T v Exclusive Books Group (Pty) Ltd

Tax directive considered by high court and decided that employment was not terminated because of reaching 55 years of age and therefore his receipt of the money had nothing to do with his age nor did it have anything to do with termination based on operational requirements, but properly interpreted there was a mutual agreement to terminate employment and was actually a resignation and so the benfits received were properly treated as ‘remuneration’ and not severance benefits which qualify for any tax benefit.

Essence

Tax directive considered and decided that settlement payment was ‘remuneration’ and not a severance benefit because there was no dismissal

Decision

(17766/2020) [2021] ZAGPJHC 42 (12 March 2021)

Order:

Refused application with costs, including some attorney and client costs.

Judges

B Vally J

Related books

Darcy du Toit et al Labour Relations Law: A Comprehensive Guide 6ed 925 pages (LexisNexis 2015) at

Darcy du Toit et al Labour Law Through The Cases – loose-leaf service updated 6 monthly (LexisNexis 2021)

Van Niekerk and Smit (Managing editors) et al [email protected] 5ed (LexisNexis 2019) at 

Rochelle le Roux Retrenchment Law in South Africa 1ed (LexisNexis 2016) at

Garbers The New Essential Labour Law Handbook 7th ed (MACE 2019) at 

Reasons

“[19] Exclusive, therefore, was correct in not applying for the directive.

In any event it did subsequently apply for it and received it save that the outcome was not favourable to Mr T. Mr T’s complaint that its application was flawed as it designated his termination as resignation is, in my holding, incorrect.

He accepts, without more, that it was not because he was retrenched – sometimes referred to as a ‘dismissal’ for operational reasons.

If we are to further accept that he was not terminated because he was found guilty of a misconduct serious enough to warrant immediate dismissal or because he was incapacitated, then at best for him he voluntarily resigned. Hence the characterisation of his termination as being a resignation is correct.

Quotations from judgment

Note: Footnotes omitted and emphasis added

[1] The applicant, Mr BT (Mr T) is the erstwhile Chief Executive Officer (CEO) of the respondent, Exclusive Books (Exclusive). His employment with Exclusive terminated on 19 March 2018 by dint of a settlement agreement concluded between himself and Exclusive (the agreement). He and Exclusive are not able to agree on the meaning and import of sections of the agreement, which prompted him to launch this application.

He seeks an order compelling Exclusive to,

a. apply to the South African Revenue Service (SARS) for a tax directive in respect of payments made to him in terms of the agreement and,
b. issue a revised IRP5 for the 2019 tax year to him.

[2] If Exclusive does not apply for the directive, he asks for he ‘will bring an action against’ it ‘for payment of R531 769.00’ for damages incurred by him due to its failure to adhere to the agreement.

Background

. . . . .

[6] The compensation was recorded in the agreement, which was signed on 19 March 2018 and which in relevant parts reads:

‘2. RECORDAL

It is recorded that:

2.1 the Employee is employed by the Company in the position of Chief Executive Officer;

2.2 the Parties have agreed that the employment of the Employee by the Company will terminate on the Termination Date by mutual consent;

2.3 the Parties hereby record the terms which govern the Termination of the Employee’s employment by the Company on the grounds of mutual consent.

3. TERMS OF SETTLEMENT

3.1 The Employee hereby resigns as an employee and as director of the Company with immediate effect. The Company shall provide the Employee with the requisite CIPC documents to sign, reflecting his resignation as director.

3.2 The Company shalt pay the Employee his remuneration for the period 1 March 2018 to 19 March 2018. Such amount, less PAYE deduction, shall be paid to the Employee by 31 March 2018.

3.3 The Company shall pay to the Employee the equivalent of 9 (nine) months remuneration in the gross sum of R2 400 000.00 (two million four hundred thousand Rand), which amount includes notice pay, leave pay and any other statutory amount to which the Employee is entitled.

3.4 The amount to be paid by the Company in terms of clause 3.3 above shall be paid to the Employee (less any deductions which the Company may be required to make in terms of the applicable Income tax legislation and other statutory deductions) within 48 (forty eight) hours of the Company receiving a tax directive from SARS. The Company undertakes to do all things necessary, with utmost expedition, to assist the Employee in applying for, and receiving, a tax directive from SARS.

3.5 …

3.6 The Company will extinguish the Employee’s loan account [which stood at R1 644 564.00 at the time] with it, upon conclusion of this agreement, as a consequence of which the Employee will no longer be indebted to the Company for any amount whatsoever, howsoever arising.

