The following is an extract from the findings of an arbitrator in a dispute settled recently:
- The dismissal of the applicant is found to be substantively unfair;
- The Respondent is hereby ordered
a. to reinstate the Applicant into its employ on the terms and conditions no less favourable to her than those that governed the employment relationship immediately prior to the dismissal dated 31 January 2021.
b. to pay
i. the Applicant as back pay in the amount of R2 100 000. The retrospective calculation was done on the Applicant’s monthly salary of R150 000 from the date of her dismissal times the period she was unemployed until the resumption of her duties as ordered.
ii. the retrospective amount by 30 March 2022. - The Applicant is to tender her services to the Respondent by 6 April 2022.
The applicant, in this instance, is an employee of the respondent (the employer).
In practice, applicants often have an expectation that they will receive the actual amount stated in an award by the arbiter. In the author’s experience, in these awards reference is seldom made to tax, or employees’ tax, and the applicants have the mistaken believe that these amounts are not subject to tax.
What are the tax consequences of the receipt of a single payment of R2,1 million for this applicant?
The nature of the amount received
The following general statement appears in the current SARS practice generally prevailing:
CCMA and Labour Court awards will be taxed either under the general definition of ‘gross income’ in section 1 of the Income Tax Act or they may be specifically included under paragraph (d), paragraph (f) or, if applicable, paragraph (c) of this definition.’
Judge Khampepe, in Booi v Amathole District Municipality and Others, a unanimous decision of the Constitutional Court said that ‘it is plain from this Court’s jurisprudence that where a dismissal has been found to be substantively unfair, reinstatement is the primary remedy’ and, therefore, [a] court or arbitrator must order the employer to reinstate or re-employ the employee unless one or more of the circumstances specified in section 193(2)(a)−(d) exist, in which case compensation may be ordered depending on the nature of the dismissal.
Paragraph (d)(i) of the definition of ‘gross income’, in section 1(1) of the Income Tax Act, includes, ‘without in any way limiting the scope of this definition, such amounts (whether of a capital nature or not) any amount (other than an amount contemplated in paragraph (a)) received or accrued in respect of the termination or loss of any employment’.
Judge Lagrange, of the Labour Court of South Africa (in Jean Ludick v Vodacom (Proprietary) Limited), stated the principle with respect to back pay as follows:
‘It is correct that whether “backpay” is awarded when reinstatement is ordered is a separate consideration from whether an award of reinstatement should be made. However, an award of backpay is not a form of relief which is additional to reinstatement. Backpay can only be awarded if retrospective reinstatement is ordered. It is important to bear in mind that section 193(1)(a) of the LRA only speaks of an order of reinstatement from a date not earlier than the date of dismissal. The section does not make provision for a separate award of backpay.’
It follows from the above that when an employer is ordered to pay an amount of backpay, as was done in this instance, it is not an order for the payment of consideration, or a lump sum. It rather is an amount of retrospective remuneration.
It is clear from the award, with respect to the applicant, that the employer had to take her into its employ on the terms and conditions no less favourable to her than those that governed the employment relationship immediately prior to the dismissal dated 31 January 2021. The amount due to her was determined by retrospective calculation, on the basis of a monthly salary of R150 000 from the date of her dismissal until the resumption of her duties.
In terms of the practice generally prevailing, ‘amounts awarded in the circumstances of a claim for compensation for loss of office, termination of employment, or unfair dismissal, will fall within the ambit of paragraph (d) of “gross income”, if there was “termination of employment or the loss, cancellation, or variation of any … employment’. Put differently, with respect to an unfair dismissal, it would only apply when the person is not reinstated.
From an income tax point of view, the amount is therefore not an amount that accrued to the individual in respect of the termination or loss of employment. This is because the payment was not made in respect of the dismissal, but in respect of her reinstatement from the date of the unfair dismissal. Backpay must therefore not be included in the gross income of a person in terms of paragraph (d) of the definition of gross income. In this instance, it rather is an amount that accrues to her in respect of employment and must be included in gross income under paragraph (c) of the definition of gross income in section 1(1) of the Act.
As the matter was disputed, the applicant was not unconditionally entitled to receive the amount until the arbiter found the dismissal to be unfair and the order of reinstatement was made. The date of accrual is therefore the date of the award by the arbitrator.
Section 7A of the Income Tax Act provides a person with an option in terms of which an election can be made with respect to the date of accrual. For the purposes of section 7A −
- ‘Antedated salary’ means an amount of salary which has become payable to any person under a permanent grant, made with retrospective effect, of a salary and which in terms of such grant is payable in respect of a period ending on or before the date on which the grant has become effective
- ‘Salary’ means salary, wages or similar remuneration payable by an employer to an employee, but does not include any bonus
In terms of section 7A(2)(a), where any antedated salary has been received by or has accrued to any person during any year of assessment and the period in respect of which such antedated salary has become payable (referred to as the accrual period) commenced before the commencement of the said year, such antedated salary shall at the option of the taxpayer be deemed if the accrual period commenced not more than two years before the commencement of the said year of assessment, to have been received by or to have accrued to the said person in part during each of the years or periods of assessment in which any portion of the accrual period falls (the part of the said amount relating to any such year or period of assessment being determined on the basis of a reasonable apportionment of the whole of the said amount between all the said years or periods of assessment).
The accrual period, with respect to the antedated salary due to her, commenced on 31 January 2021. This date is not more than two years before the commencement of the year of assessment, being 1 March 2022, during which the antedated salary was awarded. She can therefore make an election under section 7A. As the backpay, or the antedated salary, was calculated by using her monthly salary, it would therefore be a reasonable basis to apportion the total amount paid on a monthly basis.
The effect of the election made by the applicant is that R150 000 accrued to her during the year ended on 28 February 2021, R1 800 000 in the year of assessment ending 28 February 2022 and R150 000 in the year of assessment that will end on 28 February 2023.
Employees’ tax
In terms of paragraph 9(3)(a) of the Fourth Schedule the ‘amount to be deducted or withheld in respect of employees’ tax from any lump sum to which section 7A applies, shall be ascertained by the employer from the Commissioner before paying out such lump sum’.
The directive application must be submitted on the basis that the back pay accrued proportionately in the 2021, 2022 and 2023 years of assessment respectively. She will therefore receive the amount net of the employees’ tax withheld in terms of the directive.
Conclusion
The tax consequences of an amount awarded to an employee who was unfairly dismissed are relatively complex. If the employee makes an election under section 7A of the Income Tax Act, the amount will effectively be spread over the accrual period and be taxed in more than one year of assessment.
Author
PJ Nel CA(SA), Project Director: Tax at SAICA
