The following content was published in Newsflash 2023/28 – COID Maximum Earnings calculation

COMPENSATION FUND – MAXIMUM EARNINGS CALCULATION

Background

For many years, the PAGSA has requested guidance from the Compensation Fund on how to calculate earnings up to the earnings threshold that is published annually by the Minister when calculating the totals required for the completion and submission of the Return of Earnings (ROE) annual form.

Gazette No. 48337 was published on 30 March 2023 with amongst other matters, an incorrect Earnings threshold for the coming year of assessment 2023/2024. One of the other matters included in this Gazette was a notice towards the end of the Gazette of “EXPLANATORY NOTES ON THE 2022 ROE SEASON”.

This was followed by the publication of Gazette No. 48673 on 30 May 2023 that corrected the Earnings threshold for 2023/2024 and included the same “EXPLANATORY NOTES ON THE 2022 ROE SEASON” notice.

Note that in the Fund’s terminology, ‘2022’ refers to the year in which March falls, not the year in which February falls, as is the case with tax terminology conventions.
This “Explanatory Notes” notice was therefore referring to the 2022/2023 year of assessment that by then had already ended on 28 February 2023 and in respect of which payrolls and employers had already calculated earnings up to the earnings threshold of R529 264 for 2022/2023.

Explanatory Notes on the 2022 ROE Season

Amongst other matters, the “EXPLANATORY NOTES ON THE 2022 ROE SEASON” notice included a ‘Maximum Earnings’ section that stated as follows.

Maximum Earnings
A Maximum Earnings is applied annually at the end of the assessment period (28 February 2023) to the individual employee’s annual total earnings, not per month.
Full annual maximum earnings of R529 264.00 will apply irrespective of the number of months the employee was employed in the 2022 ROE Season.

Examples:
a) If an employee has earned total annual earnings of R600 000.00 from the employer during the period as stated above, the amount should be capped at R529 264.00 and be declared as such.
b) If an employee has earned total annual earnings of any amount below R529 264.00, the total annual earnings that must be declared is the total annual earnings amount as earned by the employee, regardless of whether the said employee worked for a full year or a part of the year.

Notification
To the best of PAGSA’s knowledge, this ‘Maximum Earnings’ section was published in these two Gazettes without any discussion with, or notification to, any employment organisation.
There was certainly no discussion with, or notice given to, the PAGSA, who after all has as its members the payroll supplier companies that must apply this calculation in their payroll systems.

Matters Arising from the Notice of ‘Maximum Earnings’

Effective Date
The “Explanatory Notes” notice does not specifically state an effective date, but the heading refers to ‘2022’, and in its wording, the calculation clearly refers to the year of assessment that had just ended (28 February 2023) as well as specifying the annual earnings threshold for the 2022/2023 year (R529 264).
This wording creates the impression that this calculation method must only be used for the 2022/2023 year of assessment, and not for future years. This creates uncertainty as far as implementation is concerned – see the ‘Joint Approach’ sub-section at the end of this newsflash.
Note that once it is made effective, the COID Amendment Act replaces the concept of ‘earnings’ with the Fourth Schedule definition of remuneration (with some exclusions).
The reference in the notice to only the 2022/2023 year of assessment might be because the Fund intends to issue a new ‘Maximum Earnings’ calculation of remuneration rather than earnings from the effective date of the COID Amendment
Act that has not yet been announced.

Number of Employees
Besides the fact that the notice was published too late for payroll suppliers to apply the specified calculation of ‘Maximum Earnings’ for the 2022/2023 year of assessment in their payroll systems, it did not specify how the ‘Number of Employees’ must be calculated.
Employers must complete the ‘Number of Employees’ field per month on the annual Return of Earnings form, therefore payrolls must calculate these totals for the year of assessment to assist the employer to complete and submit the ROE accurately.
If an employee works every month of the year of assessment for the same employer, the number of months that this employee works for the employer is an easy calculation. It follows that calculating the total number of such employees
per month for the employer for the ROE form is also an easy matter.
However, it is not clear how to report the number of months for employees who did not work the full year of assessment for the same employer.
In particular, the calculation is not an easy one for what we refer to as ‘broken periods of employment’, being the working periods of casual workers, seasonal workers, and workers provided by a Temporary Employment Service (TES) to a client-employer, who don’t provide services every month to an employer.
The PAGSA has queried the calculation of the number of employees with the Fund by submitting examples of different methods of counting the number of months of those employees who did not work every month during the year of assessment for the same employer and asked for clarification of this calculation.
Note the calculation of the ‘Number of Employees’ has nothing to do with the changeover in the future from ‘earnings’ to ‘remuneration’ in terms of the COID Amendment Act.

