Penalties for late submission or no submission of 2021 employer tax certificates

In terms of paragraph 14(6) of the Fourth Schedule of the Income Tax Act 58 of 1962, if an employer fails to submit the EMP 501 return by the relevant due date, the Commissioner may impose an administrative non-compliance penalty for each month that the employer fails to submit a complete return. This penalty has been available for some years, but to date SARS has yet to apply it. In line with recent Budget proposals compliance will be stepped up, and SARS issued a notice that warns employers of the potential imposition of penalties starting from the February 2021 tax certificate submissions and reconciliations.

The February 2021 tax certificate submission and reconciliations must be submitted to SARS by 31 May 2021. In terms of the above legislation, SARS can impose a penalty of up to 10% of the total amount of the Employees Tax deducted or withheld, or which should have been deducted or withheld by the employer from remuneration for that reconciliation period. SARS has however taken a decision to impose a penalty of 1% (instead of 10%) for each month that the employer fails to submit the complete return. A penalty notice in the form of an EMP 301 will be issued at the end of every month to confirm the penalty imposed.

If an employer ceases to be an employer from 1 March 2021 onwards, a final reconciliation return must be submitted within 14 days from the date that the employer ceased to be an employer. If these returns are not received timeously the 1% penalty will be applied.

At this stage it is unclear how SARS will deal with cases where due to the non-submission of monthly or six-monthly returns the Employees Tax for the period is unknown. Whilst it would make sense for the penalty in such cases to be applied retrospectively, this would undermine the purpose and deterrent effect of the non-compliance penalty. The Payroll Authors Group of South Africa has suggested that SARS might raise the penalty on an alternative basis in such cases, for example through an estimate of the Employees Tax with an adjustment once the actual Employees Tax is known.

What is clear is that SARS is stepping up efforts to punish non-compliance. Employers will be put under more pressure to ensure compliance due to the severity of the penalties that will be imposed. As compliance becomes more important, employers will need to ensure that their payrolls and related SARS submissions are accurate and submitted timeously.

2021 Budget Speech commentary – Reimbursive Travel Allowance

SARS is very aware of the fact that the current travel allowance system is open to abuse and that a large percentage of claims are fraudulent. There has been recent chatter that SARS may be looking to do away with the option of fixed travel allowances and suggestions that they may only allow business travel to be reimbursed at a fixed cost per kilometre. The current tax regime offers the reimbursive travel allowance as an option for employees. The system puts the onus on the employer to accurately determine the business travel undertaken by the employee and to then pay that at a rate per kilometre determined by SARS annually, or at a rate determined by the employer.

The taxing of the reimbursive allowance was fundamentally changed from 1 March 2018. Where an employee is reimbursed using a rate higher than the SARS prescribed rate, the difference between the SARS prescribed rate and the rate utilised by the employer will be subject to PAYE, regardless of the number of business-related kilometres travelled.

It is advisable that employers consider their reimbursement rates against the prescribed rate. An unintended consequence of reimbursing an employee on a higher rate will increase the employee’s PAYE liability and may result in lower employee take-home pay.

An alternative to avoid this possible occurrence would be for the employer to reimburse the employee at a rate below the prescribed rate of R 3.82 (R 3.98 in 2021) per kilometre. The reimbursement will not attract PAYE and will also not be taxable on the employee’s personal tax return. The simplicity of this approach reduces the reporting requirements associated with the reimbursement of business travel at a rate above the SARS prescribed rate.

HRTorQue can assist you with an evaluation of your current travel allowance and or reimbursement system. This will ensure that you are following industry best practice and that you are not at risk should SARS undertake an Employees Tax audit.

2021 Budget Speech commentary – SARS investment in technology and infrastructure

One interesting element of the 2021 budget is the fact that SARS will be allocated R3 billion to upgrade its technology and infrastructure systems and expand its specialized audit and investigative skills to prevent tax avoidance.

It was also made clear that with SARS investing in technology and data to evaluate the complex tax structures of wealthy South Africans, that these affluent taxpayers would be put in the spotlight as the first step in recovering what they believe are large amounts of money that are slipping through the tax net.

The minister also mentioned leveraging the Davis Tax Committee’s insights, suggesting that this will be a continued focus for SARS.

