Tax Administration Laws Amendment Bill

Tax Administration Laws Amendment Bill

Business, Legislation, Tax

Feedback on proposed payroll legislative changes

In a previous edition of the HRTorQue Reporter we discussed the details of the proposed changes to the Tax Law Amendment Bill and the Tax Administration Law Amendment Bill that had been released for public comment.  On 10 November 2021 National Treasury published a Draft Response Document on the 2021 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2021 Draft Taxation Laws Amendment Bill and the Second Batch of the 2021 Draft Taxation Laws Amendment Bill and 2021 Draft Tax Administration Laws Amendment Bill.

This article will look at the PAYE (payroll) and relevant Income Tax issues mentioned in this Draft Response Document (Draft Taxation Laws Amendment Bill). The feedback will follow the issues originally identified.

Taxation of a long service award

The total non-taxable value of R 5 000 and all other qualifying criteria must continue to be met. It is however proposed that in future the award can be provided in cash / voucher, as opposed to a non-cash asset, as is required by the current legislation. This would be a welcome change as the current requirements make the practicalities of achieving compliance difficult.

Response: It is accepted that gift vouchers will be regarded as assets and not cash when awarded to employees qualifying for long service or bravery awards. Government did not however accept the request to increase the exempt amount (currently assets valued up R 5 000) or amend the number of years required to qualify for long service. This issue may be relooked at in the next cycle.

Clarifying the calculation of the fringe benefit in relation to employer contributions to a retirement fund

Where the employer contributes to a defined benefit fund the actual taxable benefit accruing to the employee is derived by using a specific formula. The ‘self-insured’ risk-benefit which is included in the contribution is often “lost” when calculating the amount that the employee can use towards the calculation of the allowable deduction, thus allowing the employee a greater deduction than permitted. The proposal is to split the two amounts to ensure the value of the benefit for both the retirement fund and the self-insured risk-benefit can be determined and taxed accordingly.

Response: Government believes that the reference to ‘self-insurance policy’ is problematic. As the term is not currently used in practice there is room for confusion. In order to alleviate confusion, changes will be made in the 2021 2021 Draft TLAB to use the colloquially used term ‘risk benefits’.

Definition of an employee for ETI purposes

It is proposed that the definition of an “employee” and a “qualifying employee” be changed to clearly specify that “work” must be performed in terms of an employment contract and that the employee must be documented in the employer’s records. This is to ensure that employers don’t claim for employees who don’t actually work for them. There has been a significant amount of fraud perpetuated in this area since the introduction of ETI and this proposed change has been a long time coming.

Response: The incentive is intended to apply to all legitimate arrangements where the employee is not only engaged in the activity of studying, but rather gaining valuable work experience. In the event that some of the employee’s duties involve some sort of training or studying, the costs of said training or studying should ideally be borne by the employer. To ensure that the employee’s remuneration package is not solely allocated to the cost associated with any required training or studying, qualification for the incentive shall further be based on the employee receiving a cash payment in lieu of services rendered. Changes will be made in the 2021 TLAB to reflect this intention. The implementation date of such change is likely to be 1 March 2022.

Transfer between retirement funds by members reaching 55 (or older)

There are certain instances where a tax liability arises when a fund member reaches retirement age and transfers their funds into a preservation fund. The intention is that any transfer to a similar fund should not be taxed. It is proposed that an amendment be made to address this and allow for the tax-free transfer of funds from a preservation fund into a similar fund by a member who has already reached normal retirement age. This is a welcomed proposal as it enables individuals to maximize their return by moving from one fund to another, without any unintended tax consequences.

 Response: Government has chosen to ignore requests for greater flexibility in transfers to enable individuals to consolidate their retirement savings in any type of retirement fund, including occupational funds. Their concern with allowing transfers between occupational funds (be they transfers between same employer occupational funds or transfers between different employer occupational funds) is that the transferor and transferee retirement funds may have different rules with regards to their respective normal retirement ages. A member may therefore be able to access retirement benefits that were not available in the retirement fund transferred from.

The tax implications on a retirement fund when an individual ceases to be a tax resident

There are some proposed changes which will assist an individual in delaying the payment of the tax liability that arises when there has been a deemed “withdrawal” by the individual from the fund. It is proposed that the taxable benefit will only accrue to the individual when they receive the payment from the fund.

 Response: Bypassing tax treaties with domestic legislation is controversial and could potentially result in the double taxation for members of retirement funds. It is believed that Government should renegotiate treaties that they consider to be problematic. Section 9HC will lead to involuntary withdrawals of retirement interest on emigration (even if they had preferred to leave their retirement interest in SA). Consequently, the recent introduction of the 3-year rule still requires clarity from an administrative point of view and due to the additional complexity of the emigration process the administration costs to taxpayers has increased. Government has stated that the proposed amendments regarding the introduction of section 9HC will be withdrawn from the 2021 Draft TLAB and further amendments will be considered in the next legislative cycle in order to address the complexities that were raised through the comment cycle.

Penalties for non-submission of bi-annual PAYE reconciliations

There is a proposed new method for calculating the penalty due for this type of non-compliance. If the proposal is adopted, we will see higher penalties being issued. Employers will be forced to pay more attention to meeting deadlines and ensuring that they comply with the technical specifications of these returns.  SARS may estimate such penalties.

Response: SARS has confirmed that they will be utilizing data readily available to raise PAYE Administrative non-compliance penalties. SARS will use prior submissions as the basis for penalties where such liability is not available for the reconciliation period that is outstanding. SARS is also willing to use the salary expense reflected in the corporate Income Tax return to estimate the PAYE liability on which to base the PAYE Administrative penalty.

 There has been a concern that where the Employees Tax is overestimated the PAYE Administration penalty will be higher. If this were later corrected it would increase the unallocated payments against the taxpayer’s account. SARS has however stated that accounts and payment processing needs will be monitored. Current legislation allows SARS to adjust the Administration penalty in line with the changes in liability of the taxpayer.

Another concern involving the EMP 501 is that such returns are considered not to be submitted on eFiling if SARS performs an Employment Taxes Verification on the return. This should not be so, with returns under ETV reflecting as submitted, but flagged for review. This will prevent any proposed non-submission penalty from being raised incorrectly. SARS has stated that with any submission the status is updated to ‘received’, irrespective of whether a ETV review is done or not. SARS has asked that taxpayers raise this matter through a recognized controlling body if they have such issues again.

These issues will be expanded on in depth when we do the annual tax year-end in March 2022. We will keep a close eye on developments over the coming months.