In a payroll system there are payments made to employees in cash, however, many employees receive non-cash benefits as a result of their employment. In South Africa, there are specific rules for valuing such fringe benefits. The calculated value of the fringe benefits is then added to either the regular earnings or to the annual bonus tax totals and tax is calculated on the increased value.
Examples of fringe benefits that would be treated as regular earnings are the use of a company car, loans to employee at no or low interest rates and the taxable portion of the medical aid contribution paid by the company for the employee. Examples of fringe benefits that would be treated as an annual bonus are the acquisition of a company asset at less than market value and free or cheap holiday accommodation. There are also a number of fringe benefits that have been specifically excluded if certain conditions are met and your company policy and intention is clear to SARS.
When you outsource your payroll and you have told us about these benefits, we are able to ensure that they are taxed and reported correctly, but often structures change, new benefits are introduced and nobody thinks to mention it.
It is necessary to regularly review the payroll and company practices outside the payroll to determine whether all benefits are included and taxed. To examine if new benefits been introduced or, have remuneration structures changed as employees have been promoted or incentivised and to ensure that these changes been communicated to the payroll department properly, whether you run payroll in house or you outsource.
The ever increasing complexity of from legislative changes in this area make soft targets for the South African Revenue Service (SARS), as is evident by the recent marked increase in the number of PAYE audits conducted by the national revenue collector. Many business owners are under the impression that having their financials audited, reviewed or compiled by a firm of independent auditors and accountants minimises the risks relating to PAYE. This, unfortunately, is not the case as a review and compilation does not necessarily extend to the inspection of the underlying documents and policies for the treatment of salary components for PAYE. Even an audit does not extend to these items specifically.
Businesses must therefore be proactive and take full responsibility for their PAYE systems – even when the processing thereof is outsourced. With the threat of understatement penalties, business owners should ensure a proper and specific review of their PAYE systems.
David Beattie is a specialist who can help you with your PAYE reviews, he will determine whether current legislation is being applied, detect risk areas that must be addressed and assess what corrective steps, if necessary, can be taken to limit potential additional tax costs. Please contact him at [email protected] for professional advice in this regard.