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| Editor's Note |
In this edition we continue with our series of articles on guiding an employer through the retrenchment process focusing this month on the consultation procedure. We then focus on a recent opinion by SARS on the VAT and PAYE implications of payments made to Non-Executive Directors.
We follow this with a summary of some of the key payroll data changes following the budget speech and provide links to a few interesting reports that have recently been published by the Department of Labour (Minimum Wages) and SARS (Interpretation notes covering the exemption of foreign employment income and the exemption for amounts paid to officers or crew on ships).
Finally, we remind employers with defined benefit or hybrid schemes to make sure their Fund Administrators have provided them with Contribution Certificates for impacted employees so they can accurately run payroll in March.
As usual, should you require any further detail on any of these topics, please feel free to contact us. |
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| Table of Contents |
1. Retrenchment Part Three - Consultation Procedure
2. Remuneration Paid to Non-Executive Directors (NED)
3. Budget 2017 - Payroll System Update Summary
4. Recent SARS and Department of Labour Amendments
5. Retirement Reform - Contribution Certificates
6. Contact HRTorQue |
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| 1. Retrenchment Part Three - Consultation Procedure |
| Author: Nicky Hardwick |
Editor's Note: an important part of any retrenchment process. This is the area many employers fail and get into trouble.
In last month's article, we dealt with notification procedures. This month we look at step 3, the consultation procedure.
Good Practice Step 3. Consultation Procedure
This is the most difficult and complex stage in the retrenchment process and most often leads to Unfair Labour Practices and labour unrest unless adroitly handled. It is also the stage where I recommend that you keep written notes, and contact me for assistance in the consultation process if you encounter problems with individuals. (Read LRA Sec 189)
Management is required to "consult in good faith and "to attempt" to reach agreement (consensus)" with the employees affected. If the duty to consult went no further than giving employees or a trade union an opportunity to make representations or to advise the employer, there would be no need for s189 (2), which states that the consulting parties "must attempt to reach consensus".
"The consultation process should constitute a real and serious attempt by Management to hear and seriously consider any views and proposals put forward by the employees. This may, for instance, include the need for the retrenchment, ways and means of alleviating the retrenchment, and proposals and suggestions relating to severance packages, etc."
"To consult means to take counsel or advice from someone and does not imply any kind of agreement. Having consulted in good faith, Management has the right to implement the retrenchment even if no agreement is reached."
Management should not rush through this stage, and if necessary must hold four or five meetings to ensure that every opportunity is given to employees to consult. If there is a union that has sufficient representation and/or a recognition agreement, they must be allowed to represent their members, and be given notice, etc.
A proposed agenda should be prepared in writing and would include:
1. Confirmation that prior notice of the proposed retrenchment has been given
2. A repeat of why retrenchment is being considered:
| a. |
Information on why retrenchment has become necessary |
| b. |
Financial or operational disclosure to support the above |
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Alternatives to retrenchment which were considered, and reasons why rejected where applicable |
| d. |
Opportunity for employees to put forward any views and proposals, or alternatives to retrenchment |
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Discussion on how the retrenchment will affect the business |
3. Discussion of the proposed time frame of the exercise
a. Arrangement of further opportunities to meet with individuals - dates and times
b. Proposed date of the retrenchment
4. Selection criteria (LIFO, retention of essential skills, downgrading, apprentice contracts, voluntary retirement, temporary workers, employees on short time, poor disciplinary record (only if properly documented!), selection process and notification of redundancy. In a small operation, names of those who may potentially be affected.
5. Details of proposed severance package, UIF cards, PAYE, Tax Directives, etc. Sec 196 of the LRA states that an employer must pay severance pay of at least one week's pay for each year of completed service. Note that if you have an alternative position, e.g. driver instead of foreman, then there is no entitlement to a severance package if the employee "unreasonably" refuses to accept the offer of the alternative position. (Sec 196 (3) of the LRA).
6. Opportunity to discuss any "other" issues, counselling, etc.
NOTE: Proper minutes and a recording, if possible, should be kept of every meeting. Particular note should be made of all, and any, proposals, queries, alternatives, etc., made by the employees / union. |
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| 2. Remuneration Paid to Non-Executive Directors (NED) |
| Author: Dave Beattie |
Editor's Note: Based on this commentary, employers should be closely looking at their non-executive director (NED) payments both from a PAYE and VAT perspective. In addition, this is likely to lead to more admin for NEDs, and employers should consider how they communicate and support NEDs through this.
February has been an interesting month in terms of tax commentary regarding non-executive directors. Firstly, on 10 February SARS published Binding General Ruling (BGR) 40 and then on 14 February SARS confirmed an interpretation regarding the VAT treatment of NED fees [BGR (VAT) 41].
Binding General Ruling 40 provides clarity on the employees' tax consequences of income earned by a NED, as well as the effect those employees' tax consequences could have on the prohibition against deductions by office holders under section 23(m).
Since the 'statutory tests' contained in paragraph (ii) of the exclusions to the definition of 'remuneration' were amended in 2007 there has been uncertainty over whether payments to a NED would be subject to the deduction of employees' tax.
