The ETI challenge – EMP501 reporting

In May we reported on the fact that most payroll systems had mis-calculated the Employment Tax Incentive (ETI) because the disaster management legislation retrospectively changed rules making it exceptionally difficult.

We have been surprised to see relatively little communication about this from payroll software providers. We suspect then that most employers would have miscalculated their ETI for the six months ended 31 August 2020.

So, why is this important:

  • We have no idea what validation checks SARS will use for this recon period (in the past few days the validation checks have not allowed the disaster management ETI changes, but we assume this will be rectified). Without understanding your ETI calculations you will struggle to submit your EMP501 for this recon period;
  • Assuming SARS applies the validations correctly, if you haven’t manually adjusted your calculations for April and May in particular, then they will be wrong and your entire ETI claim will be rejected – leading to penalties and interest;
  • If you assumed your system would calculate ETI correctly during the disaster management period, you may have left lots of money on the table as unclaimed;
  • SARS is short of cash. There is a high likelihood of subsequent audits in this space given the complexity. Don’t be caught out having to pay penalties and interest post an audit because you assumed your system would do things correctly

We encourage all employers to do a manual calculation of their ETI to get comfortable with their claims and to support their EMP501 filing. Don’t be caught out.

Second Revised Draft Disaster Management Bill

The Second Revised Draft Disaster Management Bill was issued by Treasury on 19 May 2020. Due to the time sensitive nature of the amendments for payroll it was imperative that National Treasury and SARS assist the Payroll Authors Group of SA by issuing the amended requirements that would impact on payroll.

In the latest Bill three of the Employment Tax Incentive (ETI) requirements are deemed to be retrospectively effective from 1 April 2020. The result is that the ETI values that have already been calculated for April in terms of the 1 April Bill must be recalculated by applying the 19 May formulas to the April employee data. The value of the ETI calculated in April for April in terms of the 1 April Bill, will differ from the ETI value calculated in May for April in terms of the 19 May Bill for the following reasons:

The 1 April Bill proposed:

  • An extra ETI amount of R 500
  • That the ETI value for the three extended age groups must not be grossed down if there are less than 160 employed and remunerated hours in April.

The 19 May Bill proposed:

  • An extra ETI amount of R 750
  • That the ETI value for the three extended age groups must be grossed down if there are less than 160 employed and remunerated hours in April.
  • That the ‘1 October 2013 employment start date’ qualifying test is deleted from 1 April until 31 July.

The ETI total for April that is recalculated in May according to the 19 May Bill can be either more or less than the ETI total originally calculated for April according to the 1 April Bill.

The challenge to the administrator dealing with the submission for the monthly EMP 201 returns is the fact that there has been a change in benefits and that an adjustment would need to be made in the May payroll. The difference between the two ETI totals must be applied to the EMP 201 as follows:

  • If the ETI total calculated in May for April is more than the ETI calculated in April for April, then the additional amount can be added to the normal ETI total for May in the May EMP 201
  • If the ETI total calculated in May for April is less than the ETI total calculated in April for April, then the April EMP 201 must be adjusted to reflect the lesser ETI total.

PAGSA is discussing with SARS the issue of the late payment penalty and interest that would be levied if the adjustment explained in scenario 2 was made (to the April EMP 201).

Any adjustment to the ETI totals would also have an impact on the tax certificates. The recalculated ETI values for April must be allocated correctly to the monthly ETI tax certificate fields. If this is not correctly done, the tax certificate amounts will not reconcile with the EMP 201 and EMP 501 totals when tax certificates are submitted to SARS for the 2020 mid-year tax certificate submissions and reconciliations.

Finally, one additional ETI matter that has an impact on the minimum wage qualifying criteria. Section 4(1)(b) of the ETI Act requires that the employee’s wage must not be less than R 2 000 per month, or the grossed-up value of the employee’s wage if employed and remunerated hours are less than 160 hours must not be less than R 2000 per month.

This section has been deleted by the changes in the May 19 Bill and this change will be in effect from 1 May 2020 to 31 July 2020. After this deletion though it was not clear whether or not the employees of that employer qualified in terms of section 4 if there is no wage regulating measure and the National Minimum Wage Act does not apply. SARS after consultation with PAGSA has confirmed that an employer that is not subject to a wage regulating measure and that is exempt from the National Minimum Wage Act is not eligible to benefit from the Employment Tax Incentive.

We are working in times of unprecedented change. Traditionally legislation takes at least a year to pass through the various consultative processes before it is ready for promulgation. In this case we are looking at a compressed consultative process and legislation amendment process. The pressure on payroll companies to make programming changes has been relentless. The timing of legislative changes could not have been worse though. At this point we expect that in a lot of cases changes in ETI claims for April and May, may only happen in June. Whilst we welcome any Government concessions, one has to question why these COVID-19 concessions have had to be so technical and difficult to implement.

Employment Tax Incentive – Significant Risk for Employers for April and May 2020

On the 19 May the national treasury released the second draft of the Disaster Management Tax Relief Bill. We want to highlight a critical issue for employers that may pose significant risk to them where they claim Employment Tax Incentive.

The 19 May amendment followed the first amendment published on the 1 May. While the Amendment covers a variety of relief measures our concern is with the Employment Tax Incentive (ETI) measures.

Specifically, the challenge we have is that the 19 May amendment changes some parts of the ETI calculations and backdates these to 1 April. The backdating is problematic because it means the calculations apply to April payrolls which are already closed and EMP201s have already been submitted and also to May payrolls most of which are closed (albeit EMP201s for May might have not been submitted as these are due on the 5 June).

 

The two specific challenges are:

  1. The re-introduction of the minimum wage/wage regulatory measure/R2,000 pro rata minimum validation check. This excludes some employees from claiming depending on their pay and hours worked for the month;
  2. The introduction of a new tranche in the new category (people older than 29, past their 24 month claims period, employed prior to 2013) of ETI claimants. For calculations below R2,000 these are now done on a sliding scale where previously it was a fixed amount below R4,500)

 

What is the problem?

The problem is that many employers will have incorrectly claimed ETI in April and May and more importantly, because of the latest changes, over claimed. We don’t yet know SARS’s position but there is a risk that they charge penalties and interest for these overclaims.

There is an additional risk at the end of the recon period in August that individual tax certificates don’t tie up to payments made each month and fail SARS validation checks.

There is a further risk that depending on the EMP201 submitted, SARS refunds carried forward ETI, the payroll systems don’t know this and then this ETI is claimed again resulting in further overclaims.

 

Software Developers Position

In most cases employers are unaware of this risk and reliant on payroll software providers. However, it is impossible for software developers to predict the future. There is no way they could design software to look at the 19 May changes and then back date them for periods already closed. All they can potentially do is provide guidance to clients to correct it themselves, but this will probably not be available before the 5 June and even if available soon thereafter will not solve the problem.

 

What Can be Done?

We were aware of this risk in April and for our clients we ran a manual analysis (based on the rules we were aware of at the time) to make sure none of our clients over claimed as we knew the system calculations were not up to date. We intend to run a similar analysis in May and inform our clients, but of course there may also be clients who now did overclaim in April because of the changes in May. We will then do our best to rectify these and minimise the impact where possible. We will then have to do a manual final true up in June when all the rules are finalised and assuming no further changes. The net impact is to minimise but not eliminate all risk to clients. There is nothing further we can do.

For those who are not our clients we recommend doing a similar process to limit the damage. You cannot rely on your payroll software providers to solve this for you – it is not possible as they don’t have all the variables.

TERS funding – how to treat in payroll, deductions, maintenance and garnishees

The benefit received from the Department of Labour by an employer under the TERS scheme is a UIF benefit and in the ordinary course would be paid directly to the employee. It is therefore clearly not remuneration and not taxable.

Deductions form the TERS Benefit:

However, less clear is whether the employer can deduct the usual payroll deductions from the benefits received before paying them to employees:

  • Provident fund, medical aid, risk benefits and union deductions. There are two schools of thought on this and obviously no clear case law. However, we are of the view that an employer can deduct these from the UIF benefit to the extent they are contractually entitled to. We would however recommend that employers where possible communicate and get written agreement from the employee.
  • Garnishees/maintenance – while the Magistrates Act does refer to emoluments and where there is no remuneration or emoluments there is an argument that the garnishees/maintenance should not be paid, legal advice is that the garnishee/maintenance is a court order to the employer and any changes or no payment should only be in situations where the employer is no longer the employer or the court has given a ruling that the Emolument Attachment Order (EAO) is not payable. We would therefore recommend that where an employer doesn’t wish to pay the EAO that application should be made to the court.

Treatment in Payroll:

As discussed above, where the benefit is received by the employer and paid to the employee it should be treated as a UIF benefit and not remuneration.

Where an employer has decided to pre-fund the TERS benefit (in anticipation of receiving this from the DoL later) we would recommend the payment is treated as a TERS advance (and not remuneration). In the following period when the UIF benefit has been received this can be treated as a repayment of the advance. In the event the UIF benefit received is greater than the advance then the excess should be paid to the employee with no further consequences. If the benefit is less, then any excess not recovered from the employee will need to be re-classified as taxable remuneration.

