Exemption from Income Tax on Foreign Employment Income

With more and more companies opening operations in Africa and around the world it is imperative that they are au-fait with the Employees Tax legislation on sending employees off-shore. SARS Interpretation Note 16 (issue 2) was published on 2 February 2017 to provide an explanation of the legislation and particularly the requirements that need to be met for the employee to qualify for the applicable exemption. All employers are requested to read the legislation to ensure that they are familiar with the qualifying criteria as SARS clearly places the onus on the employer to make the correct interpretation of any particular deployment / transfer.

In order to qualify for the exemption, a taxpayer must:

  • earn certain types of remuneration (remuneration earned for services rendered);
  • in respect of services rendered by way of employment (there must be an employment relationship and an employment contract);
  • outside the Republic (the landmass of SA and its territorial waters – 22.2 km);
  • during specified qualifying periods (for a period or periods exceeding 183 full days in aggregate during any period of 12 months, a person must also have rendered services outside the Republic for a continuous period exceeding 60 full days in the same period of 12 months); and
  • not be subject to an exclusion (holding of public office).

In summary, and to ensure that employers are fully aware of their obligations in these situations, it is important to confirm the following.

An employer that is satisfied that the provisions of section 10(1)(o)(ii) will apply in a particular case may elect not to deduct employees’ tax in a particular case. In the case where the exemption was not applicable, the employer will be liable for the employees’ tax not deducted as well as the concomitant penalties and interest. It is the employer that bears this risk and it is therefore very important that they ensure that the circumstances of each case are carefully evaluated and that the correct tax treatment is applied.

Should you have any doubts regarding the interpretation process or require assistance working through this evaluation please do not hesitate to contact Dave Beattie on dave@hrtorque.co.za or 031 582 7410.

Value Added Tax Change – Things to Consider

VAT will be levied at the standard rate of 15% on the supply of goods and services by registered vendors post the April 2018 (The tax rate was 14% until 31 March 2018).

A vendor making taxable supplies of more than R1 million per annum must register for VAT. A vendor making taxable supplies of more than R50 000 but not more than R1 million per annum may apply for voluntary registration. Certain supplies are subject to a zero rate or are exempt from VAT.

The following are important considerations for the change of VAT rate:

Transaction Date – the VAT rate to apply depends on the time of supply rules. In simple terms, this is the date on which the transaction is deemed to occur according to the VAT Act. The general time of supply rule is the earlier of when:
an invoice is issued; or
payment is received.

For most transactions the general time of supply rule will apply. However, some transactions have special time of supply rules. Some examples include supplies between connected persons, fixed property transactions and supplies made under instalment credit agreements. In addition, some rate specific rules could apply when there is a change in the VAT rate. Most transactions which occur on or after 1 April 2018 will be subject to VAT at the new rate of 15% unless a special time of supply rule or a rate specific rule applies.

Prices Quoted or Advertised
All prices advertised or quoted by vendors for taxable supplies must include VAT at the standard rate (unless the supply is zero-rated). Post 1/4/2018 advertised prices must show 15% VAT although the Commissioner for SARS has granted permission under proviso (iii) in section 65 of the VAT Act for a vendor to display a notice that the price does not include VAT at the new rate of 15% and prices will be adjusted at the point of payment.

Agreements
Check agreements you have with suppliers/customers to see whether the agreements contain clauses restricting any change in VAT or impacting the timing of supply of goods and/or services.

Sales and Billing, Debit and Credit Notes
You need to make sure any invoices, receipts, bills reflect VAT at the correct rate of 15% after the 1/4/18 to avoid any disputes with customers or suppliers. Similarly debit/credit notes issues should reflect the VAT rate of the underlying sale or purchase.

Importation of Goods
Registered importers or clearing agents must take care that the customs declarations reflect the new VAT rate of 15% in respect of goods entered for home consumption on or after 1 April 2018.

VAT201 Returns
Care must be taken to make sure the correct rate of VAT is reflected for each period of the VAT201 return which straddles the 1/4/2018.