SARS will be using the allocated funds to attract technically skilled personnel and increase the organization’s data-gathering capabilities. This includes expanding and increasing the use of data using machine learning algorithms and artificial intelligence to connect the dots and, also a very modern digital platform in which taxpayers can easily engage with SARS.

Finally, SARS will be focusing on areas where there is still aggressive non-compliance. The abuse of asset losses, transfer pricing and the use of complex arrangements and offshore vehicles to try and mask their tax obligations will be the first areas of focus.

An automation and digital migration process that started in 2020 will be continued, considerably reducing manual intervention and improving efficiency and turnaround times.

It is interesting to note that the increased budget allocation will only be from 2022/23. This possibly suggests that the hard work that is currently being done by the new Commissioner and his team will lead to improvement in efficiency and collections in the coming year. What is certain is that the Treasury is banking on a very big year from SARS.

Those individual taxpayers and companies who have been shunning compliance and not paying their share had better get their house in order fast, as it is matter of time before SARS come knocking. SARS will be utilizing the maximum penalties at their disposal to punish transgressions going forward.

2021 Budget Speech commentary – Nature of long-service awards for fringe benefit purposes to be reviewed

An employer is currently allowed to treat a long-service award to an employee (in the form of an asset) to the value of ZAR 5,000 as a no value fringe benefit. However, employers recognize long service through awards in various forms that could be considered non-cash benefits in terms of the Income Tax Act, and it is proposed that the current provisions of the Act be reviewed to consider other awards, within the same limit, granted to employees as long-service awards.

Once clarity is provided in terms of what the ‘other awards’ are likely to be we will be able to assist you in putting together a comprehensive ‘long service award’ policy that meets current legislation. We will communicate further on this issue as and when additional information is provided.

Tax deductible donations – Section 18A certificates

With third party data supplied to SARS making up the majority of the information currently populating individual taxpayers’ tax returns, it is no surprise that SARS intends to apply the same reporting requirements to Section 18A certificates. The reason for this move is to curb the issuing of such certificates by entities that are not approved to do so. SARS has proposed that the information required in such receipts be extended and third-party reporting be extended in future to cover the receipts issued.

This proposed change will make it easier for individual taxpayers to claim a donation as a tax deduction, as qualifying claims will automatically be prepopulated on their Income Tax returns. Taxpayers are still urged to ensure that the Public Benefit Organizations that they are donating money to qualifies to issue Section 18A certificates. This qualifying criteria can be checked by a simple check on the SARS website www.sars.gov.za. Simply click on the ‘Business and Employers’ tab, go to ‘Tax Exempt Organizations’ and then ‘Approved Section 18A PBOs’. If the name of the entity you are donating to is not on this list, you will not qualify for the applicable tax deduction.

Circumstances where negligence can lead to a criminal offence for a taxpayer

The Tax Administration Laws Amendment Act (TALA) now provides in s234(2) for the following circumstances where a taxpayer could face criminal charges if they are negligent.

(2) Any person who wilfully or negligently fails to—
 (a) register or notify SARS of a change in registered particulars as required in Chapter 3;
(b) appoint a representative taxpayer or notify SARS of the appointment or change of a representative taxpayer as required under section 153 or 249;
(c) register as a tax practitioner as required under section 240;
(d) submit a return or document to SARS or issue a document to a person as required under a tax Act;
(e) retain records as required under a tax Act;
(f) furnish, produce or make available any information, document or thing, excluding information requested under section 46(8), as and when required under this Act;
(g) attend and give evidence, as and when required under this Act;
(h) comply with a directive or instruction issued by SARS to the person under a tax Act;
(i) disclose to SARS any material facts which should have been disclosed under a tax Act or to notify SARS of anything which the person is required to so notify SARS of under a tax Act;
(j) comply with the provisions of sections 179 to 182, if that person was given notice by SARS to transfer the assets or pay the amounts to SARS as referred to in those sections; or
(k) in the event where that person becomes liable to make a payment for withholding any tax, deduct or withhold or pay to SARS the amount of tax, as and when required under a tax Act, is guilty of an offence and is liable, upon conviction, to a fine or to imprisonment for a period not exceeding two years.’.

