Settlement Issues and severance payments

Employers have an obligation to deduct tax from income paid to an employee. But what about an employer's tax obligations when the employer and the employee enter into a settlement agreement to resolve issues arising from the employment relationship?

Humiliation, loss of dignity, injury to feelings and loss of any benefit

If payment is made pursuant to section 123(1)(c)(i) of the Employment Relations Act 2000 ("ERA"), then the payment is tax free. Payments under section 123(1)(c) include compensation for humiliation, loss of dignity, and injury to the feelings of the employee.

The Inland Revenue Department ("IRD") has issued a Public Ruling (BR Pub 06/05) to this effect stating that such payments: