Chapter 4. Tax Law Amendments
Following the Budget proposals on 22 February 2023, the draft amendment Bills giving effect to those proposals were issued in two batches.
The ‘Two-pot Retirement System’ amendment Bills were issued on 9 June 2023:
1. Revised 2023 Draft Revenue Laws Amendment Bill
2. Draft Revenue Administration and Pension Laws Amendment Bill.
The PAGSA and other interested organisations submitted comments to National Treasury and SARS on these two Bills on 15 July 2023. Refer to Chapter 5 ‘The Proposed Two-pot Retirement System’ for more details on these important proposed changes to the legislation.
The proposed changes to general employment tax related legislation were issued on 31 July 2023 in the following amendment Bills:
1. Draft Taxation Laws Amendment Bill [TLAB]
This Bill deals with the substantive changes to the Income Tax Act proposed in the 2023 budget.
2. Draft Tax Administration Laws Amendment Bill [TALAB]
This Bill deals with the administration-related changes proposed in the 2023 budget to the various Acts that are administered by SARS.
3. Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill [Rates Bill]
This Bill confirms the tax tables, rebates and threshold changes proposed in the 2023 Budget.
Comments on these Bills were submitted by the PAGSA to National Treasury and SARS on 31 August 2023 and where relevant are included in the discussion of the proposed changes that follow.
Note that there are changes in the 2023 amendment Bills that affect retirement funds and the members of these funds, but except for one, these changes are outside of payroll administration and are not discussed here.
4.1 Resident and non-Resident Employers
Budget 2023 Proposal: Aligning tax registration requirements for non-resident employers
It has been noted that non-resident employers may not have representative employers in South Africa for purposes of employees’ tax. They are, as a result, not liable to deduct or withhold tax from the remuneration that is paid to their employees who render services in South Africa. Nevertheless, given that they pay remuneration, they are required to register with SARS as employers.
They are liable for skills development levies and unemployment insurance contributions, which many pay. It is proposed that the various provisions be aligned to ensure consistency.
Proposed Amendment of Fourth Schedule paragraph 2
Before the proposed change, Fourth Schedule paragraph 2(1) stated as follows:
“Every—
(a) employer who is a resident; or
(b) representative employer in the case of any employer who is not a resident,
…who pays … any amount by way of remuneration to any employee shall … deduct or withhold from that amount … by way of employees’ tax an amount … in respect of the liability for normal tax of that employee.”
Assuming that the proposed amendment is accepted, sub paragraphs (a) and (b) of Fourth Schedule paragraph 2(1) will be consolidated and changed to read as follows:
“Every employer or representative employer in the case of any employer who is not a resident, … who pays … any amount by way of remuneration to any employee shall … etc.”.
Comment on the Proposed Amendment
The proposed amendment removes the distinction between the responsibilities and duties of resident employers and non-resident employers and widens the obligation to calculate and withhold employment-related taxes to include all representative employers.
The result will be that:
1. Resident employers must register as employers (no change to this long-standing requirement)
2. Non-resident employers must have a registered representative employer in South Africa.
All resident employers and non-resident employers that pay remuneration to employees must deduct employees’ tax (PAYE), skills development levies, and unemployment insurance contributions.
Experts in this field have indicated (depending on the final wording of the draft amendment) that it might be an option for the foreign employer to appoint a payroll company to be its EOR (Employer of Record)’ in South Africa, but this remains to be seen.
Proposed effective date:
1 March 2024
4.2 Foreign Employment Income – IRP3q Tax directive
Budget 2023 Proposal: Varying employees’ tax withholding in respect of Remuneration
The Fourth Schedule to the Income Tax Act allows employers to request a variation in employees’ tax withholding [Rob: this wording refers to a tax directive] to take into account foreign taxes paid. However, such a variation does not apply to remuneration arising from share options and similar schemes. This could result in cash flow implications for the affected employees, as they will only be entitled to claim a foreign tax credit when they complete their annual tax returns.
It is proposed that SARS be empowered to vary the basis for withholding under these circumstances.
