Changes to the Long Service Award Requirement – Effective 1 March 2022
PAGSA Newsflash 2022-03 discussed the general (simpler) changes made by the 2021 tax amendment Acts that were published on 19 January 2022 and indicated that there are two complicated amendments that the PAGSA has been discussing with the authorities for some time to get clarity.
One of the two problematic amendments that we have been discussing with SARS is the changes to the taxation rules for qualifying Long Service Awards, and the correct method of reporting this information on tax certificates, and we have today received the SARS opinion on the issues.
Background to Long Service Awards
Paragraphs 2(a) and 5 of the Seventh Schedule of the Income Tax Act provide that when an employee acquires an asset from an employer either for no consideration or for a consideration which is less than the value of the asset, a taxable fringe benefit arises. Depending on the circumstances, the value is either the cost to the employer, or the market value. Generally, for long service awards, the value is the cost to the employer.
However, if an employer gives an asset is to an employee in recognition of long service and the conditions for ‘long service’ are met (discussed below), the fringe benefit value can be reduced by the lower of the asset value and R5 000.
The Budget Review of 2021 noted that in practice some employers reward employees for long service in a variety of forms other than the acquisition of an asset and proposed that the taxable value of these other forms of awards should in total also be reduced by up to R5 000 on condition that the ‘long service’ conditions are met.
These proposals were turned into draft amendments, issued for comment in July 2021, and were promulgated in the final Taxation Laws Amendment Act on 19 January 2022.
The ‘Long Service’ Conditions
The ‘Long service’ conditions are specified in paragraph 5(4) of the Seventh Schedule as being:
An initial unbroken period of service of not less than 15 years, or
Any subsequent unbroken period of service for the same employer of not less than 10 years.
The reduction in the fringe benefit value does not apply automatically at intervals of 15, 25, 35 etc. years of service. Employees who received their initial long service award after, for example, 17 years of service, must wait for a further 10 years (i.e. after 27 years of work for the same employer), before the reduction of the value of the fringe benefit can be applied again.
The ‘Long Service’ Amendments – Effective from 1 March 2022
The final amendments are included in the appendix to this Newsflash for your convenience.
In short, the types of awards for long service whose taxable value can be reduced by up to R5 000 from 1 March 2022 are listed below coupled to a reference to the applicable legislation:
Existing type of award available prior to, and from 1 March 2022
1.Acquisition of an Asset at Less than Actual value [Seventh Schedule par 5(2)(b)]
New types of awards available from 1 March 2022
2.Right of Use of an Asset [Seventh Schedule par 6(4)(d)]
3.Free or Cheap Services [Seventh Schedule par 10(2)(c)]
4.Cash [“gross income” in section 1 of the Income Tax Act, par (c) and proviso (vii)]
Note the following regarding the above types of long service awards available to employers from 1 March 2022:
1.Point 1 above is not new (as far as I can determine, this provision has been in the Act since 1985)
2.Points 2, 3, and 4 are the new forms of award that are available from 1 March 2022
3.Points 1, 2, and 3 are fringe benefits
4.Point 4 is an award paid in cash.
These changes are all welcome and probably legitimise what some employers have been doing in practice for years, but they do raise some complications.
The addition of points 2 and 3, being fringe benefits, is not a radical departure from the principle that we have been familiar with for many years but allowing a cash payment as a long service award, is a radical departure.
Being potentially free of tax (up to R5 000), breaks the old maxim that anything paid in cash to an employee in return for services rendered is always taxable. But this departure from the rule is only if the long service conditions are met.
SARS Interpretation Note 71 – Long Service Awards
SARS Interpretation Note 71 was last changed in 2013 and at the time of writing, has not yet been updated to incorporate the latest amendments to the legislation governing long service awards.
However, the following aspects of the Note are up to date and of interest.
Gift vouchers are a practical and popular method of recognising long service – the value of the award is clear, and it gives the employees the freedom to purchase the asset of their choice. They are a form of property that represents a right to acquire goods or services from a merchant, and since 2013 they are regarded by SARS as an asset for the purposes of the long service award requirements.
Accordingly, gift vouchers granted by employers to employees in recognition of long service qualify for the reduction to the fringe benefit value up to R5 000 provided that the long service conditions are met.
Krugerrands are considered to be goods or commodities rather than “money” because a Krugerrand does not have a face value and it is not used as ‘money’ on a day-to-day basis to pay for goods and services.
This means that for the purposes of the long service award provisions, Krugerrands are regarded as “assets” and their value as a long service award can be reduced by up to R5 000 provided that the long service conditions are met.
Application of the Long Service Award Requirements in Payrolls
It is important to note that once cash has been paid, or one of the allowable fringe benefits have been granted to an employee in recognition of long service, the nature of the transaction changes for the purposes of tax certificate reporting.
For example, if R10 000 is paid in cash as an award, cash would normally be reported under code 3601 but because the reason that it is paid is a long service award, it must be reported as a long service award on the tax certificate and not as cash (code 3601).
