The following is knowledge that has been shared from Rhona van Taak on previous General Tax Law queries

TAX LAW: GENERAL

Differences between the terms “Accrual” or “paid”
In simple terms, ‘accrual’ is when there is an unconditional right to an amount. There are also tax court cases that indicate that the amount must also be quantifiable.
Again, to simplifying matters, if an amount that is taxable and that has accrued is turned into an amount that is not taxable, SARS will regard this as an illegal salary sacrifice and will expect to be paid the tax on the amount.
In a scenario of an end-of-year increase that would have been taxable but that is turned into a non-taxable (exempt) bursary, the issue is accrual. Has the amount accrued? In Rhona van Taak’s opinion, if the principle of converting the increase into a bursary is done at an early stage when the increase is not unconditional (which would also be before it is quantified), then there should not be a problem.
Remuneration is defined as “any amount of income which is paid or payable…”

In order to determine when PAYE should be deducted from remuneration, you must determine the earliest date between paid or payable. In other words, whichever comes first. This is the date use for the deduction of PAYE.

Remuneration will only be “paid” if the person received it (whether it is already due to him or not).
Remuneration will be “payable” when the person is entitled to it (refer to the case WH Lategan v CIR) and when that person’s right to the remuneration is unconditional (refer to the case Lategan v CIR 1926).

Furthermore, the definition of “gross income” in Section 1 of the Income Tax Act, includes this remuneration in the person’s gross income in the year in which it is received by him or the year in which it accrues to him, whichever comes first (refer to the case (SIR v Silverglen Investments (Pty) Ltd 1969).

Where salaries have not yet been paid to the employee, but the employee was unconditionally entitled to such salary, the salaries must be included in the Tax certificate of the employee as it already accrued to him.

PAYE is deductible from remuneration that has accrued on such accrual date.
Paragraph 2(1) of the Fourth Schedule states:
“…who pays or becomes liable to pay any amount by way of remuneration to any employee shall, …, deduct or withhold from that amount, …, by way of employees’ tax …an amount which shall be determined as provided in paragraph 9, 10 or 11 or section 95 of the Tax Administration Act, whichever is applicable, …, pay the amount so deducted or withheld to the Commissioner within seven days after the end of the month during which the amount was deducted or withheld…”

The only exception is when the remuneration falls within the prescription of “variable remuneration” as contemplated in Section 7B of the Income Tax Act.

This section addresses the situation where there is a timing difference between the accrual and the actual payment of the amount. For example, where an employee has an unconditional right to receive the variable remuneration, but it is only paid at a later date.

It is important to note that only certain types of remuneration are defined as “variable remuneration”, therefore only these types will be taxed when it is actually paid and not on the accrual date.

According to Section 7B, “variable remuneration” are-
• Overtime pay, bonus or commission contemplated in the definition of ‘remuneration’ in para 1 of the Fourth Schedule
• An allowance or advance paid in respect of transport expenses as contemplated in section 8(1)(b)(ii) or (iii)
• Any amount which an employer has during any year of assessment become liable to pay to an employee in consequence of the employee having during such year become entitled to any period of leave which had not been taken by the employee during that year
• Any night shift allowance
• Any standby allowance
• Any amount paid or granted in reimbursement of any expenditure as contemplated in section 8(1)(a)(ii)

Calculating PAYE

Where an employee earns fluctuating income during a tax year, the best option to determine the PAYE is to work on year-to-date earnings.
The year-to-date earnings needs to be annualised (annual equivalent) by using the formula:
Year to date yearnings ÷ pay periods worked in tax year x total pay periods in tax year.
Pay periods worked in tax year = all periods the employee was working in the tax year (eg. months) irrespective of whether or not he has been paid any remuneration during any of the periods.
You may not refund any PAYE deducted to date due to the fact that the provisions of the Fourth Schedule do not make provision for an employer to refund PAYE.