Proposed Amendment of Fourth Schedule paragraphs 9 and 10
From 1 March 2020, the changes to section 10(1)(o)(ii) resulted in the introduction of a new IRP3q directive that enables employers to apply to SARS for the IRP3q tax directive that will take any foreign taxes paid into account when calculating the PAYE amount to be withheld by the employer.
Fourth Schedule paragraph 9 states that the Commissioner may from time to time prescribe deduction tables applicable and indicates that the PAYE to be deducted from any remuneration must, subject to the provisions of paragraph 10 and 11 of the Fourth Schedule and section 95 of the Tax Administration Act, be determined in accordance with such tables.
In terms of Fourth Schedule paragraph 11A(4), where the remuneration includes section 8C share gains, the employer must, before deducting the PAYE payable on the gain, apply for an IRP3s tax directive.
Given the change to section 10(1)(o)(ii) – as stated above – employers may, in terms of paragraph 10, request a variation in the employees’ tax withholding (by applying for an IRP3q tax directive) to take foreign taxes paid by the employee into account.
Currently, such a variation does not apply to withholding required under paragraph 11A of the Fourth Schedule (namely, share gains under section 8C of the Income Tax Act) and the foreign taxes paid in respect of section 8C gains cannot be taken into account for purposes of determining the tax due on the gain.
This could have a negative effect on employees’ cash flow as they will only be entitled to claim a foreign tax credit at the time of completing their ITR12s. The proposed amendment aims to rectify this situation.
Proposed effective date:
While this is not specifically stated in the amendment Bill, I assume that the effective date will be 1 March 2024.
4.3 Apportionment of the Section 11F Monetary cap of R350,000
Background to the Allowable Deduction in respect of Contributions to Retirement Funds
‘Retirement funds’ is a generic term for pension, provident, and retirement annuity funds.
Major retirement fund reforms were introduced with effect from 1 March 2016, and besides other benefits, encouraged individual taxpayers to become members of a retirement fund to save for their retirement years by offering a significant deduction to reduce the taxpayer’s income tax and if the taxpayer is an employee, the amount of PAYE withheld in the payroll.
When calculating the monthly PAYE withholding, payrolls are allowed to deduct employer-paid plus employee-paid contributions to retirement funds from remuneration as long as the deduction in a year of assessment does not exceed the lesser of:
1. R350 000
2. 27,5% of the higher of the employee’s:
• Remuneration (in the payroll), OR
• Taxable income (on assessment).
Spreading the R350 000 Limit over the Year of Assessment
Fourth Schedule paragraphs 2(4)(a) for pension and provident funds, and paragraphs 2(4)(b) and 2(4)(bA) for retirement annuity funds, specifies as follows:
(4) The amount required to be deducted or withheld from any remuneration under this Schedule by way of employees’ tax must be calculated on the balance of the remuneration remaining after deducting therefrom—
(a) any contribution by the employee concerned to any pension fund or provident fund which the employer is entitled or required to deduct from that remuneration, but limited to the deduction to which the employee is entitled under section 11F having regard to the remuneration and the period in respect of which it is payable;
The underlined wording was supported within a year by an amendment that added a proviso to the end of paragraph 2(4) that clarified that payrolls must apply the R350 000 limit on an average per month basis (i.e., not on an annual basis), with retrospective effect from 1 March 2016.
The proviso reads as follows:
“Provided that at any time during the year of assessment the amount of the contribution to be deducted in terms of paragraphs (a), (b) and (bA) [Rob: contributions to retirement funds] must not exceed an amount that bears to the amount stipulated in section 11F (2) (a) the same ratio as the period during which remuneration was paid by an employer to the employee bears to a whole year”.
The result of the amendment was that from 1 March 2016 payrolls limited the allowable deduction to R29 167 per month (R350 000/12) from the start of the year of assessment, thereby spreading the monetary cap to the deduction over the year of assessment.