Some examples hypothetically speaking of when a taxpayer could face criminal charges:

  • For failing to inform SARS of any change of postal, physical or electronic addresses, representative taxpayer and banking particulars;
  • Failing to submit a tax return when required to do so or failing to submit documents when requested to do so by SARS;
  • Failing to keep records for the required period of time;

This is a very powerful section of the Act giving SARS significant powers. Our concern is most taxpayers have very little knowledge of the income tax act and are very reliant in many cases on tax practitioners. However, we know many individuals cannot afford tax practitioners creating significant risk for themselves.

New tax changes enacted – January 2021

The government in January published the Taxation Laws Amendment Act (TLA) and Tax Administration Laws Amendment Act (TALA). Parliament also passed into law the Rates and Monetary Amounts and Amendment of Revenue Laws Act 22 of 2020.

The significant amendments are as follows:

  • Withdrawal of retirement funds upon emigration. Taxpayers will only be able to withdraw their post retirement benefits once they have been non-resident for three tax years.
  • Anti-avoidance rules bolstered for trusts particularly for preference share funding at a low or no rate of return in a company owned by a trust connected to an individual.
  • Reimbursing employees for business travel expenses. This has been extended to include expenses incurred on meals and other incidental costs while the employee is away on a day trip. Note: this will only apply if the employer’s policies expressly make provision for and allows such reimbursement.
  • Relief for expats confirmed. Due to the travel restrictions under the Covid-19 pandemic, the days requirement for the foreign employment exemption has been reduced from 183 days in aggregate to 117 days. The relaxation only applies to the aggregate number of days and the requirement that more than 60 of the days spent outside South Africa must have been consecutive remains applicable. This amendment is not a permanent fixture.
  • Employer provided bursaries. Bona fide bursaries or scholarships granted by employers to employees or their relatives are exempt. However, this cannot be part of a salary sacrifice arrangement.
  • Tax treatment of doubtful debts. The doubtful debt allowance provision has been amended to bring parity between taxpayers that apply IFRS 9 and those who do not.
  • Roll-over amounts claimable under the ETI. The Employment Tax Incentive Act has been amended to encourage tax compliance. The amendment determines that excess ETI claims of employers that are non-compliant from a tax perspective will no longer be rolled over to the end of the PAYE reconciliation period.
  • Estimated assessments. SARS may now issue an estimated assessment where the taxpayer fails to respond to a request from SARS for relevant material.
  • SARS can withhold your refund if you are under criminal investigation including one under the Tax Administration Act. As a side note we are worried that in the wrong hands this can be used to defer refunds indefinitely (or at least for a long time) particularly where the circumstance where a criminal case can be raised have been broadened.

Criminal sanctions for minor tax offences. With the new amendments, non-compliance of certain obligations will constitute a criminal offence where it is as a result of the taxpayer’s negligence. Wilfull intent on its own is no longer required; where you are non-compliant due to ignorance of your obligations, you may be found guilty of a criminal offence. These offences are subject to a fine or imprisonment of up to two years. This is a very onerous change as the vast majority of the taxpayers we deal with have very little understanding of their responsibilities.

What is the tax payable on tips or other gratuities from clients to waitrons?

Restaurants are often confronted with the moral dilemma of whether their staff who serve clients are liable for paying tax on the tips or gratuities they receive from clients.

The tax treatment of tips paid by patrons to waitrons has been clarified by SARS in an Interpretation Note. The establishment/employer is merely holding the funds for the waitron/employee and performing a distribution role for the customer/patron.

Accordingly, under these conditions, the employer would not constitute an ‘employer’ as defined for the purposes of Employees Tax in relation to the tip or gratuity. PAYE would therefore not be deducted from the tip or gratuity by the establishment/employer.

It is important that waitrons understand that the income they received “directly” from a patron or from the establishment/employer where they are acting as a conduit for the distribution of the tips, that these tips must be included in the recipient’s (the waitron) ‘gross income’.

This means that the onus is on waitrons and other restaurant employees to declare the total amount of tips or gratuities received to SARS when completing their annual tax returns.

It is our recommendation that restaurants must have a policy and an acknowledgement by their waitrons that they understand this obligation and act responsibly when submitting their personal Income Tax returns.

Abuse of the Employment Tax Incentive Scheme

In conjunction with SAICA, the South African Institute of Tax (SAIT) urges its members to be cautious of structures created to take advantage of the Employment Tax Incentive (ETI) Scheme where the nature of the relationship between the employer and employee is not a real one.