This is the same principle that is applied to overtime, commission, bonuses, etc. that are also cash payments.
In other words, if there is an award for long service, the type of payment (cash) or the type of benefit granted changes its tax certificate administration nature from ‘how is it paid’ to ‘why is it paid’.
The long service award tax calculation applies the same rules in principle for cash awards as has been the case with the fringe benefit for many years. The long service conditions must first be met, then the value of the award must be determined, and finally the value of the award can be reduced by the lower of its value and R5 000.
It this is not clear, the codes that are explained in the next section should be of help.
Tax Certificate Codes
The PAYE BRS (SARS PAYE Business Requirements Specification) version 21.0.0 for the 2023 tax year that has been under discussion, has just been released (see PAGSA Newsflash 2022-08). The BRS specifies the technical rules that payrolls must comply with for tax certificate reporting from 1 March 2022 until 28 February 2023, subject to possible changes during the 2023 tax year.
The latest BRS includes the new codes and rules for long service award reporting on tax certificates in accordance with the introduction of the amended long service award requirements from 1 March 2022 as discussed above.
The following are the new and amended tax certificate code rules that provide for long service awards.
1.Code 3835/3885 (Long Service Award):
The value of all types of qualifying long service awards (cash and/or the allowable fringe benefits as discussed above) must be consolidated and reported as a total long service award under code 3835
The total of all long service awards before the R 5000 reduction must be reported under code 3835
SARS will reduce the total amount under code 3835 by the lower of the total amount and R5 000 and then include this reduced amount into taxable income for the assessment calculation of income tax.
2.Code 3601/3651 (Income – taxable):
All taxable income amounts that are paid in cash for services rendered and that are not required to be reported under other income codes must be reported under code 3601. Examples of the cash payments that are excluded and that must not be reported under code 3601 are listed in the PAYE BRS.
Now excluded from 1 March 2022 are long service awards that are paid in cash as specified in proviso (vii) to paragraph (c) of the definition of “gross income” in section 1 of the Income Tax Act, and that are included in the total amount reported under code 3835.
3.Code 3801 (General Fringe Benefits):
All fringe benefit amounts that are not specified to be reported under other fringe benefit codes must be added together and reported under code 3801. The PAYE BRS includes examples of the fringe benefit types that must be reported under code 3801, including amongst others, two of the fringe benefits that can be used for long service awards:
Acquisition of an asset at less than the actual value
Right of use of an asset
However, if one or more of the above two benefit types are used as awards for long service and are reported under code 3835/3885, then these amounts must be excluded from the total reported under code 3801.
In other words, an ‘Acquisition of an asset at less than the actual value’ fringe benefit or a ‘Right of use of an asset’ fringe benefit must only be reported under code 3801 if it is not a long service award.
If it is a long service award, it is reported under code 3835 as explained above.
It follows, for example, that it is possible for two benefits to be granted as ‘Acquisition of an asset at less than the actual value’, one in respect of a long service award (therefore reported under code 3835), and the other one is not a long service award (therefore reported under code 3801).
4.Code 3806 (Free or Cheap Services):
Fringe benefits resulting from free or cheap services provided by the employer to the employee must be reported under code 3806.
From 1 March 2022, free or cheap services granted by the employer as a long services award to the employee and reported under 3835, must not be reported under code 3806.
Problems with the Amended Definition of ETI Monthly Remuneration
Deviating from the purpose of this Newsflash (long service awards), I am taking the opportunity to piggy-back on it to briefly give you a ‘heads-up’ on the amendments to the definition of ETI monthly remuneration that are effective from 1 March 2022.
At the time of writing this Newsflash, we are still waiting for clarity on what were three, but are now two, issues resulting from the changes in the final Taxation Laws Amendment Act to the definition of “monthly remuneration” in the ETI Act:
1.An interpretation on aspects of the exclusion of fringe benefits from ETI monthly remuneration
2.The application of BCEA section 34(1)(b) deductions to ETI monthly remuneration.
The third issue – the new ETI calculation formulae – has been resolved tonight (25 February 2022).
The ETI calculation formulae specified in the Rates Bill issued on 23 February are incorrect. This was pointed out by a wide-awake member of the PAGSA Exco, taken to the authorities by the PAGSA, and after a flurry of discussions, resulted in the Rates Bill of 23 February being withdrawn and replaced by a new Rates Bill on 25 February that now specifies the correct ETI formulae. So make sure that you use this one.
The details of the new formulae will be explained in the next PAGSA Newsflash that will be issued as soon as the last two issues are clarified, of which the application of BCEA section 34(1)(b) to ETI monthly remuneration in the payroll promises to be difficult and could have a serious negative impact on payroll development.
This problem has been under discussion since late last year, but it is a complex matter, and we are now hoping for an opinion from SARS Legal by early next week. In the meantime, all that I can advise is to prepare yourself for some difficult changes to payroll systems.
In advance of the forthcoming PAGSA Newsflash that will focus on the ETI amendment, I can confirm that in principle SARS have interpreted that the new proviso to the definition of ETI monthly remuneration excludes all fringe benefits from ETI monthly remuneration because they are “an amount other than a cash payment” as specified in the proviso.