This means that the maximum deduction limit of R350 000 may not be applied and exhausted in the first few months of the year of assessment even if the total contribution amount in those months justified such a deduction.
Before discussing the latest proposed amendment, it is important to note that the above monetary deduction cap (the R350 000) specified in section 11F is in respect of an employee’s year of assessment, despite the later amendment that clarified that the monetary must be applied on a monthly (average) basis as described above.
If an individual has two years of assessment, then the limit applies twice, once for each year of assessment.
The Problem
When an individual ceases to be a South African tax resident on any date that is not the last day of February, two years of assessment are created during the 12 months of the tax year.
For example, when an individual ceases to be a South African tax resident on 1 June 2022:
1. His year of assessment as a South African tax resident began on 1 March 2022 and ended on 31 May 2022, creating a 3-month year of assessment as a South African tax resident.
2. His year of assessment as a South African non-tax resident began on 1 June 2022 and ended on 28 February 2023, creating a 9-month year of assessment as a non-tax resident.
Both the 3-month and the 9-month years of assessment fall within a single 12-month tax period, creating inconsistencies in two areas of the Income Tax Act:
1. Section 12T(4)(a):
For the exemption of returns earned from a Tax-Free Savings Account to apply, aggregate contributions are not allowed to exceed R36 000 during a year of assessment; and
2. Section 11F(2):
The deduction in respect of contributions to a retirement fund is not allowed to exceed the monetary cap of R350 000 during a year of assessment.
These limits are per year of assessment and are not apportioned if the year of assessment is less than 12 months.
Having two years of assessment in a single 12-month tax period when ceasing to be a South African tax resident, can therefore potentially double the Tax-Free Savings Account annual contribution limitation of R36 000 as well as the R350 000 monetary cap used to calculate the section 11F deduction.
The result is that an individual:
1. Is able to contribute R72 000 to a Tax-Free Savings Account while enjoying tax-free status (R36 000 for the 3-month period and another R36 000 for the 9-month period)
2. Can benefit from a section 11F deduction of R700 000 (R350 000 for the 3-month period and R350 000 for the 9-month period).
The Solution
To address this anomaly, the following changes are proposed in circumstances where the individual’s year of assessment is less than 12 months:
1. Section 12T(4)(a):
The contribution limit that shall apply shall be the amount that bears to the amount referred to in section 12T(4)(a) the same ratio as the number of days in that year of assessment bears to 365 days.
2. Section 11F(2)(a):
The amount that will be used to limit the allowable retirement contribution deduction, shall be:
“the amount that bears to the amount referred to in section 11F(2)(a) of the Act [Rob: R350 000], the same ratio as the number of days in that year of assessment bears to 365 days.”
Effective date
Proposed to come into operation on 1 March 2024.
4.4 Retirement Fund Fringe benefit not included in Income
Background
Contributions to a retirement fund made by the employer on behalf of the employee are a taxable fringe benefit in the hands of the employee.
Section 11F(4) of the Income Tax Act deems the employer-paid contributions to a retirement fund on behalf of an employee to have been contributed by the employee and the total contribution (‘deemed paid’ plus ‘employee-paid’ contributions), are taken into consideration when determining the employee’s allowable deduction in terms of section 11F(2) of the Act.
The Problem
While section 11F(4) specifies that the employer-paid contribution must be given a cash equivalent (taxable fringe benefit) value in terms of the Seventh Schedule, it does not include the cash equivalent amount in the employee’s income when determining the allowable deduction in terms of section 11F(2) of the Act.
As a result, if an employer’s contribution to the retirement fund is not subject to fringe benefit tax because the employee’s remuneration qualifies for foreign income tax exemption in terms of section 10(1)(o)(ii) of the Act, the employee is still entitled to a deduction in terms of section 11F(2) of the Act.
This goes against the principle that a deduction can only be allowed for amounts that are included in the taxpayer’s income (i.e., a tax deduction should not be available for tax exempt amounts).