The article and further detail can be found at this link.

The article draw attention to one structure which roundtrips cash to enable a party to take advantage of ETI and also claim skills development points for BEE.

These structures have now come to the attention of Treasury so please beware as these “ghost employee” structures will be investigated. Ultimately it will be the employer who feels the pain rather than any advisor who facilitates it.

Abuse of the incentive will also likely lead to its closure which will impact those employers who do need it to support employment. It will also discourage government from introducing similar incentives.

Relaxation of the Validation Rules for Code 4587 – s10(1)(o) foreign income exemption

(Source: PAGSA; SARS)

 Background

The Minister of Finance announced in the Budget Review on 26 February 2020 that the foreign employment income exemption would be increased from R1,0 million to R1,25 million with effect from 1 March 2020, and this was given effect in the draft ‘Rates Bill’ that was issued on the same day.

To provide for the new foreign employment income requirements, the PAYE BRS was changed to include a new code 4587 described as “Section 10(1)(o)(ii) exemption taken into account by the employer for PAYE purposes”.

The notes in the PAYE BRS version 19.4 clarify that what must be reported in code 4587 is the remuneration as defined by section 10(1)(o)(ii) that the employer has determined is exempt in terms of the requirements of section10(1)(o)(ii).

The relevant portion of section 10(1)(o)(ii) reads as follows:

“There shall be exempt from normal tax any form of remuneration to the extent to which that remuneration does not exceed 1,25million Rand in respect of a year of assessment is received or accrues to any employee during any year of assessment by way of salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance including any amount referred to in paragraph (i) of the definition of gross income in section 1 or an amount referred to in section 8, 8B or 8C, in respect of services rendered outside the Republic by that employee for or on behalf of any employer if that employee was outside the Republic-“ …

In terms of section 10(1)(o)(ii), only the following foreign remuneration types can be exempt:

  1. Salary
  2. Leave pay
  3. Wage
  4. Overtime pay
  5. Bonus
  6. Gratuity
  7. Commission
  8. Fee
  9. Emolument
  10. (General) allowances
  11. Taxable fringe benefits (section 1: gross income paragraph(i))
  12. (Special) allowances (section 8: travel, subsistence, and public office allowances)
  13. Amounts derived from broad-based employee share plans (section 8B)
  14. Amounts received in respect of a share vesting (section 8C).

 

Code 4587 Validation Rules

Code 4587 (Section 10(1)(o)(ii) exemption taken into account by the employer for PAYE purposes) was added to the PAYE BRS earlier in 2020 and is included in the current version 19.4 with effect from the 2020/21 tax year onwards.

Employers must report the total remuneration as defined by section 10(1)(o)(ii) that the employer has taken into account in the current tax year for PAYE calculation and withholding purposes.

Due to uncertainty regarding the validation rules, the PAGSA requested that SARS relax the application of the validation rules for code 4587for the August 2020 mid-year tax certificate submissions.

 

Code 4587 Validation Relaxation

SARS have agreed to relax the code 4587 validation rules, confirmed in the following notice.

 

NOTICE TO STAKEHOLDER/EMPLOYERS

Information Code 4587 –Section 10(1)(o)(ii) exemption taken into account by the employer for PAYE purposes: Relaxation of validation rules for August 2020 (202008) Employer Interim Reconciliation

SARS acknowledges concerns raised by payrolls that the application of the current validation rules for code 4587 may result in certain employers not being able to submit their interim IRP5/IT3(a) certificate information.

These validation rules as specified in the SARS Business Requirements Specification: PAYE Employer Reconciliation (2020 Release) version 19.4 will be relaxed for the August 2020 Employer Interim Reconciliation submission.

The relaxation of the validation rules will be implemented during the weekend of 19 September 2020 and the affected employers are requested not to submit their Interim Reconciliation documents before Monday, 21 September 2020.

These validation rules will be reviewed and clearly defined to provide clarity.

An updated SARS Business Requirements Specification: PAYE Employer Reconciliation (2020 Release) will be issued shortly and the amended validation rules willbe implemented towards the end of 2020.

Note that any February 2021 (202102) submission that is submitted before the implementation of the revised validations will be processed in accordance with the relaxed validation rules for code 4587.