It is important to firstly understand what a NED is though. The King lll report states that crucial elements of an NED's role are that an NED:
• must provide objective judgement independent of management of a company;
• must not be involved in the management of the company, and
• is independent of management on issues such as, amongst others, strategy,
performance, resources, diversity etc.
It is very important to understand that 'independence' in this case simply means 'the absence of undue influence and bias...'
SARS considers an NED to be a director who is not involved in the daily management or operations of a company, but simply attends, provides objective judgement, and votes at board meetings.
SARS accepts that due to the nature of the duties that NEDs perform that they are not 'common law employees'. The only way that they would be subject to employee's tax is if the so-called 'statutory tests' apply. In terms of these tests the recipient is deemed to be an employee if the 'premises' and 'control or supervision' tests apply. In terms of the 'premises' test the services must be performed mainly (more than 50%) at the client's premises. In terms of the 'control or supervision' test control or supervision must have been exercised over the manner in which duties must be performed or the hours of work. It is only if both these tests are satisfied that the recipient is not regarded as carrying on an independent trade and would therefore be receiving 'remuneration' for employees' tax purposes.
To summarise. If an NED is not deemed to be an employee, and is not a common-law employee, the amounts payable to the NED would not be 'remuneration'. These payments would not be subject to the deduction of employees' tax. NEDs would therefore be allowed to claim expenditure incurred in the production of such income subject to the ordinary deduction rules, as Section 23(m) will not apply.
It is important to note that this ruling does not apply in respect of non-resident NEDs.
BGR (VAT) 41 was issued to clarify the VAT position pertaining to the payments made to NEDs. With BGR 40 (Employees' Tax) classifying NEDs to effectively be 'independent', payments made to them will no longer be regarded as 'remuneration'. NEDs receiving director's fees that exceed the compulsory VAT registration threshold of R 1 million in any 12 consecutive month period are required to register for VAT. NEDs will however not be required to account for VAT in respect of director fees earned prior to the amendment date, provided that such NEDs fees was subject to PAYE for that period. NEDs will be able to voluntarily register for VAT even if their income is below the R 1 million threshold.
Both of these rulings are applicable as of 1 June 2017. |
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| 3. Budget 2017 - Payroll System Update Summary |
At a very high level the following summarises some of the key payroll impacts from the 2017 budget:
Updated Tax Rates for the period from 1 March 2017 to 28 February 2018:
Substance Allowances
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Meals and incidental costs, an amount of R397 per day is deemed to have been expended. |
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Incidental costs only, an amount of R122 for each day which falls within the period is deemed to have been expended. |
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Where the accommodation to which that allowance or advance relates is outside the Republic of South Africa, a specific amount per country is deemed to have been expended. Details of these amounts are published on the SARS website under Legal Counsel/Secondary Legislation/Income Tax Notices/2017. |
Medical Aid Tax credits has been increased to:
R303 for the individual who paid the contributions and the first dependent on the medical scheme and R204 for each additional dependent.
Re-imbursive Travel Allowance
Where the distance travelled for business purposes does not exceed 12 000 kilometres per annum, no tax is payable on an allowance paid by an employer to an employee up to the rate of 335 cents per kilometre
COIDA Limit Increase from 1 April 2017 to R403,500.00.
New Allowances SARS Codes have been added.
Codes 3719, 3720 and 3721 for the use of Dividends not exempt.
ETI Min Wage Check
If the Monthly Remuneration is less than the monthly minimum wage, Monthly ETI value will be zero. |
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| 4. Recent SARS and Department of Labour Amendments |
For interest, we have included on our website the following documents from SARS and the Department of Labour for you to access:
Agreement summarising the implications of the National Minimum Wage (published 27 February 2017)
Interpretation Note 16 - Exemption on Foreign Employment Income
Interpretation Note 34 - Exemption for Remuneration of Officers or Crew Members on board Ships
This interpretation note needs to be looked at closely. It creates a challenge in looking only at "this tax year" instead of a broader test of "any 12 months" leading to an inconsistency where employers will most likely have to deduct PAYE, SDL and UIF for employees until they can show these employees have been out of the country for more than 183 days. They cannot however then refund the PAYE (strictly prohibited) nor request refunds of SDL and UIF leading to potential unhappiness amongst employees who will need to reclaim PAYE on assessment. |
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| 5. Retirement Reform - Contribution Certificates |
| Author: Jonathan Aitken |
If you have either a defined benefit or hybrid scheme your fund administrator needs to provide you with a Contribution Certificate so that you can process your payroll in March. This should be provided no later than one month before the next year of assessment i.e. by end January. If you don’t have this then you cannot work out the value of the fringe benefit for your employee.
Further, please make sure you have checked whether your scheme has a defined benefit component (i.e. is a hybrid scheme). This requires a review of the fund rules to check whether there is a component where shared funds are used for a specific purpose as opposed to being kept aside for the benefits of a specific individual (as might be the case for a dread or disability element). |
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| 6. Contact HRTorQue |
Head Office (Durban)
Phone: 031 564 1155 • Email: [email protected] • Website: www.hrtorque.co.za
Address: 163 Umhlanga Rocks Drive, Durban North, KwaZulu-Natal
Johannesburg Office
Ground Floor, West Wing, 6 Kikuyu Road, Sunninghill, 2191 |
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