Budget 2023 Proposal: Clarifying the amount of employer contribution to a retirement fund to be Deductible
Section 11F(4) of the act deems an employer contribution to a retirement fund as a contribution made by the employee, and it is calculated as the amount equal to the cash equivalent of the value of the taxable benefit.
However, there is no requirement that the calculated cash equivalent be included in the employee’s income, as is the case in sections 6A and 6B of the act.
This is against the policy rationale of the act’s provisions.
To address this, it is proposed that the act be amended to require that the cash equivalent of the taxable benefit for employer retirement fund contributions be included in an employee’s income before a tax deduction is allowed.
The Solution
To correct this problem, it is proposed that sections 11F(4)(a)(i) and (ii) are amended so that the deduction only applies if the employer-paid contribution to a retirement fund on behalf of an employee is included in the employee’s income as a taxable benefit in terms of paragraphs 2(l) and 12D of the Seventh Schedule to the Act.
The proposed amendment adds the following wording to the end of sections 11F(4)(a)(i) and (ii):
“… to the extent that the amount has been included in the income of that person …”.
Assuming that these proposed changes are accepted, the full wording of sections 11F(4)(a)(i) and (ii) will be:
‘‘(i) to be equal to the amount of the cash equivalent of the value of the taxable benefit contemplated in paragraph 2(l) of the Seventh Schedule determined in accordance with paragraph 12D of that Schedule to the extent that the amount has been included in the income of that person; or”; and
“(ii) if that amount is paid by an employer to a retirement annuity fund, to be equal to the amount of the cash equivalent of the value of the taxable benefit contemplated in paragraph 2(h) of the Seventh Schedule determined in accordance with paragraph 13 of that Schedule to the extent that the amount has been included in the income of that person;
Effective date
Proposed to come into operation on 1 March 2024.
PAGSA Comments
Foreign Employment Income Exemption
The example provided by the policy makers is that of an employee earning foreign income who has met the ‘183/60 day’ condition after 6 months, and the foreign employment income (remuneration) that was not exempt for the first 6 months, has therefore become exempt going back to the start of the 6-month period.
The payroll would have applied the section 11F(2) deduction monetary and percentage caps and calculated PAYE, SDL, UIF, and ETI during those 6 months.
Once the above amendment comes into effect, the section 11F(2) deduction will not be allowable retrospectively if the fringe benefit value of the employer-paid contribution is exempt.
Between the payroll’s ‘annual equivalent’ calculation for the rest of the tax year, and the final calculation of income tax on assessment, PAYE (but not SDL and ETI) can be sorted out, but it highlights the rather impractical requirements for the administration of foreign employment income, and the fact that employers are at risk if they apply the exemption incorrectly.
Employers should not apply the exemption in the payroll until there is absolute certainty that the ‘183/60 day’ conditions have been met.
Best practice is to leave this to the end of year assessment process, but what if the employee is taxed twice – once in South Africa and once in the foreign country?
Tax Certificate Codes
Assuming that the proposed change to section 11F(4)(a) is approved and implemented, there is uncertainty as to how to report the allowable deduction amount under circumstances where the employee’s remuneration consists of foreign employment income.
Using Pension fund tax certificate codes as an example (the principle is the same for provident and retirement annuity funds, only the code values differ), the tax certificate codes that must be used for reporting are the following, with some comments below each code.
1. Code 4472 – Employer’s pension fund contributions paid for the benefit of employee.
The ‘44xx’ codes are informative codes and are not used by SARS for calculations.
The full value of the employer-paid contribution to the pension fund must be reported under this code.
2. Code 3867 – Benefit: Employer Pension Fund contributions.
The fringe benefit value depends on whether the contribution is paid to a defined contribution fund (will be the same value as code 4472) or to a defined benefit fund (will not be the same value as code 4472).
3. Code 4001 – Total pension fund contributions paid and ‘deemed paid’ by an employee (code 3817/3867).
This is the amount that is available to be deducted but the allowable deduction amount must be determined by applying the section 11F(2) percentage and monetary caps.
