Directives and Severance Benefits

In simple terms, and dealing with employees only, a “severance benefit” is defined in the Income Tax Act as a payment of a lump sum by an employer (i.e. not paid by a retirement fund or from the proceeds of an insurance policy) to an employee in respect of the relinquishment, termination, loss, or variation of the employee’s employment under circumstances where:

  1. The employer is 55 years of age or older
  2. The employee cannot continue working due to sickness, accident, injury or incapacity through infirmity of mind or body
  3. The employer discontinues the trade in which the employee was employed or makes the employee redundant by reducing staff.

Severance benefits are also described as ‘Voluntary Severance Packages’.

Taxation Rules

Severance benefits are taxed using the same tax table as used for retirement fund lump sums.

Table: Retirement Fund Lump Sum Table (including Severance Benefits):

Taxable Income Percentages and Brackets
0 – 500 000 R 0 + 0% of each R1
500 001 – 700 000 R 0 + 18% of the amount above R500 000
700 001 – 1 050 000 R 36 000 + 27% of the amount above R 700 000
1 050 001 and above R 130 500 + 36% of the amount above R 1050 000

This table must be applied on a cumulative basis by taking into account severance benefits and any retirement fund lump sums paid previously. Payrolls cannot apply this table because the payroll does not have a record of these prior lump amounts paid to the employee.

Only SARS have the records to be able to apply this table correctly and employers must apply for a tax directive from SARS to be able to withhold the correct employees’ tax amount.

Directive Rules – IRP3 (a)

SARS have confirmed the following directive application procedures for the taxation of a payment by an employer of a severance benefit.

Prior to September 2017, when an employer selected “Severance Benefit – Voluntary Retrenchment” on the IT3 (a) directive application, the normal income tax table was incorrectly used to determine the employees’ tax to be withheld from severance benefit lump sums. This was corrected by the final income tax calculation on assessment where the severance benefit tax table is used for severance benefits reported as code 3901 on the tax certificate.

From September 2017, the Tax Directive system was amended and the severance benefit tax table is now used to determine the employees’ tax amount stated on the tax directive if the reason “Severance Benefit – Voluntary Retrenchment” is selected.

If the employer used the reason “Other” and in the description field entered ‘Voluntary retrenchment’ instead of using the correct box (historically we saw people doing this because they were worried that under the old practice they would not get the R500,000 exemption), these directives must be cancelled and resubmitted with the reason “Severance Benefit – Voluntary Retrenchment” to ensure that the assessment calculation is correct.

The following ‘Reason’ options can be selected on the IRP3 (a) directive application form:
1. Severance benefit – Death
2. Severance benefit – Retirement (age of 55 or older)
3. Severance benefit – Retirement due to ill health
4. Severance benefit – Involuntary retrenchment
5. Severance benefit – Voluntary retrenchment

Tax Certificates

The following codes must be used to report the severance benefit amount and its related employees’ tax amount on tax certificates:

  • Code 3901 (Gratuities / Severance Benefits (PAYE))
  • Code 4115 (Tax on retirement lump sums and severance benefits).

Note:
If the employer has incorrectly used code 3907 for the severance benefit the amount will be treated as normal income and taxed using the income tax table on assessment without the R500 000 exemption allowed by the severance benefit tax table.

The employees’ tax withheld in accordance with the directive must be reported on the tax certificate as code 4115 and not as normal PAYE (code 4102).

Changes to the Official Interest Rate for Fringe Benefits

The Official Interest Rate for calculating Fringe Benefits decreased by 0.25 % effective 1 April 2018.

Where an employer gives an employee a loan that is less than the official interest rate or interest free, the difference between the two must be treated a taxable Fringe Benefit.

This Fringe Benefit should be processed via the payroll and reported on the Employees IRP5 against SARS Code 3801.

The Official Interest Rate is defined in the Seventh Schedule as the rate of interest that is equal to the Repo Rate, plus 100 basis points (1%).

