Tax is such a fascinating field to work in as barely a day goes by without an issue popping up that makes you scratch your head. Last week one of those issues presented itself when a client posed a question as to whether interest would need to be paid to an employee for the late payment of salary. The first hurdle that needed to be overcome was to establish which legislation would need to be considered here, and the first thing that sprang to mind was the Basic Conditions of Employment Act (BCEA).
Two sections of this Act provided clarity on the matter. Firstly, in terms of Section 32(3) of the BCEA, an employer has a 7-day grace period after the contractual date of salary payment to make such a payment to an employee. After the seven days has lapsed and no payment is received, the employee can approach the CCMA to lodge a grievance in this regard. Secondly, Section 75 of the BCEA requires an employer to pay interest to an employee on any amount due in terms of the Prescribed Rate of Interest Act. The prescribed rate of interest is the repo rate plus 3.5% (currently 9%). The prescribed rate of interest is always equal to the Prime Lending Rate. Failure to pay employees their salaries will mean that the employer will need to pay those employees interest at the prescribed rate for the period that the salaries went unpaid.
The payment of interest to an employee brings up another interesting question. Is the interest that the employer is paying ‘remuneration’ in the employee’s hands and therefore subject to PAYE? Is the interest paid to the employee in such circumstances also a reward for the use of their productive capacity, or is only the remuneration portion such a reward? If the interest is not ‘remuneration’ for PAYE purposes, would it be included in an employee’s gross remuneration for Income Tax purposes?
It’s our contention that this interest would not be ‘remuneration’ for PAYE purposes, but that it would need to be included in an employee’s ‘gross remuneration’. The employer would have an obligation to generate an IT 3(b) for the interest paid. SARS has published a Business Requirements Specification (BRS) called IT 3 Data Submission, explaining how this process would need to be done. This would ensure that the IT 3(b) would be pulled through to the employees eFiling tax profile in preparation for the submission of their annual tax return.
The implications of paying employees their salaries outside the 7-day concession period are certainly dire. The relationship between employer and employee sours and the seeds of distrust are sowed. In addition, the employer has administrative hoops to jump through to ensure that they comply with the SARS BRS specifications. There is no winner in these cases, so unless such matters are unavoidable it would be wise to avoid them at all costs.
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