4. FULL AND FINAL SETTLEMENT

4.1 The Parties hereby acknowledge and agree that by entering into this Agreement. they shall have no further claim/s of any nature whatsoever, howsoever arising, against the other, including any claim arising from the Employee’s employment by the Company, and its termination.

4.2 The Employee understands the consequences of entering into this Agreement, more particularly in regard to the waiver of his rights to refer an unfair dismissal dispute or any other dispute or claim of whatsoever nature arising from the employment relationship and the subsequent termination thereof.

4.3 The Employee has entered into this Agreement freely and voluntarily and has obtained independent legal advice in regard thereto.’

[7] In essence, Mr T was compensated in the amount of a salary for 19 days, a cash payment of R2 400 000.00 and R1 644 564.00 in the form of a loan write-off in order to agree to the termination of his employment, despite being accused of filching more than R1m and of being derelict in his duties. In short, Mr T accepted a handsome pay-out as quid pro quo for the termination of his employment. What the agreement demonstrates is that Exclusive is an employer that treats its employees, especially its CEO, very leniently.

[8] Two years later, Mr T launched the present application which is based on the terms of the agreement. According to Mr T the agreement specifically caters for Exclusive to apply for a tax directive for the payments received by him. This, he says, is consistent with an undertaking given to him by Exclusive that it would do all things necessary to apply for and receive a tax directive. He says further that Exclusive’s obligation to apply for and receive a tax directive arises by operation of the law. In this regard Mr T draws attention to par 9(3)(d) of the Fourth Schedule to the Income Tax Act 113 of 1993 (the Act).

[9] Mr T maintains that the payment of R2 400 000.00, being nine months’ remuneration, plus the write-off of his debt constitute a ‘severance benefit’ as contemplated in par 9(3)(d) of the Fourth Schedule. Therefore, the payment qualifies for a tax deduction that can be obtained by application of a tax directive, which can only be applied for by Exclusive. After acquiring the tax directive, Exclusive would then use the source code 3901 on the IRP5/it3(a) certificate. Sometime during the latter part of 2019 Mr T received an IRP5 certificate from Exclusive.

The certificate reflected that Exclusive used source code 3601 and not source code 3901 to record the payment it made to Mr T. Source Code 3601 applies to income received by the employee, whereas source code 3901 applies to gratuities. The former attracts a tax liability higher than the latter. The latter can only be used once the tax directive has been applied for and received. Hence, Mr T’s call for an interdict compelling Exclusive to apply for the tax directive.

[10] Exclusive disagrees. It says, 

  • firstly, Mr T was orally alerted by Mr Boner that Exclusive regards the payment as remuneration and that it would be deducting pay as you earn (PAYE) taxation from it. He agreed to this and hence he is estopped ‘from denying the correctness of the amount paid to him’.
  • Secondly, his interpretation of the agreement as well as his contention regarding the applicability of par 9(3)(d) of the Fourth Schedule is plainly wrong.

In support of its interpretation of the agreement Exclusive placed emphasis on the fact that Mr T succeeded in avoiding having to face a disciplinary hearing where he risked being found guilty and being disgracefully dismissed. Bearing this surrounding circumstance in mind, it says there never was any intention on its part to pay him – and any intention in his part to accept – ‘severance benefits’ in order to leave its employ.

He wanted remuneration for nine months, as well as a write-off of his debt to Exclusive, to leave voluntarily and silently. That is what he received. Furthermore, he was not retrenched – as is understood in employment law – and therefore not entitled to the tax benefit he sought to acquire through the directive. Nor was his employment terminated because he had reached the age of 55 years.

[11] Mr T agrees that he was not retrenched but maintains that this does not preclude him from receiving the benefits of a directive, as a directive is not reserved only for persons who are retrenched.

. . . . 

[13] After the correspondence was received, Exclusive instructed a tax consultant to apply for the directive online. This, according to Exclusive, is the very directive Mr T asked for initially. Exclusive received the directive. It contains the following information:

‘Reason for directive: Resignation
..
Under the provisions of paragraphs 2 and 11 of the Fourth Schedule to the Income Tax Act, you are required to comply with directive as set out below, regarding the remuneration paid to the above-named employee or member of fund.
Tax amounting to R2 026 656.00 to be deducted from the gratuity/lump sum payment of R4 503 680.00.’ (Underlining added.)

[14] Exclusive took the view that the matter should now rest. Mr T disagrees. He complains that the directive ‘was incorrectly applied for’. By this he means that the application was flawed in that it designated the reason for the termination of his employment as a ‘resignation’. Having accepted that he was not retrenched, Mr T now takes issue with the claim that he resigned. Nevertheless, he remains adamant that Exclusive did not apply for the directive and should be compelled to do so by this court. In other words, this court should grant him the prayers referred to in [1] above.