TERS Scheme applications – make sure payroll agrees to the submission

With all the back and forth and changes to the TERS scheme process employers would be forgiven for making a mistake or two. Unfortunately, mistakes could lead to the application being rejected.

Some of the areas we expect mistakes likely to arise include:

  • Employers submit a TERS application including a submission for the pay expected to be made to employees during the lockdown. However, they fail to check that their TERS submission ties to their payroll. A s a result their monthly submission to the Department of Labour (DoL) doesn’t tie up causing the DoL to reject (or delay) their application;
  • Employers decide to advance money to their employees and not wait for the UIF benefits. However, the employer treats this incorrectly as remuneration in the payroll resulting in their monthly submission to the Department of Labour showing different remuneration to their TERS submission. Net impact, the rejection of their TERS claim;

For help with your TERS scheme application feel free to contact us.

Sage announces it will discontinue statutory compliance support

In a recent announcement, Sage confirmed that from the 1 October 2019 they will no longer provide tax and compliance advisory services to customers in South Africa, the rest of the Africa region and Middle East.

This is a massive announcement for the industry as many users of Sage have benefited over the years from their regular tax and statutory updates as well as the comfort they could rely on the software to provide them with outputs consistent with the legislation.

I am sure it could not have been an easy decision for Sage to make and we can only speculate that this reflects the increasingly difficult environment we find ourselves in where maintaining compliance is extremely difficult not only because of the complexity of our legislation, but also because of the differences in interpretation applied by the authorities. This creates significant risk for software developers and we assume must have played a key part of Sage’s decision.

The challenge for employers using the Sage products is that while they have committed to trying to make the software compliant they have suggested clients contact tax practitioners (business partners) about compliance issues. The real burden for linking what tax practitioners then say about the legislation and what actually happens in the payroll system will fall on the customer significantly increasing the risk of getting things wrong (and facing the consequences).

The advantage of having a compliance support function within a software developer is the ability to practically think through new legislation before developing solutions and also being the first to hear about issues that arise with clients. This feedback loop is now gone.

I believe this will make it harder for Sage to continue offering a quality product (hopefully I am wrong) and make it harder for internal payroll administrators to do their jobs – they will now be fully responsible for compliance and won’t be able to fully rely on the system.

Salary benchmarking

Organisations often struggle to determine how to remunerate their employees fairly. In a market where quality, skilled employees are hard to find it is important to ensure that you are competitive in terms of setting remuneration levels to attract and retain high calibre staff.

Questions like:

  • Do we have internal pay parity amongst employees?
  • Are staff paid fairly against the market?
  • What do we use for benchmarking?
  • How do we do the benchmarking?

are commonplace and are sometimes difficult to answer without the correct tools and skills.

HRTorQue has the capability to conduct an internal benchmark for all your staff and compare your internal remuneration structures against comparative external market data. This benchmarking is becoming increasingly relevant based on legislative requirements around ‘equal pay for equal work’.

eTorque as a system can be very helpful in providing easy access to remuneration data for benchmarking purposes.

For more information on the Benchmarking Intervention or on how to use e-TorQue in this regard, please contact [email protected].

Payroll Fraud Audit – new service

As financial conditions get tougher, we have heard of an increased level of financial fraud in South Africa. With the level of cash flowing through payroll there is a high likelihood of fraud in this area.

HRTorQue has launched a new service to perform either a review or audit of payroll depending on client preferences.

This service is aimed at identifying the risk of fraud within the payroll process and includes a number of checks to identify whether actual fraud might exist.

We specifically look at the following areas:

  • Timesheet Fraud (hours not actually worked)
  • Manipulation of payroll calculations
  • Ghost employees
  • Commission / bonus fraud (overstated performance)
  • Reimbursable expenses (over-claiming)
  • Payroll controls and approval

For more information please contact [email protected].

Botswana Minimum Wage

The Ministry of Employment, Labour Productivity and Skills Development has published a notification informing the public that the Government of Botswana has approved an increase for minimum wage rates for 2019/2020.

The adjusted minimum wage rates took effect on 1 July 2019.

Trade / Industry Basic Minimum Wage
Building, construction, exploration and quarrying industries P6.77 per hour
Wholesale distributive trade P6.77 per hour
Manufacturing, service and repair trades P6.77 per hour
Hotel, catering and entertainment trades P6.77 per hour
Garage, motor trade and road transport P6.77 per hour
Retail distributive trade P6.01 per hour
Security guards P6.77 per hour
Domestic service sector P1,000.00 per month
Agricultural sector P1,000.00 per month

Employers are advised to adhere to the newly stipulated rates. Failure to do so will be a violation of s138 of the Employment Act, Cap 47:01 and punishable in terms of s151(d) of the same Act.