Public Protector Advocate Thuli Madonsela has successfully challenged the South African Revenue Service’s (SARS) taxation of a financial compensation amount paid to the estate of a late civil servant, who had suffered prejudice after his services were unprocedurally terminated.
In a landmark case that has set a precedent in that it was the first time an objection of this nature was raised with SARS, the collector of revenue agreed to refund the estate of the said official an amount of R110 903.19. The amount had been deducted, as income tax, from the Department of Correctional Services’ settlement offer of R484 697.87, which was paid to the official’s estate.
The issue of financial compensation came up after the Public Protector found in September 2011 that the process followed by the department in terminating the official’s services was not in compliance with the Public Service Act and the Constitution and therefore constituted maladministration.
This was after allegations that Minister Nosiviwe Mapisa-Nqakula had decided that the official’s services be terminated as his ill health had become an impediment to his performance of official duties.
The official had complained to the Public Protector that he had been offered a “verbal” package of early retirement without the reduction of pension benefits and an added period of three and a half years of service, including a lump sum salary payment for that period. He did not receive a written confirmation of the package. When his service was terminated in 2010, the department’s undertaking was not adhered to.
Following her investigation at the time, the Public Protector had directed that the official be immediately re-instated and that the department conducts an investigation into his incapacity due to ill health and considers ill health retirement for him.
She had also directed that the official be placed on a temporary incapacity leave until the finalisation of the ill health retirement and that he be compensated for financial damages and humiliation suffered.
At the time, Minister Mapisa-Nqakula accepted the remedial action, with her department agreeing to implement it fully. Unfortunately, the official died before the remedial action could be implemented, prompting the department to pay the compensation to his estate.
However, what then came into question was whether the settlement offer by the department constituted income in the hands of the taxpayer or his estate and whether the benefits were therefore taxable in terms of the Income Tax Act.
Following deliberations on the matter, SARS agreed that compensation payable as remedial action constituted an ex lege payment or payment “as a matter of law” and also constituted a receipt of a capital nature that would not be taxable in terms of the Act.
“I wish to express my profound gratitude for your assistance during our most trying times, when my sick, now late husband, was unfairly treated … I do not have words of appreciation for your professionalism, devotion, competence and compassion,” said the widow of the official, after the refund was effected recently. She cannot be named for safety reasons.
For more information contact:
Kgalalelo Masibi
Spokesperson for Public Protector South Africa
Cell: 079 507 0399
Tel: 012 366 7006
Email: kgalalelom@pprotect.org
