HRTorQue Reporter
September 2016

Editor's Note

In this edition we look at a number of interesting issues.

We look at the potential impact of bonus provisions and smoothing the payment of PAYE on bonuses. We also consider the recent constitutional court ruling on the impact of employment equity plans and the recruitment (or not) of candidates based on whether they meet the plan's targets or not.

Then, we consider the use of cost to company remuneration policies to better maintain and control employment costs in the organisation.

Finally, an interesting contribution on the Rand by the Foundation Group.

As usual, should you require any further detail on any of these topics, please feel free to contact us.

Personal tax filing season started on the 1 July. If you would like our help preparing your return, please read the relevant section of this newsletter explaining how much it will cost and what you need to do.

We do offer a referral scheme for new clients sent in our direction so if you know of anyone looking for outsourced payroll services then please let us know*.

*Terms and conditions apply.

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Table of Contents

1. When should bonus provisions be taxed
2. Workplace equity policies and employment equity legislation
3. Cost to Company calculations - Benefits and pitfalls
4. Employment Equity workshop - Coming soon
5. The Rand - Things to think about
6. Contact HRTorQue

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1. When should bonus provisions be taxed

Author: Karen van den Bergh

Editor: This article covers an area of natural unintended consequences. In an effort to smooth cash flow through a bonus provision accrual, employees leaving before the full PAYE liability can be recouped can lead to real issues for employers.

When implementing a bonus provision, employers traditionally spread the tax over the tax year with the bonus being paid in December. The question is when the tax should be paid on these bonuses, can it be spread over the course of the year and what happens if an employer pays the tax in line with the provision, an employee leaves before the bonus is paid?

Regulations:

We will make reference to Paragraph 2(1) of the Fourth Schedule to the Income Tax Act, 1962:

"Every employer... who pays or is liable to pay any amount by way of remuneration to any employee shall, unless the Commissioner has granted authority to the contrary, deduct or withhold from that amount, ...and shall... pay the amount so deducted or withheld to the Commissioner within seven days after the end of the month during which the amount was deducted or withheld…or in either case within such further period as the Commissioner may approve."

The employees' tax to be deducted from remuneration must be determined in accordance with the tax tables as prescribed by paragraph 9(1) of the Fourth Schedule that provides, "The Commissioner may from time to time, having regard to the rates of normal tax... prescribe deduction tables applicable to such classes of employees as he may determine, and the manner in which such tables shall be applied..."

Paragraph 2(1) of the Fourth Schedule read with paragraph 9(1) provides authority for the Commissioner to exercise a discretion to allow an employer to withhold employees' tax in a different period as normally required (i.e. within 7 days after the end of the month) as well as the manner in which the tax tables must be applied.

The Commissioner exercises the discretion to allow an employer to pay SARS the employees' tax withheld in a different period than the normal seven days after the end of the month in which it was deducted or withheld under paragraph 2(1).

Conclusion:

Ordinarily employees' tax must be deducted or withheld in the month in which the once-off amount is paid to the employee and be paid over to SARS within seven days after the end of the month in which it was deducted or withheld. However, the Commissioner exercises the authority under paragraph 2(1) of the Fourth Schedule read with paragraph 9(1) to deduct employees' tax on a monthly basis across the year of assessment as per the manner prescribed in the Guide for Employers. In conclusion, tax smoothing or "Bonus Tax Spread" is allowed in the case of a guaranteed, non-discretionary bonus.

We would, however, like to caution employers to ensure they include a clause in the employment contract that covers this practice in detail. The contract must include, and the employee must agree to the fact that, should his/her employment be terminated for whatever reason, the balance of the tax that has not been recovered for the bonus paid will be recovered from his final payment. Should the last payment not be sufficient to cover the outstanding debt, the employer needs to specifically indicate that the balance will be handled as a loan. The employer should also take cognisance of the fact that implementing this practice could pose a risk to the company. Should an employee abscond, and have no monies owed to him/her from the company, the company will be liable to settle the outstanding PAYE with SARS.

If you are currently spreading the tax for your bonus, and need assistance in aligning your contracts or your process to ensure that you are compliant, please give us a call.

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2. Workplace equity policies and employment equity legislation

Author: Jonathan Aitken

Recently, an interesting article by Professor Hugo Pienaar of Cliffe Decker Hofmeyr was posted on their website dealing with the recent ruling by the constitutional Court on Solidarity and Others v Department of Correctional Services and Others (CCT 78/15) [2016] ZACC.

Without going into too much detail about the case, the ruling indicated that the employer should take into consideration both regional and national demographic targets when setting equity targets for its workforce in its employment equity plan. In the circumstances, the employer had not appointed a number of coloured applicants in the Western Cape because they did not meet their national targets despite coloured candidates being the majority applicants (and demographic representatives) in this region.

