The Supreme Court of Uganda has affirmed its decision in Uganda Revenue Authority v. Siraje Kajura Hassan (Civil Appeal No.9 of 2015) that terminal benefits (benefits upon termination of employment), retrenchment packages, or compensation packages after loss of employment are taxable employment income under the Income Tax Act (ITA).
This was in the case of Patrick Nyabiryo and 1,117 others v. Uganda Revenue Authority (Civil Appeal No.24 of 2022) where the top Court upheld the decision of the Court of Appeal that terminal benefits constitute employment income and are therefore taxable under Sections 19(1) (a) and 19(1)(d) of the Income Tax Act.
Section 19(1) (a) and (d), respectively, provide that: “19 (1). Subject to this section, employment income means any income derived by an employee from any employment and includes the following amounts, whether of a revenue or capital nature –
(a) Any wages, salary, leave pay, payment in lieu of leave, overtime pay, fees, commission, gratuity, bonus, or the amount of any travelling, entertainment, utilities, cost of living, housing, medical, or other allowance;
(d) any amount derived as compensation for the termination of any contract of employment, whether or not provision is made in the contract for the payment of such compensation or any amount derived which is in commutation of amounts due under any contract of employment.”
The Supreme Court held that Section 19(1) (d) of the Income Tax (as amended) is broad enough to encompass whatever various definitions of compensation post-job loss the appellants sought to argue were exempt from tax by virtue of not being included in the definition contained in the provisions, particularly that the compensation given to the Appellants was as a result of a government restructuring programme and that the provisions apply when the compensation is voluntary or involuntary upon employee termination due to misconduct.
In this case, the appellants were former employees of the defunct Uganda Electricity Board (UEB) who lost their jobs following a government restructuring programme and were given retrenchment packages/compensation packages upon that job loss.
The respondent, Uganda Revenue Authority (URA), taxed them separately, but they brought this lawsuit as a class action to recover a total amount of more than 900 million on the ground that they were unlawfully taxed.
“In the context of Section 19(1) (d) [of the Income Tax Act] which provides that employment income includes “any amount derived as compensation for the termination of any contract of employment,” it is my view that this amount includes any sum of money paid to an employee because his/her contract has been terminated. In the present case, the relevant payments to the appellants were made following the termination of their contracts with UEB. Accordingly, these payments amounted to employment income within the meaning of Section 19(1)(d) of the Income Tax Act.” Justice Elizabeth Musoke, JSC wrote on behalf of the top Court bench comprising Justice Percy Night Tuhaise, JSC; Justice Stephen Musota, JSC; Justice Christopher Madrama Izama, JSC; and Justice Catherine Bamugemereire, JSC.
“I must also point out that the interpretation that terminal benefits amount to employment income within the meaning of Section 19(1)(d) of the Income Tax Act was the view of the majority of this Court (Arach-Amoko, Nshimye, Tibatemwa-Ekirikubinza, JSC) in the Siraje Hassan Kajura case (supra). Opio-Aweri, JSC also thought that terminal benefits amounted to employment income within the meaning of Section 19(1)(d) although he was of the view that they also amounted to employment income within the meaning of Section 19(1)(a) too.” She added.
Benjamin Ahikiiriza is a legal writer and publisher of the Legal Reports Digital Media.