COURTNEY MCNISH

This article is intended to clarify these complex issues related to the applicability of taxation on payments to employees regarding separation settlements and ex-gratia awards.

Under Section 5(1) (e) of the Income Tax Act Chapter 75:01 (hereinafter referred to as “the act”), tax is payable on gains or profits from any employment or office, including pensions or emoluments within the meaning of Section 100, and any contribution of the employee paid by the employer on behalf of the employee to an approved pension fund or scheme.

Emoluments are defined in Section 100 of the act as all salary, wages, overtime, bonus, remuneration, perquisites including the value of board and lodging, stipend, commission or other amounts for services, directors’ fees, retiring allowances or pension, arising or accruing in or derived from or received in TT and which are assessable to income tax.

However, there is no specific definition of what is considered to be gains or profits from any employment.

Additionally, there is no mention of compensation for loss of office. Given that there is no definition or mention, it can be argued that a separation settlement payment is not a gain or profit, but rather a capital payment made in exchange for the loss of employment, and therefore not subject to taxation.

The common-law jurisprudence states that where payment for compensation for loss of office is made to an employee in exchange for the surrender of employment, this payment would not be taxable, as it could not be considered to be a profit gained in respect of employment, but rather a capital receipt or an amount received as compensation on surrendering a right.

In Henley v Murray (HM Inspector of Taxes) (1949) 31 TC 351, the relevant payment was made following a compromise of a potential dispute that the parties agreed between themselves. The Court of Appeal drew a distinction between the “receipt of remuneration or profits in respect of the office” and “sums paid in consideration of the surrender by the recipient of rights in respect of the office.” It was held that the sums paid were not taxable.

Conversely, in EMI Group Electronics Ltd v Coldicott (1999) STC 803, where a payment made in pursuance of a contractual provision, agreed at the outset of the employment, which enabled the employer to terminate the employment on making that payment, was held to be remuneration in respect of the employment. even though it was made in conjunction with the termination of the employment.

Such a payment is not paid in consideration of the recipient’s “surrender of rights” under the contract, because the recipient is receiving what was bargained for under that contract and therefore taxable.

[caption id="attachment_977681" align="alignnone" width="1024"] The Inland Revenue Division, South Regional Office in San Fernando. - FILE PHOTO/LINCOLN HOLDER[/caption]

Further, in the case of GCT v Comptroller of Income Tax (2020) SGITBR 3 the Income Tax Board of Review rejected the long-standing position taken by the Com