The repo rate decreased to 6.5% on the 28th March 2018, and the official interest rate therefore became 7.5% effective 1st April 2018.

Please note that HRTorQue Outsourcing have updated all their payroll outsourcing clients effective 1st April 2018.

Travelling Allowance 2018/19

Rates per kilometre, which may be used in determining the allowable deduction for business travel against an allowance or advance where actual costs are not claimed, are determined by using the following table:

Value of Vehicle
(inc. VAT) (R)
Fixed Cost
(R p.a.)
Fuel
(c/km)
Maintenance
(c/km)
0 – 85 000 28 352 95.7 34.4
85 001 – 170 000 50 631 106.8 43.1
170 001 – 255 000 72 983 116.0 47.5
255 001 – 340 000 92 683 124.8 51.9
340 001 – 425 000 112 443 133.5 60.9
425 001 – 510 000 133 147 153.2 71.6
510 001 – 595 000 153 850 158.4 88.9
Exceeding 595 000 153 850 158.4 88.9

Note: 

80% of the travelling allowance must be included in the employee’s remuneration for the purposes of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes.

No fuel cost may be claimed if the employee has not borne the full cost of fuel used in the vehicle and no maintenance cost may be claimed if the employee has not borne the full cost of maintaining the vehicle (e.g. if the vehicle is covered by a maintenance plan).

The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year.

The actual distance travelled during a tax year and the distance travelled for business purposes substantiated by a log book are used to determine the costs which may be claimed against a travelling allowance.

Alternative simplified method:

Where an allowance or advance is based on the actual distance travelled by the employee for business purposes, no tax is payable on an allowance paid by an employer to an employee up to the rate of 361 cents per kilometre, regardless of the value of the vehicle. However, this alternative is not available if other compensation in the form of an allowance or reimbursement (other than for parking or toll fees) is received from the employer in respect of the vehicle.

Income Tax Rates and Thresholds 2018/19

Tax rates for the period 1 March 2018 to 28 February 2019 for individuals and special trusts:

Taxable Income (R) Rate of Tax (R)
0 – 195 850 18% of taxable income
195 851 – 305 850 35 253 + 26% of taxable income above 195 850
305 851 – 423 300 63 853 + 31% of taxable income above 305 850
423 301 – 555 600 100 263 + 36% of taxable income above 423 300
555 601 – 708 310 147 891 + 39% of taxable income above 555 600
708 311 – 1 500 000 207 448 + 41% of taxable income above 708 310
1 500 001 and above 532 041 + 45% of taxable income above 1 500 000

Trusts other than special trusts: rate of tax 45%

Rebates

Primary R14,067
Secondary (Persons 65 and older) R7,713
Tertiary (Persons 75 and older) R2,574

Age Tax Threshold

Below age 65 R78,150
Age 65 to below 75 R121,000
Age 75 and over R135,300

March 2018 Budget Highlights for Payroll

Employment Tax Incentive Act and Special Economic Zones (SEZ’s)

In the budget speech, the Minister of Finance stated that he has Gazetted a notice creating six Special Economic Zones. The link between ETI and SEZ’s is created within Section 6 of the Employment Tax Incentive Act which provides the criteria that must be satisfied before an employee can qualify to generate the tax incentive for the employer. One of those conditions is that of the age of the employee.

The portion of section 6 that is relevant to SEZ’s is section 6(a)(ii) which states:

Qualifying employees. An employee is a qualifying employee if the employee- (a)

  • is not less than 18 years old and not more than 29 years old at the end of any month in respect of which the employment tax incentive is claimed;
  • is employed by an employer operating through a fixed place of business located within a special economic zone designated by notice by the Minister of Finance in the Gazette and that employee renders services to that employer mainly within that special economic zone; or

The Gazette published by the Minister of Finance now links the six SEZ’s to section 6(a)(ii).

This means that there is no age qualification test for employees who render services mainly within one of the six designated SEZ’s to an employer whose business is located within that SEZ.

