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

Posted on By Douw van der WaltIn Business, Legislation, Tax

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

Posted on By Jonathan AitkenIn BEE, Human Resources, Skills Development, Tax

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

Posted on By Jonathan AitkenIn Business, Tax

(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.

Do I need to submit a personal income tax return?

Posted on By Megan YeomanIn Business, Tax

Please see below requirements/criteria to be met for individuals to submit an income tax return:

(“if you answered yes to any of the following questions you will need to submit an income tax return”)

Do any of the following apply to you for the tax year 1 March 2019 to 29 February 2020?

  • Did you conduct any trade* in South Africa or if you are a South African tax resident did you conduct any trade*?
  • Did you receive an allowance such as a travel, subsistence or office bearer allowance? Check your IRP5/IT3(a) if unsure.
  • Did you hold any funds in foreign currency or assets outside South Africa that have a combined total value of more than R225 000 at any stage during the tax year?
  • Did you have Capital Gains or Capital Losses exceeding R40 000?
  • Was any income or a Capital Gain from funds in foreign currency or assets outside the Republic attributed to you?
  • Do you hold any rights in a Controlled Foreign Company?

*The term “trade” means every profession, trade, business, calling, occupation or venture, including the letting of any property but excluding any employment.

Filing deadlines:

  • 1 September to 16 November – taxpayers who file online
  • 1 September to 22 October – taxpayers who cannot file online can do so at a SARS branch by appointment
  • 1 September to 29 January 2021 – provisional taxpayers who file online

https://www.sars.gov.za/TaxTypes/PIT/Pages/Do-you-need-to-submit-a-return.aspx

Watch out – new potential rights and powers for SARS

Posted on By Jonathan AitkenIn Business, Legislation, Tax

The government in August published the Draft Taxation Laws Amendment Bill (TLAB) and Draft Tax Administration Laws Amendment Bill (TALAB) for comment.

There is a lot of information in these Bills including (source gov.za):

Key tax proposals contained in the 2020 Draft Rates Bill include the following:

  • Changes in rates and monetary thresholds to the personal income tax tables
  • Adjustment of transfer duty rates to support the property market
  • Increases of the excise duties on alcohol and tobacco

Key tax proposals contained in the 2020 Draft TLAB include the following:

  • Proposed introduction of export taxes on scrap metals
  • Tax measures required as a result of the modernisation of the foreign exchange control system
  • Aligning the carbon fuel levy adjustment with the Carbon Tax Act
  • Allowing a carbon tax “pass through” for the regulated liquid fuels sector
  • Addressing an anomaly in the tax exemption of employer provided bursaries
  • Clarifying rollover relief for unbundling transactions
  • Consequential amendments as a result of 2019 changes to section 72 of the VAT Act

Key tax proposals contained in the 2020 Draft TALAB include the following:

  • Amendments enabling the proposed introduction of an export tax on scrap metals
  • Removal of the requirement to prove intent with regard to certain offences listed in the Fourth Schedule to the Income Tax Act, the Value-Added Tax Act and the Tax Administration Act
  • Refusal to authorise a refund where returns are outstanding under the Skills Development Levies Act and the Unemployment Insurance Contributions Act
  • Withholding of a refund pending a criminal investigation
  • Estimated assessments where relevant material requested by SARS has not been supplied

We note with particular concern two of the proposed amendments:

  1. the proposed amendment to the TALAB to “Remove the requirement to prove intent with regard to certain offences listed in the Fourth Schedule to the Income Tax Act, the Value-Added Tax Act and the Tax Administration Act”.
  2. The proposals around limiting refunds being paid where returns are outstanding (UIF, SDL, Income Tax).

The reason we are concerned is because we have already seen how difficult it can be for taxpayers to get a refund. Now we are once again seeing legislation that will potentially make refunds harder. Further, it is of major concern that it is proposed the words “wilfully and” be removed from the Income Tax Administration Act. Previously it was up to SARS to show that the taxpayer had shown a wilfull intent before a criminal indictment could be followed. Now the onus falls on the taxpayer to show they had just cause for any error. It is conceivable that SARS could use this as a draconian tool to target individuals. One might even see a scenario where SARS institutes a criminal case in order to defer a large refund knowing the burden and cost will fall on the taxpayer to prove otherwise.

