Author: Nicky Hardwick
In South Africa, the withholding tax treatment of CCMA (Commission for Conciliation, Mediation and Arbitration) settlement awards depends on the nature of the settlement amount. Here is a handy breakdown:
Nature of the settlement
The key issue is whether the amount is considered:
- Remuneration (eg. compensation for loss of income, notice pay, salary)
- Or a non-taxable settlement (eg. compensation for unfair treatment not related to loss of income)
Taxable CCMA settlements
If the settlement amount compensates the employee for loss of earnings, such as unpaid salary, notice pay, severance pay, or compensation for unfair dismissal (as opposed to damages), then it is subject to PAYE (Pay-As-You-Earn) withholding tax as remuneration. The employers duty is then to:
- Withhold tax under paragraph 2(1) of the Fourth Schedule to the Income Tax Act.
- Issue an IRP5 certificate to the employee reflecting the income and tax withheld.
Non-taxable settlements
If the settlement compensates the employee for non-patrimonial damages (such as emotional distress), or a solatium (compensatory award for pain and suffering), then it may not be subject to PAYE, depending on how it is classified and worded. However, SARS may scrutinise such agreements closely, especially if structured to avoid tax.
Practical guidelines
The wording in the settlement agreement is critical.
- Employers should classify the nature of each component of the award.
- If there is uncertainty, seek professional tax advice or obtain a tax directive from SARS.
- Always disclose the full settlement to the employee, including the tax implications.
SARS position
SARS generally treats most CCMA settlement awards as remuneration unless clearly shown otherwise. They encourage transparency and correct PAYE treatment to avoid penalties.
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- Tax directive services: Need certainty from SARS on how a settlement should be taxed? We can assist you in applying for tax directives to ensure compliance and avoid costly errors.
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Let us help you protect your business and employees by getting it right the first time. Contact us at [email protected] or visit www.hrtorque.co.za to find out more.