Directors

In terms of the definition of employee and employer in the Fourth Schedule to the Income Tax Act, if any director (executive or non-executive) provides services to an employer as an employee, they must be taxed in exactly the same way as any other employee.
However, in their capacity as the holder of an office, one has to determine whether or not the individuals are offering these services as an independent contractor.
Executive directors are employees by the nature of being an executive, therefore generally all amounts paid to them by the company are remuneration, and subject to PAYE, SDL, UIF etc.
Non-executive directors are seen to be independent contractors and their fees are not remuneration. In this regard, refer to the SARS Binding General rulings (BGR) numbers 40 and 41 for non-executive directors.
Both of these BGR’s deal with non-executive directors (NED’s), number 40 for PIT, and number 41 for VAT.
While it is an enlightening exercise to read these two BGR’s, they are not directly relevant to executive directors.
An executive director provides services to the company and is an employee of the company if he or she is paid remuneration as defined by the Fourth Schedule of the Income Tax Act in return for those services.
Besides amounts paid such as salary, wage, bonus, overtime, commissions etc, ‘fees’ are defined to be remuneration and are therefore administered in the same way as, for example, salary as far as PAYE, SDL, UIF etc is concerned.
The starting point is therefore that the director is an employee, and in terms of the tax result, there is no difference between a ‘salary’ and a ‘fee’.
However, if it is determined by the two statutory tests provided in the definition of remuneration that the director is paid fees in respect of services rendered as an ‘independent trade’, then the director is no longer an employee.
A discussion of the two statutory tests is very lengthy and I am afraid is outside of the scope of this – independent contractors are a very difficult area.
Consult the SARS Interpretation Note 17 (EMPLOYEES’ TAX: INDEPENDENT CONTRACTORS), in particular section 3.1. for more information.

Employer cease trading/stop trading/close business

In terms of paragraph 13(2)(c) of the Fourth Schedule to the Income Tax Act, an employer who ceased to be an employer, must submit the EMP501 reconciliation together with all associated IRP5 tax certificates to SARS within 14 days of the date on which the employer has so ceased.
This means that the employer may submit the reconciliation documents immediately and do not need to wait for the filing season to open. It must also be noted that all certificates must be marked as final certificates, in other words the period in the certificate number must be 202102 and the indicator in easyfile must be set as final certificate.

Independent contractor

In order to determine if a worker/service provider will be an independent contractor, etc, you need to classify such person.
• Is the contract for services for a company/trust or an individual.
If it is for a company/trust, then the possibility exist that the company/trust might be a personal services provider (provided that it complies with the provisions of the Fourth Schedule, namely:
A personal service provider (PSP) is a company or trust, where the services rendered to a client is rendered personally by a person who is a CONNECTED person to such company or trust, and
• Such person would be regarded as an employee of the client if the services were rendered directly to the client; or
• The duties are mainly performed at the premises of the client and is subject to the control and supervision of the client as to the manner in which the duties are preformed; or
• More than 80% of the income of the company/trust from services rendered consists of amounts received from one client.
However, there is an exception to the above, namely, where the company/trust employs 3 or more employees who are full-time engaged in the business of the company/trust of rendering services (other than a connected person). If the company/trust complies with the exception, then it is not a PSP.
If the contract for services is with the individual, then the employer must determine whether or not the individual is an independent contractor.
The statutory tests as prescribed in Interpretation Note 17 must be performed in order to determine if the person is an independent contractor.
These statutory tests are the following:
• Are the services performed mainly (more than 50% of the time on average) at the premises of the client, and
• Control and supervision of manner in which duties are performed or as to the hours of work
If any one or both of the two statutory tests are satisfied, then the person providing the services is independent.
Please note that IN 17 also provides a flow chart on the scenarios to be tested in order to determine the status.
Tools are provided by SARS to guide employers to classify the employee correctly (please refer to Interpretation Note 17 for details).

Zero tax agreement between employer and employee

Any employer that is liable to pay remuneration to an employee, is liable to withhold and pay over the relevant employee taxes to the South African Revenue Service (SARS) on a monthly basis. This is governed by the Income Tax Act No 58 of 1962.
The term “Remuneration” is defined in paragraph 1 of the Fourth Schedule of the Income Tax Act. An extract of this definition is shown below:
“any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered….”
Paragraph 7 of the Fourth Schedule states the following:
“Any agreement between an employer and an employee whereby the employer undertakes not to deduct or withhold employees’ tax shall be void.”
It is our opinion, on review of the legislation and the facts at hand, that no grounds exist to not withhold employee’s tax. We further would like to caution the employer, that should employee’s tax not be levied on the amount, and SARS should take the opinion that the amount is considered “Remuneration” as defined, the employees will be liable for the outstanding tax on this amount when the employee’s submit their personal income tax returns, and in turn could hold the employer responsible.
An alternative consideration to resolve the issue at hand, would be for the employer to apply for individual tax directives for each affected employee. The Income Tax Act does allow for consideration by the Commissioner on special circumstances and thereby rule on a reduced or exclusion of PAYE on a specified amount.
Finally, consideration could be given to the option of the employer to cover the tax liability of the employee on this amount. A transaction such as this will in itself needs to be taxed as a benefit (Payment of Employee Debt). The principle would be that the employer adds an allowance to the employee’s income that would cover that tax due on the amount. This transaction will invariably increase the cost to the employer. There is a calculation in tax law that caters for this. In this instance the employee would get the full benefit of the tax liability paid on his/her behalf by the employer and SARS would get the full tax due on the amount paid. The effect of doing the transaction would be an increase in employer expenses.