Rocky shoals ahead…

Is it just SARS sharpening its teeth, or is this an assault on taxpayer rights?

Posted on By Dave BeattieIn Business, Legislation, Tax

Proposed new legislation seeks to put additional pressure on taxpayers to ensure the accuracy of their tax submissions. Section 34 of the Draft Tax Administration Laws Amendment Bill, 2020, proposes to amend Section 234 of the Tax Administration Act, which will remove the concept of willfulness (“intention”) from the range of acts that constitute an offence under the Tax Administration Act.

It would mean that you could be guilty of an offence if you neglect to, for example, notify SARS of a change in registered details (addresses, contact numbers, bank accounts, email addresses and public officer), respond to a request for documents or information from SARS late or not pay taxes when due.

Other common problems that could result in punishment include:

  • Supporting documents being misplaced, or clerical errors, which result in adjustments to VAT or PAYE returns by SARS.
  • Late payments of VAT or PAYE by taxpayers due to banking cut-off challenges or pay late due to an error in interpretation of a payment cut-off date.
  • Taxpayers being unaware of a potential tax liability due to ever changing and complex legislation, and such liability being paid to SARS late.

SARS is currently able to impose penalties on taxpayers for such contraventions, so the question that needs to be asked is why these additional measures are necessary. The answer to this is the explanation provided in the Draft Bill. The ‘requiring proof of intention’ in terms of a taxpayer’s action appears to be a sticking point to SARS. This makes prosecution for non-compliance difficult. Remove this hurdle and SARS can prosecute at will.  The proposed change, if passed, will provide SARS with an additional weapon with which to force taxpayers to comply with their filing and payment obligations. So, will ‘intent’ be a mitigating factor of any sort? The concern to tax practitioners and taxpayers alike is that SARS will use a heavy-handed approach to dealing with inadvertent errors in an attempt to improve tax collection. Whilst honest taxpayers have no problem with SARS using legislation to tackle serial tax offenders, it would not be fair and equitable if honest taxpayers who had genuinely made a mistake became collateral damage on this battlefield. It is hoped that sanity will prevail here and that a more measured approach is followed

Can compliance wait?

Posted on By Dave BeattieIn Business, Legislation, Tax

We always hear that South Africa has some of the best legislation in the world. We also hear that South African has too much red tape that stifles the entrepreneurial spirit. In the 26 years that I have been a tax practitioner I have seen legislation introduced that clearly unnecessarily adds to the compliance burden of the business owner. Very often this legislation is introduced in a haphazard manner that complicates the application of the legislation at company level. The introduction of the Employment Tax Incentive in 2013 is a case in point. We are 7 years down the line and making very slow progress in terms of achieving a stable and easy to understand product.

When dealing with clients and prospective clients, legislative compliance is often a very emotional issue. In our tough economic times, most businesses are concentrating on keeping clients and generating revenue. Compliance almost becomes a nuisance factor. Irrespective of how hard we try and put legislative compliance into the spotlight we find that there is a ready reason to put it on the backburner. No matter how frustrating this is, it isn’t until a crisis that legislative compliance becomes important. So, what constitutes a crisis?

When celebrating the turn of the year very few people would have predicted the position the world would be in now. Enter the COVID-19 pandemic stage left. This unprecedented event has wrought havoc on economies across the world.  In our own economy panic set in when it was announced that there was going to be a general shutdown. The poor state of the economy left most employers ill prepared for such an event and very quickly it was evident that many companies would not be able to pay their employees for April. Government quickly stepped in with the introduction of funding schemes and the TERS UIF scheme.

We were faced with the difficult situation of trying to analyse and interpret this new legislation whilst receiving a deluge of TERS claims to process on behalf of clients. The volume of work was certainly not a problem. The problem was the fact that many of the claims related to new clients who did not run their payroll with us. Compliance issues that we regularly post articles on and highlight in Health Checks to our clients are now the cause of many of these new clients either not getting TERS claims, or having such claims delayed. What is abundantly clear is that compliance around payrolls and the human resources space is one of those areas that organisations are neglecting. Who would have thought that it would take something like COVID-19 to bring these inadequacies and non-compliance into the spotlight.