Analysis

[15] Mr T’s case is that clause 3.4 of the agreement obliges Exclusive to apply for the directive. To this end, he relies particularly on the last sentence of the clause, which provides that Exclusive ‘undertakes to do all things necessary, with utmost expedition, to assist’ Mr T ‘in applying for, and receiving, a tax directive from SARS.’ Mr T understands this clause to mean that Exclusive had to apply for the tax directive. He is not oblivious to the fact that it actually says that Exclusive has only undertaken to do everything ‘to assist’ him in acquiring the directive. His contention is that only Exclusive can apply for the directive. If he could apply for it he would do so, and then seek Exclusive’s assistance if it was required. Since he seeks the directive but cannot acquire it, Exclusive is obliged to apply for it. By so doing it is complying with its obligation to ‘assist him’ to obtain it. There is much force in his logic. However, Exclusive’s obligation only arises if it agrees that he qualifies for the directive. He does not qualify if the amount is paid as remuneration.

[16] Clause 3.3 states that the amount of R2 400 000.00 is the ‘equivalent of 9 months remuneration’. It does not say that it is remuneration. However, clause 3.2 specifically makes reference to the payment as his remuneration – albeit for the period of 1 March 2018 to 19 March 2018 – while clause 3.3. does not.

On the face of it, the phrase in 3.3 indicates that the payment is not remuneration. However, there is a further factor that has to be borne in mind. It is that the amount includes ‘notice pay, leave pay and any other statutory amount to which the Employee [Mr T] is entitled.’

The inclusion of these amounts due to him indicates that the payment – albeit a lump sum one – is actually remuneration that is paid in advance.

In terms of par 1 of the Fourth Schedule ‘Remuneration’ refers to payment received by an employee from an employer, ‘whether in cash or otherwise and whether or not in respect of services rendered.’

On this interpretation, and bearing in mind the evidence presented by Mr Boner that he and Mr T understood the payment to be remuneration, I conclude that the payment was meant, and was understood by all concerned, to be remuneration. It was remuneration he received for avoiding the disciplinary hearing while agreeing to leave the employment of Exclusive voluntarily and silently.

[17] In the same vein, the payment to him was not a severance benefit as defined in s 1 of the Act which reads:

‘severance benefit means ‘any amount … received by or accrued to a person by way of a lump sum from or by which arrangement with the person’s employer or an associated institution in relation to that employer in respect of the relinquishment, termination, loss, repudiation, cancellation, or variation of the person’s office or employment or of the person’s appointment (or right or claim to be appointed) to any office or employment if:

(a) such person has attained the age of 55 years.

[18] Mr T’s employment was not terminated because he reached 55 years of age and therefore his receipt of the money had nothing to do with his age.

[19] Exclusive, therefore, was correct in not applying for the directive. In any event it did subsequently apply for it and received it save that the outcome was not favourable to Mr T. Mr T’s complaint that its application was flawed as it designated his termination as resignation is, in my holding, incorrect. He accepts, without more, that it was not because he was retrenched – sometimes referred to as a ‘dismissal’ for operational reasons.

If we are to further accept that he was not terminated because he was found guilty of a misconduct serious enough to warrant immediate dismissal or because he was incapacitated, then at best for him he voluntarily resigned. Hence the characterisation of his termination as being a resignation is correct.

[20] Once the directive was received, Mr T’s complaint fell away. Exclusive could not be compelled to do that which it had already done.

[21] Exclusive also raised the issues of non-joinder of SARS, as well as estoppel based on Mr T’s representation to it at the time the agreement was concluded and for a period of two years after the payment was received by him. The conclusion I have arrived at makes it unnecessary for me attend to these issues.

Costs

[22] Both parties sought costs on an attorney and client scale. They each believed that they should not be out of pocket. Mr T contends that Exclusive was unnecessarily intransigent, forcing him to launch the application. Exclusive contends that Mr T was not only unreasonable, deliberately untransparent and lacking in candour in the application. He did not inform the court of the fundamental reason for the termination of his employment, which was to save him the disgrace of being found guilty of misappropriating large sums of money over time and of being derelict in his duties.

Thus, he should not have hauled it before court and forced it to expend resources defending itself, especially after it had applied for the directive and furnished it to Mr T when it received it. Mr T received it through his attorneys on 26 November 2020. I agree.

Order

[23] The following order is made:

a. The application is dismissed
b. The applicant is to pay the costs which costs after 20 November 2020 are to be taxed on an attorney and client scale.

Court summary