PAYE under-deducted

In terms of the Fourth Schedule to the Income Tax Act 58 of 1962 (“the Act”), there is an obligation on employers to withhold employees’ tax from remuneration paid to employees. This mechanism of collection of employees’ tax provides the South African Revenue Service (“SARS”) with an efficient way in which to obtain the employees’ tax due to the fiscus. Instead of having to deal with each employee separately, SARS only has to concentrate on the relevant employer’s withholding obligation.
The provisions of the Fourth Schedule do not absolve the employer from its obligation in terms of the Act where the employer has not issued payslips and/or account for the salary related taxes to SARS. Although in terms of Labour Law payslips should be available for salaries paid to employees.
In addition, the Seventh Schedule to the Act places a responsibility on an employer to calculate the cash equivalent of fringe benefits granted to employees and include this amount in the determination of the employees’ remuneration from which the employees’ tax is calculated.
If an employer fails to deduct or withhold the full amount of employees’ tax due, paragraph 5(1) of the Fourth Schedule to the Act stipulates that such employer shall be personally liable for payment to the Commissioner of the amount of employees’ tax which he fails to deduct or withhold. In addition, the employer will be liable to a penalty of 10% of such amount in terms of paragraph 6(1) of the Fourth Schedule to the Act, as well as interest in terms of section 89bis(2) of the Act.
Furthermore, if an employer fails to pay an amount of employees’ tax with the intent to evade his obligations under the Act, paragraph 6(2A) of the Fourth Schedule to the Act imposes a penalty of up to 200% of the outstanding employees’ tax.
Therefore, there is a heavy burden on employers to ensure that they withhold the correct amount of employees’ tax due to SARS, or else they could make a costly error.

Recovery of PAYE from employee:

The Fourth Schedule provisions allows the employer to recover PAYE under-deducted from the employee. However, where an employer is unable to deduct PAYE under-deducted from an employee due to the fact that the employee is no longer in the employment of the employer, such under-deducted PAYE must be paid by the employer to SARS and will be deemed to be a penalty in terms of paragraph 5(5) of the Fourth Schedule to the Income Tax Act.
Due to the fact that the employer cannot recover this amount from the employee in question, such PAYE cannot be included in a tax certificate issued to the employee. In fact, the PAYE amount must be reflected in the “Tax Paid on Behalf of Employee” on the EMP501 reconciliation in order to rectify the liability of the employer.
The liability of the employer is calculated by –
• adding all the values of code 4102 on all tax certificates PLUS any amounts declared on the “TAX PAID ON BEHALF OF EMPLOYEE” and “AUDIT RESULT NOT IN CERTIFICATES”; compared to
• all liabilities completed in the relevant months in the PAYE columns.
Due to the fact that there is no space on the EMP501 for SDL and UIF amounts as “PAID ON BEHALF OF EMPLOYEE”, the additional SDL and UIF (not recovered from the employee) needs to be completed in the “AUDIT RESULT” fields under the SDL and UIF columns.
The following is found on Page 30 of the SARS Reconciliation Guide.

When the individual’s tax assessment is done, such individual will then have to pay the shortfall on assessment as the PAYE paid on behalf of the employer will be deemed a penalty, and was not recovered from the individual. This is the main reason why the under-deducted amounts must not be included in the tax certificate if it is not recovered from the individual by the employer.

