Introduction
While the principle of accrual has not changed, the advent of monthly tax certificate submissions has put the spotlight squarely on monthly accrual as opposed to annual accrual.
Besides the introduction of section 7B, accrual is not something new, and anecdotally, I will be the first to admit that over decades, the compliance by the majority of employers with monthly accrual principles when correcting mistakes made in earlier months, was probably very low.
To make it clear, the PAGSA understands the accrual requirement, and this document is not attempting to open non-compliance loopholes, but rather hoping to find a pragmatic solution for all parties in the interests of the roll-out of a very important and beneficial new era in PAYE administration.
Under discussion for quite some time, have been the serious practical administration difficulties that result from the monthly tax certificate requirement when coupled with the application of corrections in the current payroll processing month of incorrect non-variable and variable remuneration amounts in earlier months (both in the current year of assessment and in previous years), clawbacks of remuneration paid in earlier months, and the correction of YTD PAYE liabilities as a result of PAYE over-deductions.
Under the principle of taking it step-by-step, this document summarises the problems that we foresee with corrections to earlier months in the current year of assessment and then takes it further to what in our opinion is a logical necessity, that of allowing negative amounts on monthly certificates (but not on final YTD certificates) including negative PAYE.
Although it was suggested that a new “Clawback Code” [i.e. an amended section 11(nA) deduction code] in respect of over-paid amounts refunded by the recipient employee to the employer) as a replacement for negative corrections of the bottom-line figures, the PAGSA is concerned that the actual detail will not be corrected or the correct detail will not be visible, see more detail later in this document. In essence, our impression in general is that the section 11(nA) solution addresses the ‘form’ but not the ‘substance’ of the problem.
Summary of Problems related to Corrections to Earlier Months
This is an overview of the administration problems resulting from the correction of non-variable and variable remuneration amounts in earlier months that have been discussed in the recent meetings with SARS, but without differentiating between ‘clawbacks’ and ‘mistakes’ (whether deliberate or inadvertent).
1. SDL: The least problematic of the payroll taxes (no monthly limit and a flat 1% of the leviable amount).
2. UIF: The legal application of the monthly UI limit means that the earlier month must be re-opened by the payroll, the remuneration correction applied to that month, the UI contribution recalculated, the revised UI contribution amount declared and paid to SARS, and a revised declaration made to the UI Fund for that month (that will invalidate any current UIF benefit claims in process).
3. PAYE: All payrolls allow the annual balance of remuneration to be calculated by applying either an ‘average’ or a ‘cumulative average’ method of forecasting, and the majority of employers make use of these methods because of its beneficial ‘smoothing of PAYE’ results.
The principle behind these ‘annualisation calculations’ is that the total PAYE for the year of assessment is correct at the end of the year and is ‘smoothed’ over the year.
The knock-on effect of a remuneration correction in respect of an earlier month (say) March to the subsequent months as a result of the annualisation calculation principle means that PAYE previously declared for those subsequent months will also be incorrect and should be re-declared and paid, subject to interest and penalties.
The volumes of correction transactions will be excessive.
4. ETI: To be frank, because of the difficulties with UIF and PAYE, we have not analysed the potential problems that ETI might have on ETI administration.
These problems would be as a result of the monthly R6,500 remuneration limit, and the application of the ‘three-step’ formula that payrolls must use to calculate ETI, as well as the administration of the corrections within the 6-month ETI claim cycle.
Allowing Corrections to be Reported as Negative Income Amounts
There are various situations where amounts reported to SARS on an employees’ monthly payroll information record might subsequently need to be corrected. For the purposes of this section, we will be focusing only on ‘mistakes’ made in previous months, and not on ‘clawbacks’ which will be discussed in the next section.
Suppose an employee is paid R1 000 under income source code 3607 in respect of 10 hours of overtime worked in March. In June it was realized that the employee should only have been paid for 8 hours of overtime, so was therefore overpaid by R200. The employer must therefore recover the R200 over-payment from the employee in the June pay period.
As has been discussed on various occasions, reopening the March pay period in the payroll to correct the overtime payment is usually not possible in computerized payroll systems, and even if it was, would result in the EMP201, UIF declaration, general ledger and management reports all having to be redone and/or resubmitted for March. There is also the question of the knock-on effect on the YTD PAYE calculated in all subsequent pay periods to consider, which might result in all subsequent months to be resubmitted as well.
To avoid this complexity, most payroll systems will simply recover the R200 over-payment from the employee in the June pay period and correct the YTD PAYE, UIF etc. in June.
In the case of over-payments specifically, this is usually achieved in the payroll by adding a negative income transaction under the relevant income source code to the employee’s payslip in the current pay period, June in this example.
We understand that what happened in the past cannot dictate to what happens in the future, but we are trying to get a better understanding of the process envisaged by SARS, and then to see how we can take it forward.
If the employee had income under code 3607 in the June pay period that was equal to or greater than the value of the correction being made, the balance of code 3607 in June after the negative income transaction had been added would still be a positive value or would be zero.