Whilst we have seen a frantic scramble to meet the necessary compliance standards by many organisations, this behaviour is akin to putting a plaster on a leaking dyke. There has to be a real intention to get the basic building blocks of the payroll / HR process correct.  This is not a very time-consuming process and the solutions need not be expensive, corporate solutions. A practical solution can be designed to ensure that there is legislative compliance and that the company meets industry best practice. ‘Nice to have’ systems can be added at a later stage if a need is established.

Step one though is to highlight the areas of non-compliance, the areas where there are holes, and to not only plug those holes but to implement a basic system that provides the comfort of knowing that non-compliance is not going to cost the company a lot of time and money at some stage in the future.

HRTorQue offers a free HR Health Check to any organisations wanting a snapshot of where they are in terms of compliance and industry best practice. The process takes a maximum of 1.5 hours and the outcome is a report listing the areas of non-compliance and where improvements can be made. If you would like to take advantage of this opportunity you are welcome to contact Dave Beattie on [email protected].

Home Office Expenses – Tax deductions for Working from Home

Posted on By Dave BeattieIn Business, Coronavirus Reliefs, Tax

Whilst the concept of a ‘home office’ is certainly not new the unprecedented challenges of the COVID-19 pandemic has brought the concept and its terms and conditions firmly into focus. With many companies not able to return to full or partial employment until at least Level 2, employers have quickly had to formulate plans to get employees set up in their homes so that they are in a position to get to a productive capacity as soon as possible.  The punitive cost of office space, traffic congestion and a changing work dynamic are all additional reasons why productivity conscious employers are looking at the ‘home office’ concept as a solution to such problems.

The onset of COVID-19 has pushed the need for employees to maintain a home office into a necessity. Overnight employees have been thrust into this new working culture. Employees have hurriedly had to set up a workspace to enable them to be productive and client-facing as soon as possible. In many of these cases the practicalities of such changes would have only been agreed after the fact, with the most important of these being the costs associated with the ‘home office’. Depending on the agreement reached with the employer in terms of who is required to pay such costs, the employee may need to familiarise themselves with the tax legislation in this regard.  SARS allows such employees to deduct their home office expenses within the “Other Deductions” section of their annual Income Tax return. It is important to note that this is only allowed under certain specific conditions. Before explaining the legislation though it is important to understand that the situation is different for sole proprietors or independent contractors who also work from home. They can automatically deduct their home office expenses and do not need to work through the same stringent set of conditions applied to employees to see whether they qualify for a deduction. The relevant portion of home office expenses can simply be reflected within the “Local Business, Trade and Professional Income” section of their annual Income Tax return.

 

So, what are the requirements to deduct home office expenditure for a salaried employee?

  • The employer must allow the employee to work from home. SARS requires that this fact be put in writing in the form of a letter or an addendum to the employment contract.
  • The employee must spend more than half of their total working hours working from their home office.
  • The employee must have an area of their home which is used exclusively for this purpose. For example, employees who meet clients in their dining room at home would not qualify. A separate office, which is used specifically for the employee’s work, must be maintained to qualify for the deduction. This is often a sticking point with SARS and could potentially be problematic, particularly with the flexible arrangements made to deal with the COVID-19 pandemic.
  • The office must be specifically equipped for the employee’s trade, i.e., it must be specially fitted with the furniture, tools and equipment required for the employee to perform their work. A room utilised for multiple activities would not qualify.

 

What expenses can be deducted?

Firstly, one must look at the employee’s remuneration structure to confirm whether they:

  • Earn more than 50% of total remuneration either from commission or some other variable income based on work performance; or
  • Is a normal salaried employee with variable payments or commission making up less than 50% of their total remuneration?

The first group (i.e., commission / variable income earners) can claim pro-rated deductions based on rent, interest on bond, repairs to the premises, rates, cleaning, wear and tear, and all other expenses relating to their home. In addition, they can also take other commission-related business expenses, such as telephone, cell phone, gifts, stationery and repairs to the printer into account.