PAYE refunds by employers

In terms of paragraph 2 of the Fourth Schedule to the Income Tax Act, the employer has an obligation to deduct PAYE from the remuneration paid to the employee as and when the remuneration is paid and pay such amount deducted over to SARS via the monthly EMP201 return.
Due to fluctuating of remuneration or unpaid pay period, it might happen that the final calculation of PAYE done at the end of the employee’s tax period, indicate that there is an over-deduction of PAYE. This calculation is normally done when the total remuneration paid until the end of the employees’ tax period is annualized and the annual tax rates are used to determine the total PAYE on the total remuneration paid during the tax period.
The Fourth Schedule do not make provision for the employer to refund any over-deduction of PAYE to the employee. The employee is supposed to complete his income tax return in order to claim this over-deduction.
PAYE can never go into a credit in any month.
Paragraph 11B was repealed by s. 11 (1) of Act No. 16 of 2016 with effect from 1 March, 2017 and applicable in respect of years of assessment commencing on or after that date. In this paragraph the provisions to allow an employer to refund SITE only employees when the final tax determination is made could be found. This is no longer applicable as the SITE is no longer applicable.
Prior to the deletion of the SITE provisions in the Fourth Schedule, the employer had the authority in terms of the said Schedule to refund any over-deduction in the case of a SITE ONLY employee. Due to the deletion of the SITE provisions and that fact that SITE is no longer applicable, these provisions have ceased to exist.
SARS may indicate a tax certificate as an over-deduction of PAYE during their “Tax validation” and the report provided by SARS may indicate that the PAYE on the tax certificate is excessive to the total remuneration for the complete tax period. However, this is only a warning message to employers in order for employers to ensure that their determination of PAYE is correctly done.
As mentioned above, employers may not refund PAYE to employees. Should the employer find that the PAYE was deducted correctly during each pay period (eg. Month, etc.), this warning message should be ignored and the tax certificate should be deemed as final.
Furthermore, should a recalculation proof that an over-deduction of PAYE is in fact applicable, the warning message should also be ignored as the employer do not have the authority in terms of tax law to refund this to the employee.
Only in cases of under-deduction, should the employer correct the situation and the tax certificate as it is clear in terms of paragraph 5 of the Fourth Schedule that the employer is ultimately responsible for any under-deductions.

Refund by employee to employer for access remuneration paid. (Also applicable to Rention Bonusses)

SARS has published an Interpretation Note (IN no. 88) with regards to amounts to be refunded to employers.
A deduction of this amount so refunded to the employer by the employee must be treated as a Section 11(nA) deduction in the tax year when the amount is refunded to the employer and not in the year when it was paid by the employer to the employee (e.g. when the expense incur).
In order to claim the refunded amount, the employer must provide the employee with a letter on its letterhead stating the amount so refunded to the employer and when the amount was paid and the reasons for the obligation to refund to the employer (e.g. non-compliance to a certain criteria, etc.).
The amount should then be completed on the individual’s income tax return (other deductions). Please refer to the IT12 Comprehensive Guide, for details on where the amount should be completed.

Register employees for tax

In terms of the Tax Administration Act, any person receiving remuneration is required to register for income tax, irrespective if such an employee has a PAYE liability.
Due to this, the SARS easyFile software has a function to register new employees for tax purposes (see bottom of VIEW/EDIT EMPLOYEE: (ITREG)
Furthermore, SARS has issued the following notification on their website during August 2019:
The following notice from SARS is important in that it outlines the channels that SARS have put into place in order to smooth the process of registering an individual for income tax once that person has been appointed as an employee.

NOTICE STARTS
Dear Employer,

It has come to our attention that job seekers are being asked for their Income Tax Reference Numbers in order to be considered for job interviews.

While we will readily assist persons who approach our offices to register, such processes are putting unnecessary strain on both the prospective employees and on our SARS branches.
It is important to note that SARS does not require a person to have a tax number when they are employed for the first time.

We provide a variety of easy processes to register your employees for Income Tax, which do not require them to visit a SARS branch. The available processes to register your employees are:
• SARS e@syFile™ Employer (“Individual ITREG”) using Employee Registration; or
• Bundled registration (“Bundled ITREG”) available on e@syFile™ Employer allowing you to register up to 100 employees at a time but limited to 1 000 employees per month.
• When registered as an organisation, employers can register individual employees on eFiling. When registered as a tax practitioner a file upload option is available in Excel or CSV file format on eFiling.