Rate Specific Rules

There are some specific rules for supplies straddling the 1/4/2018. For example:

Supplies starting before and ending on or after 1 April 2018:
Where goods are delivered or services are performed during a period commencing before 1 April 2018 and ending on or after 1 April 2018, the VAT-exclusive price of the supply must be apportioned on a fair and reasonable basis and allocated to the respective periods. The VAT rate is then applied accordingly. That is, the rate of 14% is applied to the value of supplies before 1 April 2018 and the rate of 15% is applied to the value of supplies from 1 April 2018 onwards. This rule does not apply if the time of supply is triggered before 1 April 2018.

This rate specific rule applies to:

  • goods supplied under rental agreements
  • goods supplied progressively or periodically
  • goods or services supplied in construction activities; and
  • services rendered over the period concerned,
    but does not apply to supplies of fixed property (including residential fixed property).

Goods delivered or services actually performed on or after 1 April 2018 where the time of supply is triggered between 21 February 2018 and 31 March 2018:
Rate specific rules also apply where the time of supply occurs between 21 February and 31 March 2018 (that is, on or after the date of the announcement of the increased VAT rate, but before the effective date of the increased rate). Under this rule, when goods are delivered on or after 23 April 2018, or services are performed on or after 1 April 2018, but the time of supply is triggered between 21 February and 31 March 2018 as a result of any invoicing or payment in relation to the supply, then VAT at the rate of 15% applies. However, if the goods are delivered before 23 April 2018 (that is, within 21 days after 1 April 2018), or the services are rendered before 1 April 2018, then the supplies concerned will be subject to VAT at 14%.

Further information is available here.

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

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.

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.

SARS Text Reminders – Pay your Tax

In early November, shortly after the 31 October mid-year employer filing season SARS “mistakenly” sent out thousands of text messages to individual taxpayers telling them their accounts were in arrears and they needed to act now to prevent legal action.

A very successful tactic I should imagine as there is little doubt this triggered many individuals to pay their taxes well before their due date. As a result, I would not be surprised if this “mistake” becomes a more regular practice.

Timing of payment of personal taxes:

The Income Tax Administration Act provides the following deadline for paying one’s personal taxes:

The taxpayer has until the ‘Second Date’ on their annual tax assessment to pay any Assessed Tax liability raised by SARS. After this date SARS will levy interest at a rate of 10.5% per annum until the liability is settled.

Taxpayers are usually granted a period of at least six weeks in those cases where assessments are finalised before the 15th of the month in which to pay the assessed tax due. Where assessments are finalised after the 15th of the month, taxpayers are usually given until the end of the second month, that is, a period of up to 10 weeks within which to pay the tax due.

In the majority of the cases where SARS has issued the above-mentioned text messages, the Second Dates are only 31 January 2018. Taxpayers are therefore within their rights to hold on to their money until 31 January 2018 without fear of interest being raised.

Tax Ombudsman Report on SARS Delaying Payment of Refunds

In September the Tax Ombudsman released their report on their investigation as to whether there was evidence to support the view that SARS were intentionally delaying the repayment of refunds to individuals.

The Tax Ombudsman’s report concluded that there was sufficient evidence to suggest SARS were delaying refund payments on purpose.

This is not a surprise. Over the past twelve to eighteen months we have received a number of complaints from clients. The reasons provided for late payments have been similar to those outlined by the ombudsman and include:

  1. The taxpayer or tax practitioner submits all the supporting documentation required by SARS via e-filing. The case is resolved after a couple of weeks and a ‘completion’ letter received. The taxpayer expects to receive their tax refund within a week or two but this does not happen. Contact is made with SARS and the taxpayer / tax practitioner is told that there is a ‘special stopper’ on the account. The taxpayer is told they must come in personally with their proof of address, ID, banking details and all the supporting documentation used to complete their return. The reason provided for this is the high probability of fraud on the taxpayer’s account.
  2. Tax returns are submitted with there being no request for verification. Taxpayers then receive a verification request some weeks later. Supporting documentation has then to be uploaded to SARS and in the process delaying the release of a potential refund by 3-4 weeks.
  3. Taxpayers after meeting all compliance requirements find that they do not receive their tax refund. After enquiring with SARS they are told that their banking details need to be validated. The taxpayer then must personally go into SARS to perform this process. This is particularly irksome where banking details have not changed and have been on the system for many years.

We wish there were a simple way to fix this. Alas the only way is to go into a SARS branch and try and address this directly.

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?
No