The second group (i.e., salaried employees with variable payments or commission making up less than 50% of their total remuneration) can only claim pro-rated deductions based on rent, interest on bond, repairs to the premises, rates, cleaning, wear and tear, and all other expenses relating to their home.

 

How to calculate the home office deduction.

First calculate the total square meterage of the home office in relation to the total square meterage of the home and then convert this to a percentage. Then, apply this percentage to the home office expenditure to calculate the portion that is deductible.

This calculation is best explained with an example.

James is a design engineer who works for Smart Engineering. His remuneration only consists of a salary. His company is happy for him to work from home due to limited office space and flexibility in terms of working hours. He has a separate office at home which is fitted with a desk, cupboard, computer and printer which he uses exclusively for his job. The computer and printer were purchased one year ago for R21 000. His office is 10m2 and the floor space of his entire home, including the office, is 100m2.

During the 2020 tax year he incurs the following expenditure:

  • R100 000 interest on mortgage bond
  • R42 000 rates and electricity
  • R36 000 cleaning costs (including maids wages)
  • R8 000 security and monitoring costs
  • R23 000 cell phone expenses (business portion)

Based on the above information, James qualifies for a home office deduction. The square meterage of his home office (10m2) is 10% in relation to his entire home (100m2).

James’s home office deduction for the tax year can be calculated as follows:

10% x (R100 000 + R42 000 + R36 000 + R8 000) = R18 600

James would also be entitled to a R 7 000 wear and tear deduction on his laptop / printer (assuming a three-year SARS write-off).

As a ‘salaried employee’ James would reflect his home office expense / other claimable expenses claim within the ‘Other Deductions’ section of the annual Income Tax return (ITR12).

It is important to note that any deduction reflected in the ‘other deductions’ field will elicit a query from SARS. They will request details of the claim. The first thing to do is to clearly show the calculation of how the percentage of home office expenses were arrived at. It is advisable to have a detailed schedule reflecting the totals per expense item and then have the schedules of the expenses specific to the claim. It is not always practical to send every invoice to SARS so a schedule will allow them to choose specific expenses if necessary. With any home office submission to SARS you must include a copy of the letter / employment contract from your employer confirming the requirement to maintain a home office.

There is another tax issue that needs to be understood before going down the road of the home office. While people are eager to claim the home office tax deduction in order to reduce their taxable income (and ultimate tax liability), few people understand the negative tax impact a home office will have on the calculation of Capital Gains Tax when they sell their homes one day.

When taxpayers sell their primary residence, there is a primary residence exclusion of R2 million. This means the first R2 million of the capital gain (or loss) is excluded for the purposes of working out Capital Gains Tax. All individual taxpayers receive an additional R40 000 capital gains exclusion per year.

However, if the taxpayer worked from home and used part of the house as an office, the Income Tax Act requires the capital gain to be apportioned between primary residence use and business use. This apportionment must take into account the length of time that the home office was used as a portion of the entire period of ownership, as well as the size of the home office compared to the size of the entire property.

Before happily agreeing to the use of a home office there is some homework that the employee should do. The employee should compare the potential Capital Gains Tax implications with the annual tax saving from the home office deduction to decide which is more advantageous from a tax perspective. Whilst the Capital Gains Tax implications are unlikely to be material if only a small part of the home is used as a home office, it is still important to factor this consideration into the decision.

With the tax position now clear focus now needs to be put on the implementation process. Whilst we can all agree that we are working and living in unprecedented times, what we as humans often have problems with is communication.  Disagreements abound because people battle with communication. There is no better place to see communication challenges than in the workplace. Factor in a money issue and there is sure to be unhappiness. When discussing a change in working conditions with an employee ensure that there is adequate consultation on the matter and that the applicable terms and conditions are put in writing. The employee must understand what the expectations of them will be and what equipment and facilities will be required in this home office. After explaining the tax position and successfully negotiating the specifics of the new working conditions employer and employee should be in a good position to take advantage of this remote working relationship.

