Golden handshakes seem to be becoming increasingly popular at the moment. The Oxford Dictionary defines a golden handshake as ‘a payment given to someone who has been made redundant or retires early’.
The term ‘golden handshake’ is not defined in the Income Tax Act. A ‘severance benefit’ is defined in section 1 of the Act. Assuming that a golden handshake is not a ‘severance benefit’ as defined in section 1, it is included in the ‘gross income’ of a taxpayer either in terms of the specific inclusion under paragraph (d) or paragraph (f).
Paragraph (d)(i) of the definition of ‘gross income’ includes any amount (unless it falls into paragraph (a) of the definition), including any voluntary award, received or accrued 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. Paragraph (d)(i) defeats the argument that compensation for loss of office represents an amount of a capital nature. Restraint of trade payments are of a capital nature and do not fall within the provisions of paragraph (d) but are caught by the provisions of paragraph (cA) of the definition.
In terms of paragraph (f) of the definition of ‘gross income’, any amount received or accrued in commutation of amounts due under a contract of employment or service is included in gross income. This provision ensures that a commuted amount forms part of gross income if it can be attributed to an amount due under a contract of service. It has been held in ITC 517 (1942) SATC 263 that the words ‘amounts due’ in paragraph (f) do not refer only to amounts presently due but also to amounts that, in terms of a contract, will fall due in the future in respect of services to be rendered.
The provisions of paragraphs (d) and (f) do overlap, since most amounts owing as a commutation of amounts due will be received or will accrue on the termination of service. Paragraph (f) may, however, be applicable when paragraph (d) does not apply.
Golden handshakes are therefore included in the gross income of a taxpayer and are subject to taxation.
Author: Muneer Hassan CA(SA) is a Tax Consultant and a Senior Lecturer in Taxation at UJ
