Employment Tax Incentive

Employment Tax Incentive – Claiming when not reported in a specific month.

The Income Tax Act allows employers to claim Employment Tax Incentive (ETI) until the end of each six-month cycle. As each six-month cycle ends with the EMP501 employer reconciliation process it seems obvious employers should be able to claim ETI up until their EMP501 is submitted. Not so according to the e@syfile software.

Assuming an employer has not submitted an ETI claim on the EMP201 for a particular month the obvious ways to claim during the six-month cycle would be to either add the additional valid claim on to the EMP501 or to amend the EMP201 for the month where the ETI should have been claimed (had all info been available at the time).

  1. Adding to the EMP501 – when one tries to do this e@syfile records an error stating that one cannot claim ETI on an EMP501 that is not reflected on the EMP201;
  2. Amending the EMP201 – e@syfile no longer allows the amendment of the EMP201 for ETI claims when the filing period to which it relates is finished.

E@syfile therefore prevents one from claiming the ETI within the six-month cycle. The best solution we understand is to use the Automated PAYE Dispute Management Process, but this is still to be tested fully.

UIF – As Applied to Learners

For a couple of years the Department of Labour has been talking about changes to the benefits to be provided to qualifying employees. These proposed changes have been widely published and discussed in payroll forums and at seminars.

The changes to the Unemployment Insurance Act, signed into law on 19 January 2017, have yet to be made effective. This Act deals with the payment of benefits, with changes to the ‘application’ of the Unemployment Insurance Act being introduced. Indications are the effective date will be 1 March 2018, but this remains to be seen.

The 2017 Bills make related changes to the ‘application’ of the Unemployment Insurance Contributions Act, which deals with contributions.

For both Acts, the provisions that excludes learners in terms of the Skills Development Act from contributing and being eligible to claim benefits, have been deleted. Once effective, the result of these changes is that all learners must contribute, and consequently be eligible to claim benefits.

Note however that both Unemployment Insurance Acts define an employee as per the Fourth Schedule of the Income Tax Act and exclude common law independent contractors, even if paid deemed remuneration (income reflected against IRP 5 code – 3616). The Fourth Schedule also defines the remuneration on which the contribution must be calculated, with some special exclusions. In my understanding, these exclusions do not apply to the learnership situation, and all learners will have to contribute.

To conclude, all learners will have to contribute, unless they are not an employee as defined, and contributions must be made unless the remuneration value is zero.

Employee vs Independent Contractor? When to deduct employee’s tax.

SARS Interpretation Note 35 and SARS Interpretation Note 17 give guidance on the tests to be passed to distinguish between an independent contractor and an employee and in which circumstances employees tax (PAYE) should be deducted.

IN17 contains a flow chart illustrating the decision making process. In summary, the tests are as follows:

Question Deduct Employee’s
Tax (PAYE)?
Is the person a labour broker or are they remunerated by a labour broker? Yes
Is the person a personal service provider? Yes
Does the person meet all of the below criteria (if the answer is no to any of these questions then PAYE needs to be deducted)?

  • Are they resident in South Africa?
  • Do they have more than three employees of their own?
  • Can you confirm the person does not have to deliver the service mainly at the client’s premises and that control and supervision by the client is not present?
  • Is the dominant impression that of an independent contractor?

Company Car – Fringe Benefit Determination Process

If the company is providing a company financed vehicle to an employee for business and private use please follow the attached decision-making process:

Step 1
Is the vehicle acquired under an operating or finance lease?

If it is an operating lease then proceed to step 2. If it is a finance lease then proceed to step 3.

Step 2 – Operating Lease
If you believe it to be an operating lease can you confirm that it meets the following requirements:

  • The employer must lease the vehicle from a lessor in the ordinary course of the lessor’s business (not being a banking, financial services or insurance business);
  • The vehicle must be available to lease to the general public for a period of less than a month;
  • The costs of maintaining the vehicle (including any repairs to the vehicle necessary due to normal wear and tear) must be borne by the lessor; and
  • Subject to the claim a lessor may have against a lessee for failing to take proper care of the vehicle, the risk of loss or destruction of the vehicle must not be assumed by the lessee.

If the vehicle is confirmed to have been acquired under an operating lease (rental) the fringe benefit is based on the monthly rental and fuel cost to the employer.

Step 3 – Finance Lease
If the lease is a finance lease the fringe benefit will be calculated as follows:

  • Company to supply the ‘determined value’ of such vehicle. This value is the retail market value including VAT (but excluding finance charges and interest)
  • On a monthly basis, the employee having right of use of such vehicle will be taxed as follows:
    • ‘Determined value’ x 3.5% x 80% where the vehicle is not acquired with a maintenance plan (and the monthly business travel undertaken is less than 80% of the total travel. 20% is applied where the monthly business travel exceeds 80% of the total travel).
    • ‘Determine value’ x 3.25% x 80% (or 20% where business travel exceeds 80% of the total travel) where the vehicle is acquired with a maintenance plan.