Note that the Special Economic Zones that have been in existence for quite some time were created by the Minister of Trade and Industries, not by the Minister of Finance, and therefore were not linked to the requirements of section 6(a)(ii) of the ETI Act.

It is not yet clear when the effective date of the SEZ’s being incorporated into the Employment Tax Incentive Act.

Subsistence Allowance Limits (effective 1 March 2018)

For South Africa, the daily limits are as follows:
Incidental expenses: R128 per day
Meals and incidentals: R416 per day

For any country outside of the borders of South Africa, there is a daily limit per country. The list of these countries with their limits is available on the SARS website.

Medical Tax Credits (effective 1 March 2018)

The monthly values per person are:

2017/18 2018/19
Principal member R303.00 R310.00
First dependent R303.00 R310.00
Per subsequent dependent R204.00 R209.00

When are loans a fringe benefit for an employee?

The legislation in this regard remains unchanged.

Loans in aggregate of less than R 3 000 at any one stage do not attract any fringe benefit tax. If the loan exceeds this value though, SARS will raise a fringe benefit based on the SARS interest rate applied to the loan balance. This fringe benefit will be added to the employee’s taxable remuneration that month. Generally payroll systems will do this calculation for you provided you notify the payroll administrator of the loan balance, the agreed monthly repayments and whether an interest rate is applied to the loan. If this interest rate is equal to or higher than the SARS official rate (currently 7.75%) no fringe benefit will be applicable. If it is lower the payroll will tax the difference monthly.

Tax Treatment of Severance Benefits

For years, payroll administrators, tax consultants, accountants and human resource consultants have battled to get their heads around the tax treatment of tax directives pertaining to ‘voluntary’ retrenchments. There was a generally prevailing opinion that a ‘voluntary’ retrenchment did not qualify for the favourable tax treatment given to ‘involuntary’ retrenchments. The logic of this was that the employee had chosen to leave employment and that the termination was akin to a ‘mutual termination’. In reality though the concepts are far removed from each other from a tax treatment perspective. This article will focus on the concept of ‘retrenchment’ as a means of reducing the number of employees due to the closing of the business or for economic or restructuring reasons.

In a recent development the South African Institute of Tax Professionals (SAIT) made a submission to SARS stating that the concept of ‘voluntary retrenchment’, as opposed to forced retrenchment, exists in employment law. The courts have held that voluntary retrenchment agreements are valid and enforceable contracts.

Erika de Villiers, head of tax policy at SAIT, says that in the latest guide relating to tax directive forms SARS clearly makes a distinction between voluntary retrenchment and involuntary retrenchment. This new classification appears to reflect an interpretation that in the case of a voluntary severance package, the employee does not qualify for the more favourable tax treatment applicable to a severance benefit.

In terms of the tax tables for severance benefits, the first R 500 000 is tax free and the remaining amounts are taxed at a sliding rate, with 36% being the top rate. It is interesting to note that the voluntary retrenchment option is processed by SARS in the same way as normal taxable income, with the normal tax tables applicable to individuals being used. In such cases the IRP 5 source code used to report such income would be 3601 (normal taxable income).

The SAIT submission states that the Income Tax Act does not differentiate between voluntary and involuntary retrenchment packages. The definition of ‘severance benefit’ deals with amounts paid on retrenchment for an employee, and does not refer to the terms ‘voluntary’ or ‘involuntary’. Erika de Villiers says that SAIT is of the view that the SARS Completion Guide for the forms should be updated in order not to differentiate between ‘voluntary’ and ‘involuntary’ retrenchment.

SARS has been receptive to these comments and have stated that they will be amending their guides and forms in due course to reflect the change in policy. De Villiers says that in the interim SARS accepts that the voluntary retrenchment packages should be disclosed under the ‘involuntary’ retrenchment field on the application form, to ensure that the payment is treated correctly.

It is also important to note that should an employer negotiate a more favourable voluntary retrenchment package payable due to the operational reduction of staff, this payment will still fall within the definition of ‘severance benefits’ and qualify for the favourable severance benefit tables.

