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.