It is not very common that companies reinstate employees subsequent to a dismissal. However, some of us might have experienced or witnessed a reinstatement after suspension, possibly after investigations. It often happens that most employees are suspended with pay, and in some instances without pay or with reduced pay.
A quandary that is often brought about by reinstating such employees is the tax treatment of the lump sum paid to them, whether or not they are reinstated. One may advocate taxing the whole amount in the month it is received by the employee as it arguably qualifies as gross income subject to PAYE. We will analyse this matter in detail below.
Is the lumpsum taxable?
For one reason or another, it is common knowledge that when someone is dismissed from work, they cease to be an employee. A reinstatement of the same employee maybe construed to be a second employment altogether. On the other hand, a suspended employee technically remains an employee of any organisation. However, the gist of the discussion is primarily concerned with employees who are suspended with reduced or without a salary, as well as those who are dismissed and then subsequently reinstated.
It can be reasonably argued that a lump sum amount received by a reinstated employee following a dismissal or suspension is compensation and therefore no PAYE is applicable on it. However, this seemingly reasonable argument is not in sync with provisions of the Income Tax Act, which include compensation in the scope of taxable income of an employee. Technically, the lump sum received by an employee is undoubtably taxable whether or not it is compensation for unfair dismissal. Having made this observation, we need to have a look at how such a lump sum is treated by the tax laws.
As highlighted above, the lump sum amount received by a reinstated employee is taxable. Most employers would take it that the lump sum should be taxable in the month the pay is received. Such a move would obviously result in an employee being burdened with a much heavier tax bill. However, in such an instance, the law is friendly to the employee as explained below.
The tax treatment
We have established that a lump sum received by a reinstated employee is indeed taxable. A closer look at the law will help us clarify this matter. The Income Tax Act actually states that “where an employee receives a lump sum payment after reinstatement following a dismissal or suspension from duty with reduced or without pay, such lump sum payments shall be spread back over the period in which such income was earned or would have been paid”.
Well, this seems like a game changer. It means that an employee who receives compensation for unfair dismissal for two years and is then reinstated will have the remuneration taxed over two years. The obvious benefit of that treatment is the exemption of the first P48 000 in each year, which reduces the PAYE burden.
Given the above, employees who are reinstated and are liable to a lump sum or compensation are advised to carefully check the PAYE deducted on such payments. Employers are also advised to bear in mind that such payments should be spread over the period for which the employee was supposed to be at work because PAYE is assessed by applying tax tables relevant to that respective period retrospectively.
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