Issue 4 Retrenchment and Reinstatement Packages

In July 2022, Caroline Ltd paid employees the following amounts:

1. Lump sum payment following reinstatement

In February 2022, the Labor Court awarded Gibson a Finance Officer a compensation of P596, 000 who had been placed on suspension for 15 months on allegations of non-compliance with the companys code of conduct. He was on a reduced salary for the 15 Months. Caroline Ltd paid the compensation during the year and P196, 000 was attributable to year ended 30 June 2021 and P400, 000 to year ended 30 June 2022. Gibson was on a two-year contract and his salary, excluding the lump sum, for the two years ended 30 June 2022 were as follows:

Year ended 30 June 2021 P436,000

Year ended 30 June 2022 P436,000

2. Retrenchment packages of P944,000.

During the year, Caroline Ltd paid retrenchment package amounting to P944, 000 per employee when it closed the payroll department and outsourced it. All the employees who received the retrenchment package were higher rate taxpayers.

Required

What was the tax liabilities on the redundancy packages and lump sum payments received by the employees on their reinstatement? Show all the workings

BOTSWANA RATES:

Use the following tax tables to answer your questions, where necessary.

Rates of tax from 2016/2017 tax years

Resident companies On taxable income

Standard rate 22%

Manufacturing company rate 15%

Non-resident companies

Standard rate 30%

Resident individuals

P0 P36,000 Nil

P36,001 P72,000 Nil + 5% of excess over 36 000

P72,001 P108,000 P1,800 + 125% of excess over 72 000

P108,001 P144,000 P6,300 + 1875% of excess over 108 000

Over P144,000 P13,050 + 25% of excess over 144 000

Non-resident individuals, trusts and estates

P0 P72,000 5% of every pula

P72,001 P108,000 P3,600 + 125% of excess over 72 000

P108,001 P144,000 P8,100 + 1875% of excess over 108 000

Over P144,000 P14,850 + 25% of excess over 144 000

Capital gains individuals

P0 P18,000 Nil

P18,001 P72,000 P0 + 5% of excess over 18 000

P72,000 P108,000 P2,700 + 12.5% of excess over 72 000

P108,000 P144,000 P7,200 + 18.75% of excess over 108 000

Over P144,000 P13,950 + 25% of excess over 120 000

Capital gains companies

Net aggregate gains are taxable at the company rates of tax.

Tax on Foreign dividend 15%

Basis of valuation of benefits

Individuals vehicle benefit

Vehicle cost		Employee benefit	Fuel cost adjustment
P1 - P50 000		P2 500	P1 000
P50 001 - P100 000		P5 000	P2 000
P100 001 - P150 000		P7 500	P3 000
P150 000 - P200 000		P10 000	P4 000

Benefit on the excess of P200 000 is 15% thereof with a maximum fuel cost adjustment of P5 000.

Individuals housing benefit:

If rated:

10% of the propertys rateable value prorated by occupation and reduced by any contribution made by the employee.

If not rated:

Gross floor area x P250 per sq metre x 8% for a standard building

The benefit is prorated by period of use and reduced by any contribution made by the employee.

Individuals furniture benefit

10% of furniture cost in excess of P15, 000 pro - rated by usage.

CAPITAL TRANSFER TAX RATES

Aggregate Taxable Value Rate of Tax per cent

1. Person (other company) First P100 000 2 per cent

Next P200 000 3 per cent

Next P200 000 4 per cent

Balance 5 per cent

2. Resident company 12.5 per cent

3. Non-resident company 12.5 per cent

Capital value of an annuity

Capital value = A x 1 (1/(1 + r) / r

Where - A is the annuity payable

r = rate of return

N = number of years over which the annuity is payable