Government COVID-19 tax concessions

Posted on By Dave BeattieIn Business, Coronavirus Reliefs, Human Resources, Skills Development, Tax

The impact of the COVID-19 pandemic has had far reaching implications on the South African economy and businesses, big or small. The true spirit of South Africans has come to the fore though and we have seen general society and Government quickly respond to deal with the hardships that have quickly become evident. Government has implemented various concessions to assist with the alleviation of the cash flow burden that tax compliant small to medium sized businesses may suffer arising as a result of the COVID-19 outbreak. The following concessions will be for a limited period of four months, beginning 1 April 2020 and ending on 31 July 2020:

  • Deferral of 35% of the payment of PAYE liability, without SARS imposing administrative penalties and interest thereon.
  • The deferred PAYE liability must be paid to SARS in equal instalments over a period of 6 months commencing on 01 August 2020, i.e. the first payment must be made on 07 September 2020.

Treasury has proposed the following changes to the qualifying criteria for the Employment Tax Incentive scheme during this concession period:

  • The Maximum ETI claimable per qualifying employee is increased to R1 750 in the first year of employment and to R1250 in the second year of employment.
  • Employers to be allowed to claim an ETI amount of R750 for employees who are between the ages of 18 and 29 years and are no longer eligible for ETI as the employer has claimed ETI in respect of those employees for 24 months (First new category).
  • Employers to be allowed an ETI amount of R750 for employees who are between the ages of 30 and 65 years who earn less than R6 500 (Second new category) and
  • The payment of ETI reimbursements to be made monthly instead of twice a year.

Provisional Tax has been addressed by the provision of the following concessions:

  • Deferral of the portion of the first and second provisional tax payments to SARS, without SARS imposing administrative penalties and interest for late payment of the deferred amount.
  • The first provisional tax payment (due from 01 April 2020 to 30 September 2020) to be based on 15% of the total estimated liability and the second provisional tax payment (due from 01 April 2020 to 31 March 2021) to be based on 65% of the total estimated liability.
  • The deferred amount must be paid when making third provisional tax payment (top-up) to avoid interest being charged.

The requirements to be met for the above proposed tax relief are as follows:

  • Annual turnover not exceeding R100m
  • The company must be fully tax compliant (No outstanding returns, no outstanding tax debt other than a debt of less than R100 suspended debt or debt subject to the instalment payment agreement.

A Skills Development Levy (SDL) holiday was introduced in the second wave of concessions. From 1 May 2020, there will be a four-month holiday for SDL contributions (1% of total salaries) to assist all businesses with cash flow. All employers who are registered for SDL will automatically qualify for the SDL payment holiday. The zero amount SDL liability will be defaulted on the relevant EMP 201 returns.

The tax deductible limit for donations (currently 10% of taxable income) will be increased by an additional 10% for donations to the Solidarity Fund during the 2020/21 tax year. Therefore, there will be a limit of 10% for any qualifying donations (including donations to the Solidarity Fund in excess of its specific limit) and an additional 10% for donations to the Solidarity Fund.

The 20% tax-deductible limit for donations will apply only to donations made during the 2020/2021 tax year. Any donations over the limit made during the 2020/2021 tax year will be carried forward and deemed to be a donation made in the succeeding year of assessment (2021/2022) and be subject to the 10% limitation in that year.

The donations thresholds have also been increased at payroll level. Employers can traditionally factor in donations of up to 5% of an employee’s monthly salary when calculating the monthly employees’ tax to be withheld. An additional percentage that can be factored in up to 33.3%, depending on the employee’s circumstances – will be provided for a limited period for donations to the Solidarity Fund.

This will ensure that the employee gets the deduction that is in excess of 5% much earlier than under normal circumstances and will therefore not have to wait until final assessment to claim a potential refund, provided the donation is made to the Solidarity Fund.

However, it is important to note that a final determination must still be made upon assessment as the employee may have other income, deductions, or losses that impact the final taxable income before the deduction of donations.

If these concessions are utilised effectively the cashflow injection into companies will go a long way to assisting such entities get through these trying times. The concessions must be managed correctly though as any slip ups could cost the company in terms of penalties and interest.

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

Posted on By Jonathan AitkenIn Business, Payroll / eTorQue, Tax

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.