4. Code 4587 – Section 10(1)(o)(ii) exemption taken into account by the employer for PAYE purposes.
The ‘45xx’ codes are ‘informative codes’ and are not used by SARS for calculations.
The employer declares the total foreign income exemption amount taken into account for PAYE purposes up to the maximum of R1,25m for PAYE purposes, but SARS only verify the exemption on assessment based on documentation requested from and submitted by the employee.
The tax certificate reporting problems are illustrated by the following scenario.
• The employee’s foreign employment salary is R1 500 000
• The pension fund is a defined contribution fund (the fringe benefit equals the employer contribution)
• The employer-paid contribution to the pension fund is R150 000
• The employee-paid contribution to the pension fund is R50 000.
The employee’s foreign employment income is reported on the tax certificate as follows:
CODE DESCRIPTION AMOUNT
3651 Income R1 500 000
3867 Benefit: Employers Pension Fund contributions R150 000
3699 Total Foreign Employment Income (remuneration) R1 650 000
The foreign employment exemption ‘183/60 day’ conditions of s10(1)(o)(ii) are met, therefore the employer can decide to ‘flag’ R1,25m of the total R1,65m remuneration as exempt in the payroll (note: this is a ‘risk’ decision – if it is found on assessment that the exemption conditions are in fact not met, penalties and interest will follow).
The portion of total remuneration that is not exempt is therefore R400 000.
The employee’s 4xxx codes are reported on the tax certificate as follows:
CODE DESCRIPTION AMOUNT
4587 Section 10(1)(o)(ii) exemption taken into account by the employer for PAYE purposes R1 250 000
4472 Employer’s pension fund contributions paid for the benefit of employee R150 000
4001 Total pension fund contributions paid and ‘deemed paid’ by employee R??
The question is: What is the correct value of the 4001 deduction that must be used and reported by the payroll?
The problem is that there is no guidance in the legislation or elsewhere to decide the sequence in which the employee’s various remuneration amounts are applied (fully or partially) towards the foreign employment income exemption threshold of R1,25m.
The code 4001 deduction amount can be one of the following two amounts:
1. R200 000:
The R150 000 fringe benefit (code 3867) is not allocated to the exempt portion of the total remuneration. It is income and available as a deduction. The code 4001 deduction amount is therefore equal to the total pension fund contribution paid by an employee (R50 000) plus the contribution that is ‘deemed paid’ by an employee (R150 000), subject to the section 11F(2) percentage and monetary caps.
2. R50 000:
The R150 000 fringe benefit (code 3867) is allocated to the exempt portion of the total remuneration, therefore it is not income and is not allowed as a deduction.
The code 4001 deduction amount is therefore equal to the total pension fund contribution paid by an employee (R50 000) subject to the section 11F(2) percentage and monetary caps.
While the draft amendment is correct in principle, the administration thereof is uncertain. The PAGSA has explained the above scenarios to SARS and requested a ruling on how to apply the tax certificate codes.
The section 11F(2) Deduction is more than the Remuneration
This should not happen frequently (if at all?), but just to provide for it in case it happens that the deduction amount is more than the remuneration from which it must be deducted.
Payrolls must apply the deduction up to the amount of the remuneration, resulting in a balance of remuneration equal to R0,00 and there will be no PAYE or SDL calculated – UIF is calculated on (gross) remuneration.
Payrolls are allowed to carry the unused portion of the deduction forward from month-to-month and apply the excess deduction (if possible) in the following month, provided the monthly maximum of R 350 000 ÷ 12 = R 29 166 is not exceeded.
If an unused deduction amount remains available at the end of the year of assessment, payrolls may not carry the excess deduction forward from the end of one year of assessment into the year of assessment that follows for PAYE calculation purposes. In this case, the legislation provides that the final unused deduction amount will be rolled forward into the following year of assessment for income tax application in that year, then the next year, etc.
Note this ‘carry forward’ of an unused deduction amount after the income tax assessment calculation, is only for income tax calculation purposes.
This excess amount is not available to the payroll (i.e., for the PAYE calculation) in the following year of assessment.