CCMA Settlement Awards and Mutual Termination

CCMA Settlement Awards and Mutual Termination


Settlement Awards

For more detail and advice on structuring settlement awards please contact us.

As a company that processes payrolls on an outsourced basis, we regularly get requests to pay employees in terms of an instruction from the Commission for Conciliation, Mediation and Arbitration (CCMA).

Amounts received as a result of a CCMA or Labour Court award would be specifically included in ‘gross income’ in terms of Section 1 – definition of ‘gross income’, paragraph (d) or (f). With the payment, constituting ‘gross income’ there is an obligation to withhold employee’s tax.

The amount of employee’s tax that the employer is required to withhold must be ascertained by way of a tax directive application to SARS. SARS has published Interpretation Note 26 (March 2004), which provides clear guidelines as to the responsibility put on employers in this regard.

Mutual Termination

We have recently had to deal with large volumes of voluntary separation packages / mutual termination awards that are not related to retrenchment. Many tax practitioners and payroll administrators have struggled to identify how to deal with the taxation or reporting of a voluntary separation package. The SARS guides have also not been very clear on this matter, resulting in the reporting and taxation of such payments not being accurate.

When dealing with this matter it is important to understand the distinction between voluntary retrenchment, and voluntary termination of services, as their tax treatment and reporting differ.

Standard retrenchment procedures and reporting should be followed in the case of a voluntary retrenchment, where voluntary retrenchment was agreed upon as an alternative to forced retrenchment (agreed to in the context of a proper retrenchment exercise under section 189 of the Labour Relations Act). In the case of a retrenchment as discussed above, a tax directive must be applied for and the income reflected against code 3901 on the IRP 5 tax certificate.

When an employee is paid a voluntary separation package that is not related to a retrenchment, this income must be reflected under code 3907 (“Other Lump Sums”) on the tax certificate. The employer is still required to apply for a tax directive using the normal application process but with the reason for the application listed as ‘voluntary separation package’.

SARS has released a document on their website “Clarification of Source Codes”, which explains the use of both of these codes.