As stated in point 1 above, there are aspects of this ruling that must still be clarified.
A Newsflash will be issued as soon as the outstanding ETI issues are clarified.
Increase to the R5 000 Reduction?
In the light of the fact that it appears that the reduction value of R5 000 as provided for by paragraph 5(2)(b) of the Seventh Schedule has been in place since 2002 – just on 20 years – in our comments on the draft amendment Bill in July 2021, the PAGSA took the opportunity to request an inflation increase to the R5 000 reduction.
Guess what. Our request was not considered because the 2021 Budget did not propose an increase to the R5,000, therefore the draft amendments were not allowed to contemplate an increase to the R5 000 reduction. I knew that this request was unlikely to succeed, maar wie weet wat gaan gebeur – ‘vra is vry’ …J
The final amendments are included verbatim in the appendix to this Newsflash (see below) for your convenience in case you want to see the actual wording of the requirements.
In closing, I hope that this Newsflash has clarified the new long service award requirements for you.
Chairman Payroll Authors Group of South Africa
All information provided by the PAGSA is subject to our DISCLAIMER.
Appendix – The Long Service Award Legislation from 1 March 2022
2. For the purposes of this Schedule and of paragraph (i) of the definition of “gross income” in section 1 of this Act, a taxable benefit shall be deemed to have been granted by an employer to his employee in respect of the employee’s employment with the employer, if as a benefit or advantage of or by virtue of such employment or as a reward for services rendered or to be rendered by the employee to the employer—
(a) any asset consisting of any goods, commodity, financial instrument or property of any nature (other than money) has been acquired by the employee from the employer or any associated institution in relation to the employer or from any person by arrangement with the employer, either for no consideration or for a consideration given by the employee which is less than the value of such asset, as determined under paragraph 5 (2): Provided that the provisions of this subparagraph shall not apply in respect of—
(i) any meal, refreshment, voucher, board, fuel, power or water with which the employee has been provided as contemplated in subparagraph (c) or (d);
(ii) any marketable security acquired by the exercise by the employee, as contemplated in section 8A, of any right to acquire any marketable security;
(iii) any qualifying equity share acquired by an employee as contemplated in section 8B; or
(iv) any equity instrument contemplated in section 8C; or
(2) The value to be placed on such asset shall be the market value thereof at the time the asset is acquired by the employee: Provided that where the asset in question is movable property (other than marketable securities or an asset which the employer had the use of prior to acquiring ownership thereof) and was acquired by the employer in order to dispose of it to the employee or the asset in question (other than marketable securities) was held by the employer as trading stock, the value to be placed thereon shall be the cost thereof to the employer or, where such asset was held as trading stock and the market value thereof was less than such cost, such market value: Provided further that where—
Proviso (vii) to paragraph (c) of the definition of “gross income”:
The following paragraph is inserted at the end of the proviso to paragraph (c) of the definition of “gross income”:
(vii) the provisions of this paragraph shall not apply in respect of any amount received by or accrued to or for the benefit of any person in respect of long service as defined in paragraph 5(4) of the Seventh Schedule, to the extent that the aggregate value of an amount determined under this paragraph together with all amounts determined under paragraphs 5(2)(b), 6(4)(d) and 10(2)(e) of the Seventh Schedule do not exceed R5 000;”;
The following paragraph substitutes paragraph (b) of the further proviso to subparagraph (2) of paragraph 5 of the Seventh Schedule:
“(b) any asset is given by an employer to an employee for long service, such value to be placed thereon shall be reduced by the lesser of the cost to the employer of all such assets so given to the employee during the year of assessment and R5000: Provided that the aggregate value of an amount reduced under this paragraph together with all amounts determined under paragraphs 6(4)(d) and 10(2)(e) of this Schedule and paragraph (vii) of the proviso to paragraph (c) of the definition of ‘gross income’ in section 1 does not exceed R5 000.”.
The following paragraph is inserted after paragraph 6(4)(c) of the Seventh Schedule:
“(d) such use is granted by an employer to an employee for long service as defined in paragraph 5(4) to the extent that it does not exceed R5 000: Provided that the aggregate value of an amount determined under this paragraph together with amounts determined under paragraph (vii) of the proviso to paragraph (c) of the definition of ‘gross income’ in section 1 and paragraphs 5(2)(b) and 10(2)(e) of the Seventh Schedule does not exceed R5 000.”.
The following paragraph is inserted after paragraph 10(2)(d) of the Seventh Schedule:
“(e) any services granted by an employer to an employee for long service as defined in paragraph 5(4) to the extent that it does not exceed R5 000: Provided that the aggregate value of an amount determined under this paragraph together with all amounts determined under paragraph (vii) of the proviso to paragraph (c) of the definition of ‘gross income’ in section 1 and paragraphs 5(2)(b) and 6(4)(d) of the Seventh Schedule does not exceed R5 000.”.