In both cases the calculated fringe benefit is reduced by any consideration paid by the employee towards the cost of the vehicle.

Please note that to determine what method to use in calculating the taxable fringe benefit for the car you must first check whether the lease agreement is an operating or a finance lease. The rentals plus petrol method is only used for operating leases. For finance leases the retail market value at the time the employer obtained the vehicle must be used.

Please contact your payroll team or dave@hrtorque.co.za for further information in this regard.

SARS – Employment Tax Incentive Guide

In September SARS issued a draft guide to claiming Employment Tax Incentive (ETI). This is well worth reading. While ETI is a valuable tool for employers it is also one of the highest risk areas. If an employer makes a mistake then suddenly they can face a big bill for the PAYE they should have paid plus 10% penalties and interest. By the time a bill is received the amount can be significant and has the potential to cause liquidity issues.

The challenge with ETI is that systems (SARS and third party) have had their challenges and employers are sometimes faced with a bill even when they believe they have followed the rules correctly. It is important in these situations for employers to have kept proper records and to have confidence they can defend their claims.

Final Reminder – COIDA Annual Return of Earnings

The Compensation Commissioner has issued a final reminder for the submission of outstanding Return of Earnings for 2017.

An estimated return based on estimate earnings can now be submitted before the 31 October 2017.

On or before the 30th April 2017 (as extended by the recent notice) you are required to submit your Return of Earnings (ROE) submission to the Department of Labour, as is legislated under the Compensation For Occupational Injuries And Diseases Act (No. 30 of 1993). Each registered business must submit a separate return.

This Act replaces the Workmen’s Compensation Act and provides for compensation for disablement caused by occupational injuries or diseases sustained or contracted by employees in the course of their employment, and for death resulting from injuries and diseases. The benefits are paid from the Compensation Fund, which gets its money from compulsory contributions paid by employers. All employers carrying out business within the Republic of South Africa are required to register.

If you have not requested this service from us in the past and require us to complete and submit this return on your behalf, please contact us on info@hrtorque.co.za. If we have submitted for you in the past then we will complete your return and send you the figures before submission. The cost for this service is R702.00 per return (excl. VAT).

Are the new UIF limit and rules operational yet?

In May 2017, the UIF Amendments Bill was signed into Law. This amendment improved the benefits available to those on maternity, for dependents of those deceased and for those not working due to illness. In addition, the UIF limit increase was published by the Minister of Labour in Government Gazette No. 40691 dated 17 March 2017, which relates to unemployment benefits in terms of the Unemployment Insurance Act, 2001 (Act No. 63 of 2001).

However, the above amendments only applied to changes in benefits and there were no official changes under the UIF Contributions Act and as such the payroll limit should not be increased. Further, those responsible for making payments under UIF do not believe the amendments are implemented.

From a practical perspective therefore until further notice, the limit on payroll should be set to the legislated value of R178 464.00 per annum or R14 872.00 per month (maximum deduction R 148.72 per month). In addition, those expecting to receive the enhanced benefits are unlikely to find much joy when trying to claim (one should also remember that UIF benefits are only available to those who contribute to UIF so where no contributions have been made no benefits are claimable).

Taxation of Employees Employed to Work Offshore

Taxation of Employees Employed to Work Offshore (prior to 183 days rule being met)

A client of ours employed someone who will work offshore for longer than 183 days/60 days consecutive days (this is clear in his employment contract). Until he reaches the 183 days how should they tax him – i.e. withhold tax each month and then give it back to him once the 183 days or deduct and pay to SARS and let the employee claim at assessment time?

Should an employer be satisfied that an employee that is ordinarily a resident in the Republic, but stationed outside of the Republic, rendering services for a resident employer complies with the exemptions set out by section 10(1)(o)(ii) of the Act it is possible for the employer to stop deducting employees tax. It must be noted that an employee must spend 183 full days in aggregate outside the borders of South Africa, the 183 days need not be continuous, however the employee must spend at least 60 continuous days outside South Africa for this exemption to apply. Proof of these travels must be kept and all travels must be in service of the employer.

The potential exemption under Section 10(1)(o)(ii) of the Act does not automatically exempt the employer from their liability to deduct and pay over employee’s tax in accordance with the Fourth Schedule of the Act. The liability of deducting PAYE will always lie on the employer, and should there be any under payment the employer will be held liable for the outstanding taxes and interest.

