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Do this before you pay your employee's compensation award to avoid SARS' penalties
CCMA awards are taxable. This means the thing you need to do before you hand over your employee's compensation is calculate and deduct PAYE on that money.
You need to do this when it's:
• Included in your employee's gross income e.g. a performance bonus;
• Not of a capital nature (e.g. a CCMA award against you for your employee's pain and suffering); or
• Linked to employment or the holding of an office. For example:
The loss of office (loss of earnings and office) like a severance package or retrenchment package;
The loss of the right to office (potential or future earnings/loss of office) like a CCMA judgement against you for your employee's lost future revenue from an unfair dismissal;
Unfair dismissal (loss of earnings or office); and
Termination or breach of your employment contract.
Since awards relate to unfair dismissal, here's how to tax your ex-employee's compensation if you lose an unfair dismissal case.
If you lose an unfair dismissal case at the CCMA, don't forget to tax your employee's compensation award
These awards are taxable under paragraph (d) of the Income Tax Act
under the definition of 'gross income'. You must tax your employee's compensation, even if it's a voluntary payment, if your employee claims compensation for:
• Loss of office;
• Termination of employment; and
• Unfair dismissal.
In some cases of unfair dismissal, the CCMA or Labour Court will order you to rehire the employee. The employee may waive his right to come back to work and take the option of a lump sum award instead.
This award falls within the scope of gross income and is taxable. But this also means you must deduct tax from the payout.
These amounts will form part of the employee's remuneration. So you'll deduct these costs as part of his salary bill (source code 3608).
You must deduct the PAYE on this amount correctly; or you may end up under-declaring PAYE. If this happens, you'll face penalties and interest from SARS.
So don't just give your ex-employee compensation award until you've fulfilled your obligation to tax that money.