In the past there has been some confusion about whether gratuities in the form of tips earned by waitrons, which have been handed to their employer for “safekeeping” and paid later into the waitron’s bank account, were regarded as remuneration or not.
In terms of the Income Tax Act, PAYE must be withheld when an “employer” pays “remuneration” to an “employee”. These terms are defined in the Fourth Schedule to the Income Tax Act and apply only for the purpose of that part of the Income Tax Act. An employee is defined as, amongst other things, any person who receives remuneration whilst remuneration is defined and includes, amongst other things, any bonus, or gratuity. An employer is defined as, amongst other things, any person who pays or is liable to pay remuneration. In other words, there must be a flow of remuneration from an employer to an employee before PAYE must be withheld.
The SARS Ruling, which was published on 14 February 2011, confirmed that where an employer (restaurant owner) holds tips received from customers in safekeeping on behalf of the waiters and then transfers that money to the waiter’s banking account, no PAYE need to be withheld by the employer. The SARS Ruling, which is valid until August 2015, comes as no surprise as there is no flow of remuneration from an employer to an employee, as is required in terms of the Fourth Schedule to the Act. Here, there is a flow of money (tips) from a customer to the waitron, whereas the employer merely holds the monies on behalf the beneficial recipients (the waitrons).
It is however surprising that this SARS Ruling was interpreted by some as meaning that these ‘tips’ are not taxable at all. In consequence, SARS issued a clarifying note to the Ruling confirming that the Ruling applies to the non-withholding of PAYE and does not mean that ‘tips’ are not taxable.
Quite independent from the PAYE withholding obligations, discussed above, is the gross income definition and in particular paragraph (c), which includes in gross income any amount, including any voluntary award, received or accrued in respect of services rendered. This paragraph brings within its ambit all amounts received as a quid pro quo for services rendered. The only question to be answered is whether the tips are received in respect of services rendered. If the answer is yes, the tips fall within the ambit of gross income. Quite clearly, the tips are received in respect of services rendered by the waitron and therefore they are taxable. Of course, in the absence of a paper trail, it will be difficult for SARS to police the taxation of tips and it will be up to the honesty of waitrons.