Audits of the 2022/2023 Return of Earnings
Soon after the publication of Gazette No. 48673 on 30 May 2023, the PAGSA received reports from PAGSA members that an external company, presumably appointed by the fund, was auditing employers, and raising penalties and interest on calculations of the ‘Maximum Earnings’ in respect of the 2022/2023 year of assessment that were not aligned with the ‘Maximum Earnings’ calculation method specified in the Gazettes.
As stated above, payroll systems and employers had already calculated the ‘Maximum Earnings’ before the two Gazettes that specified the method of calculation were published.
PAGSA concerns were brough to the Fund’s attention but there has been no response, which is unusual.

State Law Advisers – Legal Opinion
Fairly recently, the PAGSA was sent a copy of this legal opinion by the State Law Advisers by a third party (i.e., not by the Fund). Until then PAGSA were not aware of its existence, and as far as PAGSA know, it was never issued in the public domain.
This opinion is dated 4 April 2019, and supports the method of calculating the ‘Maximum Earnings’ discussed above.
From this, PAGSA can only assume that at some stage between 4 April 2019 and early 2023, the Fund agreed with this opinion and decided to implement it retrospectively for the 2022/2023 year of assessment without discussion or notice.

Steps Taken by the PAGSA

Queries on the Application of the COID Amendment Act
In PAGSA comments dated 8th May 2023, the PAGSA requested feedback from the Fund on some practical implementation aspects of the COID Amendment Act once it is given an effective date, including confirmation:
1. That payrolls must replace the concept of ‘earnings’ with the Fourth Schedule definition of remuneration (with some exclusions) for the purposes of the ROE form and assessment by the Fund. Note that while the answer to this is clear in the legislation, PAGSA asked for confirmation because of contradictory opinions in circulation.
2. That the ‘year of assessment’ for the purpose of the Return of Earnings will remain a ‘1 March to 28 February’ year despite the specification in the COID Act of a ‘1 April to 31 March’ financial year. Despite the fact that section 82 clearly specifies a ‘1 March to end of February’ year of assessment for ‘ROE’ reporting and that there
is no reference to a “financial year” in section 82, there are contradictory opinions on this issue.
In addition to the above, PAGSA have in the past requested that, because of the replacement of ‘earnings’ with Fourth Schedule remuneration, the effective date (at least for this portion of the COID Amendment Act), is made effective from the start of a tax year (i.e., the 1st of March of a year).
To date PAGSA have not yet received a response from the Fund, which again is unusual.

Queries on the Implementation of the ‘Maximum Earnings’ Calculation
The PAGSA has queried the implementation of the ‘Maximum Earnings’ calculation several times, pointing out the impossibility of payrolls applying a specified calculation to a year of assessment that has already ended.
PAGSA have also requested that any penalties and interest that have been raised are reversed. PAGSA concerns were politely acknowledged, but without any meaningful response.

Joint Approach
The lack of response by the Fund resulted in the PAGSA joining forces with organisations in labour circles to jointly approach the Compensation Fund and the DoEL. This process is ongoing, and is focusing on:
1. Determining the legal status of the “EXPLANATORY NOTES ON THE 2022 ROE SEASON” notice
2. Questioning whether the intention that the ‘Maximum Earnings’ calculation specified in the notice should be applied for the 2022/2023 year of assessment is reasonable in practical application terms.
3. Determining whether or not the ‘Maximum Earnings’ calculation as specified in the notice must be applied for the 2023/2024 year of assessment and for future years of assessment.
4. Clarification of the calculation of the ‘Number of Employees’ that must be reported on the ROE form if an employee does not work every month of the year of assessment for the same employer.
5. Requesting that the penalties and interest that have already been raised in respect of the 2022/2023 year of assessment are retracted and that the audits are stopped.
6. Discussion and response to the practical concerns raised by the PAGSA in our comments submitted to the Fund regarding the implementation of the COID Amendment Act.

Based on the experience of the recent past, PAGSA don’t expect a speedy resolution to the above issues, so the question now is how to proceed.
PAGSA personal guidance:
1. If penalties and interest have been raised for the 2022/2023 year of assessment because the calculation used was not aligned with the ‘Maximum Earnings’ calculation as specified in the Gazettes, consider appealing this action, and if justifiable, approaching the courts.
In this regard, if your company has been penalised, you are welcome to contact the PAGSA who can put you in contact with an organisation that will take this forward on your behalf.
Any reasonable person should agree that one cannot implement a requirement at a point in time if the requirement was not known at that time.
2. Consider applying the ‘Maximum Earnings’ calculation as specified in the Gazettes for the 2023/2024 year of assessment in your payroll system until we get clarity on the way forward.
It appears certain that the Fund’s intention is that an ‘annual’, as opposed to a ‘monthly’, calculation of ‘Maximum Earnings’ should be applied, and that this ‘annual’ calculation principle will be retained when we move away from the concept of ‘earnings’ to the Fourth Schedule definition of ‘remuneration’ when the COID Amendment Act is made effective at some stage in the future.
To repeat, this is PAGSA personal guidance, and you would be wise to seek other advice in addition to this.