Further, on appeal, the Constitutional Court addressed the Barnard Principle (South African Police Service v Solidarity obo Barnard [2014] ZACC 23 which states that an employer may refuse to appoint a candidate who falls within a category of persons that is already adequately represented at a certain occupational level. In this case, the court was required to consider whether the Barnard principle's application is limited to white people only and whether this principle may also be applied in respect of gender. The court ruled that the Barnard principle is not only limited to white people but rather to candidates from all racial groups as well as both men and women.

So what's the point you ask?

It appears critical for employers to be very careful before turning down a candidate's appointment because it doesn't fit in with their targets in their Employment Equity Plan.

While the legislation and court rulings clearly allow for this, it is not cut and dried and the individual and regional circumstances need to be considered.

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3. Total Cost to Company - Benefits and pitfalls

Author: Dave Beattie

Editor: The cost to company remuneration basis is a great methodology to get the right balance between employer and employee decisions in managing remuneration. It makes employees far more aware about the components of their remuneration and the impact it has on their take home pay.

The 'total cost to company' basis of remuneration (otherwise known as CTC), whilst not a new concept, is taking hold in South Africa. Initially only bigger companies used this approach to remunerate staff but over the past 5 years I have noticed that its use had spread to most companies who operate recognised payroll systems. The question that is often asked is 'why is the approach being used and what benefits does it create for both employer and employee?'

In my experience companies invariably convert to this basis of remuneration to gain control of the costs of employment.

In the past employers negotiated salaries with employees and only concentrated on the actual cash benefits payable to employees. Benefits such as medical aid and retirement fund contributions were not considered. If you analyse the cost of these benefits you would notice that they make up a significant portion of employees' total cost of employment. Benefits therefore must be considered on an equal footing with the cash salary paid to employees. The 'total cost of employment' concept is therefore the logical answer to this remuneration issue.

Legislative changes can result in increased costs for employers. These changes however are seldom accompanied by a decrease in the increases expected by employees annually. A cost to company approach allows employers to better manage overall employment cost increases.

Another common question asked by employers is "how do I determine what an employee's total cost of employment is?" The answer is very simple. Add the employee's cash salary (basic pay plus allowances) to the company's contributions to the employee's benefit funds.

Let's look at an example:

Employee A receives a monthly basic salary of R 15 000, a travel allowance of R 5 000 and the company contributes 7% of the employee's basic salary to a provident fund and R 1 000 per month to a medical aid. The employee's total cost to company is therefore:

Basic pay	R 15 000
Travel allowance	R 5 000
Provident fund	R 1 050 (R 15 000 x 7%)
Medical aid	R 1 000
Total cost to company	R 22 050

Using this approach, employers will always know what an employee is costing them. The advantages to the employer is that they now have a basis on which to work from when allocating employees annual increases and bonuses.

Employees on the other hand often fail to see the fact that benefits paid by employers are also salary costs. They are also suspicious of changes to their pay structures, thinking that their employer is trying to rob them. It is important that these concerns are addressed before there is unnecessary industrial action. For the more informed employees though the CTC approach offers flexibility when negotiating salary increases. The employee is able to choose the salary components that best suit their immediate needs. Salary increases can be channeled, subject to the company's policies, into components that they choose. This flexibility has however been significantly reduced by the amendment of employee tax legislation over the past few years.

As an incentive to look at the possible conversion to a CTC approach it may be a good idea to look at a topical example which many employers are currently faced with, the high annual medical aid premium increases.

Employers who have traditionally paid contributions on behalf of employees have been hard hit by these cost increases. In many cases employers have had to absorb at least a 16% increase in medical aid premiums as well as granting employees inflation linked annual increases. The only way of controlling these costs is to use the CTC approach to remuneration. At the time of granting annual increases the employer agrees a total cost to company figure with their employees. When medical aid increases are announced the employee would be faced with a problem. As the CTC cannot change the employee would have to take a cut in cash salary to absorb the medical aid increase. This forces most employees to take a good hard look at their medical aid requirements. Many employees have downgraded their medical aid schemes to better suit their needs whilst at the same time maintaining an adequate cash salary. There is still however a belief that some companies have adopted the CTC approach in order to pull the wool over employees eyes and have changed conditions of service without adequately explaining the total cost concept to the employees.