This certainly creates a complication for employers who have followed the policy currently in practice at SARS. Tax directives may need to be cancelled and new applications made. There is unfortunately only a small window of opportunity to do this before the 2018 tax year closes.

Increases in Wages – Domestic Workers

The Minister of Labour, Mildred Oliphant, had the pleasure of announcing that: “wages for the vulnerable workers in the Domestic Worker Sector will be adjusted with effect from 1 January 2018”.

In terms of Sectoral Determination 7: The minimum wages will be adjusted upwards for employees.

  • This means that an employee that works more than 27 hours in Area A (largely urban areas) should be paid not less than an hourly rate of R13.05.
  • Secondly, for an employee that works less than 27 hours in Area A should be paid not less than an hourly rate of R15.28.
  • Thirdly, for an employee that works more than 27 hours in Area B (largely rural areas) should be paid not less than an hourly rate of R11.89.
  • Fourthly, for an employee that works less than 27 hours in Area B should be paid not less than an hourly rate of R14.03.

The new determination will be effective until the end of December 2018 (following which a new determination will be issued).

Sectoral determination covers the protection of workers in vulnerable sectors/areas of work. The determination sets minimum working hours, minimum wages, number of leave days and termination rules.

National Minimum Wage Bill

On Friday, 17 November 2017 the Department of Labour published the National Minimum Wage Bill, 2017 (“the NMW Bill”) and the Basic Conditions of Employment Amendment Bill (“the BCEA Bill”) for public comment, pertinent aspects of both are discussed below.

The National Minimum Wage Bill, 2017

The purpose of the NMW Bill is to advance social economic development and social justice by improving the wages of the lowest paid employees, by protecting employees from unreasonably low wages, by preserving the value of the national minimum wage and by promoting collective bargaining and supporting economic policy.

In order to achieve the aforementioned goals, the NMW Bill seeks to provide for a national minimum wage and establish a National Minimum Wage Commission (“the Commission”) which is intended to implement the provisions of the National Minimum Wage Act, 2017 (“the Act”).

The NMW Bill, in its current form, specifies a national minimum wage of R20,00 for each ordinary hour worked. The NMW Bill further specifies that farm workers, domestic workers and workers employed on an expanded public works programme should be paid a minimum wage of R18,00, R15,00 and R11,00 per hour, respectively. Workers who have concluded learnership agreements will also be entitled to allowances, depending on their qualifications, ranging from R301,01 to R1 755,84 per week.

The NMW Bill further prescribes that the payment of a national minimum wage takes precedence over any contrary provision in any contract, collective agreement or law, except a law amending the Act. The national minimum wage must also constitute a term of the employee’s contract except to the extent that the contract, collective agreement or law provides for a wage that is more favourable to the employee.

Furthermore, the national minimum wage is calculated as being the amounts above excluding any payment made to enable an employee to work including transport, equipment, food or accommodation allowance, any payment in kind, which includes board or accommodation, gratuities including bonuses, tips or gifts and any other prescribed category of payment.

If an employee is paid on a basis other than the number of hours worked, the employee may not be paid less than the minimum wage for the ordinary hours of work. Furthermore, it would constitute an unfair labour practice where employers unilaterally alter hours of work or other conditions of employment when the national minimum wage is implemented.

However, the NMW Bill empowers the Minister, on application by an employer, to grant exemptions for payment of the national minimum wage in certain circumstances. The exemption granted must specify the period for which it is granted, which may not be longer than a year, it must specify the wage that the employer is required to pay its employees and any other relevant condition. This may offer some relief to small employers that are genuinely unable to pay employees wages in line with the prescribed minimum.

The NMW Bill also makes provision for the establishment of the Commission to review the national minimum wage and to make recommendations annually for the adjustment of the national minimum wage. The Commission may also investigate the impact of the national minimum wage on the economy, collective bargaining and income differentials.

The Act is to commence on 1 May 2018.