In the SARS document ‘Guide for Employers in respect of Employees’ Tax’, SARS provides the following advice:

“The question of whether an employee will qualify for the exemption or not is a question of fact that can… be answered [only] once the requisite number of days has been met. Directives are therefore not issued for such taxpayers. Where the employer is satisfied that the employee will meet the necessary criteria for the exemption to be granted, the employer is at liberty not to deduct employees’ tax provided that a copy of each page of the employee’s passport and a copy of the relevant contract for the services to be rendered in a foreign country are kept. Should it transpire that the employee does not qualify for the exemption, the employer will be held personally liable for any losses that SARS may suffer due to the non-deduction of the full amount of employees’ tax.”

The ultimate question of how the employer should treat the individual situation depends on the individual circumstances. If the employer is risk averse, the exemptions provided in Section 10(1)(o)(ii) of the Act should only be applied when the employer is fully satisfied that the employee meets all the necessary requirements and not before, and that the employer fully understands that should SARS find the employee does not meet all the requirements, that the employer will be held liable.

ETI – SARS Challenges Continue

Editor’s Note: The issue below is causing real difficulty for employers and outsourcers alike. For the outsourcer, it is sometimes difficult to explain to a client that despite submitting everything correctly, SARS systems are rejecting ETI claims. This is particularly difficult when ETI claims are usually material and the first time the client finds out about it is when they get an assessment for a large sum of PAYE plus penalties and interest.

ETI submissions to SARS in August 2016 were a nightmare for employers. Incorrect validation checks in the SARS E@syFile system resulted in multiple ETI submissions being rejected and assessment notices sent to employers to repay millions of rands in ETI plus penalties and interest.

SARS assured us these had been resolved for the February 2017 submissions and we hoped this would be the case. Alas this was not to be.

Feedback from our own experience and those of the Payroll Authors Group Members give the following examples of challenges experienced:

  • Validation checks that were supposed to be removed have continued to throw up some rejections of submissions;
  • If employees are included with wages below the threshold e.g. R1,900 compared to R2,000, even if no ETI is claimed the submission has been rejected;
  • Where employees turn 18 near the end of the month and ETI should be validly claimed the whole ETI claim has been rejected because the birthday is “too late in the month” (sic);
  • ETI has been rejected for unallocated payments on statements of accounts going back as far as 2003 tax returns. This has been made more difficult by SARS local branches inability to help with allocations.

The rejection of the claim is accompanied by an assessment for the full PAYE (against which the ETI was claimed) together with interest and penalties. Even when corrections to the issues above are submitted the employer still needs to go through the separate, arduous process of appealing the interest and penalties.

Employment Tax Incentive – Non-Binding Private Opinion

Editor’s Note: The guidance below is useful in interpreting ETI which continues to be a challenge for employers given the problems with SARS systems. However, please be aware that where the article refers to PAGSA these are opinions only and not binding.

It has been a tumultuous 12 months in terms of ETI. There have been many queries regarding this incentive and one wonders whether all the effort that is going into the interpretation of the law is worth it considering it will only be valid until 2019.

Directly after the promulgation of the amendments to the Employment Tax Incentive Act on 19 January 2017, the Payroll Authors Group of South Africa (PAGSA) requested guidance from SARS to assist payroll suppliers and employers to implement and apply the new requirements correctly. SARS issued a Non-Binding Private Opinion dated 7 February 2017 in response to the queries.

In summary, the following interpretations have been forwarded by SARS:

SARS will refund unclaimed ETI if:

  • The PAYE was less than the ETI
  • The employer was not tax compliant, but later became tax compliant

No refunds will be made for any other reason.

The term employed and paid remuneration’ hours (if less than 160) must be used to:

  • ‘gross up the ‘wage’ paid (to be checked against the monthly minimum wage)
  • ‘gross up’ the ‘monthly remuneration paid (to be checked against R6 000 per month)

The wording of ’employed and paid remuneration’ was clarified by SARS to be:

  • ’employed’ hours, less
  • ‘Unpaid’ hours, plus (this reduces ‘wage’)
  • ‘Premium’ hours (this increases ‘remuneration’)

The PAGSA has summarised this to mean:

  • ‘Employed hours’ for ‘contracted’ employees is the average working hours per month (173 hours or 195 hours) and for wage employees the weekly hours of 160 hours for a 4 week month and 200 hours for a 5 week month.
  • For casuals these hours will be the actual hours worked.
  • ‘Unpaid’ hours are hours that are not worked and not paid.
  • ‘Premium’ hours are hours worked that exceed the ordinary hours of work.

The clarity on these issues will go some way to assisting payroll administrators with the interpretation of the ETI legislation and its application in payroll. Like any relatively new legislation though we will continue to have teething problems that will only be rectified by organisations like the PAGSA raising concerns with SARS. We will continue to keep you abreast of any changes or interpretations as we receive updates from SARS and the PAGSA.