We encourage you to utilise these options to streamline the process of obtaining Income Tax numbers for employees.
For more information please consult the “SARS e@syFile™ Employer User Guide” available on the SARS website www.sars.gov.za.

Resident

The SARS guide with regards to taxation in RSA explain this specifically in paragraph 2.3 or the non-resident paragraph.
The RSA tax system is based on the fact that residents are taxed on their world-wide income (subject to certain exclusions), irrespective of where their income was earned.
However, a non-resident is taxed in RSA on the income earned in RSA, depending on the provisions of the Double Taxation Agreement (DTA) with the relevant country of which the individual is a resident.
Salary income earned in South Africa by a non-resident will be subject to normal tax in South Africa, unless DTA entered into between South Africa and the foreign country in which he or she resides, stipulates otherwise.
The starting point for a non-resident who renders services in South Africa is that the employment income is subject to normal tax in South Africa. If however a DTA is in existence and all three of the following requirements are met the income will not be subject to normal tax in South Africa:
• He or she is present in South Africa for a period or periods in aggregate not exceeding 183 days in any 12-month period (not necessarily a year of assessment).
• His or her remuneration is paid by, or on behalf of an employer who is not a resident of South Africa.
• His or her remuneration is not borne by a “permanent establishment” that the foreign employer has in South Africa. A “permanent establishment” is a complex concept, especially determining the establishment of one but in essence means a fixed place of business through which the business of the employer is wholly or partly conducted.
The foreign codes prescribed in the PAYE BRS is only used for residents to whom the section 10(1)(o) exemption may be applicable.
If a non-resident is not taxed in RSA due to the Double taxation agreement provisions, the IRP5 must be issued with a code 3602 and not 3652 (3652 is only used for residents relating to 10(1)(o).
SARS has issued an Interpretation Note (IN) No. 16 for explanation on the Exemption from Foreign Employment Income in terms of section 10(1)(o) which is effective from 1 March 2020.
The Interpretation Note states that once the employer is satisfied that the exemption applies, the total amount of each remuneration type must be split into exempt – no PAYE) and non-exempt (with PAYE) portions, for example:
• 3601 salary earned in RSA, subject to normal tax
• 3651 salary earned outside of RSA that is less than R1,25 million and exempt with no PAYE
• 3651 salary earned outside of RSA that exceeds R1,25 million with PAYE
In order to qualify for the exemption, the individual must be outside RSA for at least 183 full days during any 12 month period. These fill days do not have to be continuous. Calendar days must be taken into consideration for this determination and not working days. A 60 days period must be continuous.
The 183-days test does not work on tax year but on any 12-month period. On page 6 of this IN it is clearly stated that the period of 12 months is not necessarily a year of assessment, a financial year or a calendar year. It is ANY period of 12 consecutive months.
Therefore, if the employer uses the period for example as, May 2019 to April 2020, in order to test the 183 and 60 day periods, it might result in the exemption to be applied for March and April 2020.

Tax prescription period

Tax debt is defined in the Tax Administration Act, 2011. Before this Act came into effect, section 11(a)(iii) of the Prescription Act, 1969 applied to tax debt which indicate that tax debt prescribed after 30 years.
However, since the Tax Administration Act came into effect, section 171 of this Act indicate that SARS may not proceed with the recovery of tax debt after the expiration of 15 years from certain events, namely:
• Date the assessment becomes final; or
• Decision relating to objection and appeal becomes final.

Variable remuneration – Commission

The Commission that will be paid in the year after the employee resigned, will be treated as “variable remuneration” as provided in section 7B of the Income Tax Act.
In terms of this provisions, it is deemed to accrued to the employee on the date on which it is paid to the employee.
Due to the fact that the employee does not work for the employer on this payment date, the amount so paid will be taxed at the 25% flat rate which is applicable to non-standard employment.
An IRP5 for the year relating to the payment date (2021) should be issued to this employee for this payment made in 2021.

Voluntary tax deduction / Additional tax

The provisions of the Fourth Schedule of the Income Tax Act, allows for the “voluntary PAYE deduction” provided that the employee request this in writing from the employer.
In order to ensure that the tax certificate passes the tax validation process, the employer must set the indicator on the certificate as Y (Voluntary over deduction indicator).
If the reconciliation was already submitted to SARS, correct the applicable certificate by adding the indicator as Y, and re-submit the reconciliation with the certificates.