We have recently become aware of an interesting ruling impacting on the tax treatment of leave pay on retirement or retrenchment.
When employees are retrenched or retire and there is leave pay owning, it is traditionally added to the amount that is sent to SARS for inclusion in the tax directive. If, however, any of the leave that was granted to the employee was in excess of what the employee was entitled to receive according to Basic Conditions of Employment, and that leave was allowed to be accumulated and paid out, this encashment is fully taxable and cannot be included in the amount sent to SARS when applying for a tax directive.
As an example, according to the Basic Conditions of Employment, a 5 day worker is entitled to 1 days leave for every 17 worked or 15 working days per annum. In terms of this ruling, if the employee is entitled to more than 15 days leave and is allowed to accrue those days and be paid those days, the value of this leave would not qualify to be included in the tax free portion for tax directive purposes. It will need to be fully taxed as is the notice pay.