The use of the 'cost to company' concept is gaining momentum. This fact is clearly evident if you page through the 'employment' section of your local newspaper. Employers want to know what employees are costing them and also seek solace in comparing the salaries that they pay with those reflected in newspapers. The concept is here to stay and I believe that more employers will begin to use this method of remuneration in an attempt to gain consistency in terms of pay structures in the market place. It is imperative though that there is extensive consultation with all employees before implementing the CTC concept as a remuneration practice. This consultation must allow the employees to ask questions and work through examples. It is therefore important that the correct process is followed and that an experienced legislative compliance specialist is used.

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4. Employment Equity Half Day Workshop with Nicky Hardwick

Workshop: An introduction to the Employment Equity Act, Reports and Committee Responsibilities

The workshop will be led by Nicky Hardwick a consultant with more than 10 years experience in the field of Employment Equity. Nicky specialises in assisting designated organisations to become legally compliant in terms of the Employment Equity Act. Nicky has provided consulting and training services to numerous small and large companies, NGOs and Government.

At the end of the workshop, learners will be able to:

•	Understand the various requirements of the Employment Equity Act in respect of discrimination and affirmative action.
•	Understand the requirements for completing and submitting the Employment Equity Report.
•	Have the ability to review policies, practices and working conditions with the view of identifying barriers to employment equity and affirmative action.
•	Understand the Amendments to the Employment Equity Act.
•	Understand the workings of an Employment Equity Committee.

Date:	6 October 2016
Time:	08h30 to 12h30
Venue:	163 Umhlanga Rocks Drive, Durban North
Cost:	R795.00

To book, please contact Harusha on 031 564 1155 or [email protected].
BOOKINGS ARE NOT CONFIRMED UNTIL BOOKING CONFIRMATION HAS BEEN RECEIVED.

Please Note:
• All costs exclude VAT.
• All workshops can be presented in house at your premises.

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5. The Rand - Things to think about

Author: Hadyn Little (Foundation Fund Managers www.foundationgrp.co.za)

The Rand has resembled a punching bag over the past year or two and its woes are never far from news headlines, but what does this actually mean for you and me individually?

2015 was one way traffic as the Rand gave up 30% against the Dollar with almost no respite over the 12 month period, but 2016 has been a very different story. Yes, there has been weakness this year (and the very real threat of even more!!), but there have also been pockets of Rand strength. So, given the volatile nature of the Rand this year how does this impact us in everyday life? Some of the impacts are obvious, but others are hidden yet no less important.

1.	The most obvious impact is for those businesses who participate in the import or export sectors. If your business imports raw materials, capital equipment or finished goods then staying closely in tune with the Rand's fluctuations is of paramount importance. As an example I had a client who calculated his costs at €17.20 before quoting his local client, and this off a sizable import invoice of €110 000 to pay a few months down the line. Local political headlines quickly drove the rate to €17.80, and I can promise you that my client was in a mild state of panic. My advice is if you have a big invoice payment to make, or a fixed cost to adhere to then fixing your rate forward is essential.

2.	For those individuals looking to externalise a portion of their wealth then knowing what factors impact the exchange rate is key. If possible, it is advisable to have approximately 30% of your investible wealth in a hard currency (USD, GBP, EUR, CHF, JPY) but if you are about to send monies offshore for the first time then it obviously doesn't make sense to do so when the rate is high. While predicting what the rate will do is an impossible task there are markers in the economic calendar that impact the Rand. FED monetary policy announcements, our SARB monetary policy announcements, US employment figures (first Friday of every month) and various others will drive Rand action so be mindful of these before going offshore. For those individuals who have already taken money offshore and who are looking to send more then the exchange rate becomes very important. It is vital that you calculate what your average exchange rate is over your previous transactions so that you know when to send additional monies at a rate that will bring your average rate down. Quite simply, add up the Rand value of all your transfers and then add up the Dollar values you received offshore (assuming you bought Dollars). Divide the Rands by the Dollars and that will give your average exchange rate, and then make sure any further transfers are below this rate.

3.	Our inflation rate is directly linked to the exchange rate. Almost everything we buy, from food, to clothes to electrical equipment to petrol has some import component in its price. If the importer has to spend more Rands to bring these goods in, then this additional cost is passed on to the consumer. Unfortunately, we all know that the opposite is seldom true, and that prices do not come down as the exchange rate improves, but keeping an eye on the exchange rate will help you budget for your monthly expenses should the currency be in a weakening trend.

4.	Our interest rate is also linked to the exchange rate. This is an indirect relationship with inflation as the common ground, and the Reserve Bank has set a target of 3% to 6% inflation. At present we are above 6%, with some economists predicting a breach of 7% by year end. To curb inflation the Reserve Bank increases our interest rate which attracts foreign investment and strengthens the Rand. Almost all of us have some form of debt, and a rising exchange rate that drives inflation up will ultimately end up in higher interest rates and bigger monthly instalments.

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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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