If however the employee did not have income under code 3607 in the June pay period, the balance of code 3607 in the June pay period would be -R200 (i.e.: negative).
The value of code 3607 reported to SARS in the employee’s monthly payroll information record in the June declaration file will therefore be -R200 (negative).
The YTD value reported to SARS for code 3607 on the employee’s tax certificate will however be R800, which is still positive.
This will also be a true reflection of the employee’s payslip for June. If the March payroll will have to be reprocessed, there will not be remuneration to withhold the overpayment from as the employee would already have been paid, and the employer will have to deduct the overpayment from the June remuneration in any case.
The use of the suggested “Clawback code” [section 11(nA) deduction code] with a value and allowing an employer to take this deduction into account for the June PAYE calculation, instead of a negative 3607 income source code, will provide the same result in this example.
The only difference will be that there will be a zero value 3607 for June but a new Clawback deduction code for the section 11(nA) deduction of R200. This will result in the 3607 value on the Employee YTD Certificate at the end of the year of assessment being reflected as R 1 000 and the section 11(nA) code with a value of R200.
This is not the true reflection of the detail as the section 11(nA) deduction will not be linked to the 3607 income – it could also provide for repayments of any other type of remuneration such as code 3601, particularly on the YTD certificate.
SARS has mentioned previously that the intention is to create a SARS App that will allow taxpayers to inspect their tax certificate data on a regular basis. When this happens, and the section 11(nA) correction is not recorded against the source of the problem, it could result in misunderstandings, queries, etc.
Recommendation
To facilitate the correction of over-payments in the current processing month it is recommended that the validation rules of the monthly BRS be changed to allow for the value of income codes to be reported as negative values in the monthly payroll information records, provided that the associated YTD value of the relevant income code is not less than zero.
No income source code will therefore ever be reported on an employee’s tax certificate with a value of less than zero.
Allowing Clawbacks to be Reported as Negative Income Amounts
Background
There are various instances in which remuneration that was previously paid to an employee might subsequently have to be refunded to the employer. For the purposes of this section, we will refer to such refunds of remuneration as “clawbacks”.
Note that clawbacks are not “errors” that were made in previous pay periods that then need to be corrected at a later stage – they are new and independent transactions that result from events that occurred subsequent to an amount of remuneration previously being paid to an employee, which events then necessitate the repayment of some (or all) of said remuneration to the employer by the employee.
Also note that clawbacks are not generally treated as after-tax “deductions” from an employee’s net pay in payroll systems. Instead, they are treated as refunds of income that was previously paid to an employee, and as such generally result in the reduction of the YTD value of the income source code under which the remuneration was originally paid to the employee. Note that this does not constitute a reversal of a previous accrual, but rather a reduction in the value of the remuneration that accrues in the period in which the clawback is processed.
Amounts that need to be refunded to an employer in terms of clawbacks can either be paid to the employer by the employee “outside” of the payroll (in which case the employer must issue the employee with a section 11(nA) letter so the employee can claim a deduction on assessment) or it can be recovered from the employee “inside” of the payroll.
This will probably change if the amounts refunded are to be included on the IRP5/IT3 tax certificates under the new suggested deduction codes.
Current Practice
The way in which clawbacks are usually achieved inside of payroll systems is by adding a negative income transaction for the value of the relevant repayment to an employee’s income in the current pay period. If the employee has existing income under the relevant income source code in the current pay period and the value of that existing income is greater than or equal to the absolute value of the negative income transaction being added, then the net value of the relevant income source code in the current pay period after processing the clawback will still be a positive value or will be zero.
If however the employee has no existing income under the relevant income source code in the current pay period, or the value of any existing income under the relevant income source code in the current pay period is less than the absolute value of the negative income transaction being added, the net value of the relevant income source code in the current pay period after processing the clawback will be negative.
This is unavoidable, as the clawback must be processed against the same income source code under which it was previously paid to the employee, but that income source code might not have sufficient value (or might not exist at all) on the employee’s payslip for the current pay period.
It should however be noted that even though the net value of a given income source code might therefore be negative in one or more individual pay periods, the YTD value of that income source code will never be negative.
The value of any given income or deduction source code on an employee’s YTD tax certificate will therefore never be less than zero.
Example 1:
An employee earning R10 000 per month is granted paid maternity leave for 2 months from the beginning of April to the end of May on the condition that the employee remains employed with the employer for at least 12 months after returning from maternity leave. The employee subsequently resigns at the end of June, so needs to pay back the full value of the paid maternity leave (R20 000) to the employer.
The employee’s normal June salary of R10 000 is reflected under code 3601 (Income – Taxable).
Since the maternity leave was originally paid to the employee under code 3601, the clawback of the -R20 000 maternity leave must also be processed under code 3601 to reduce the YTD value of code 3601.
However, since the value of code 3601 on the employee’s June payslip is only R10 000, the balance of code 3601 after processing the -R20 000 clawback will be negative (i.e.: -R10 000) in the June pay period.
The value of code 3601 reported to SARS in the employee’s monthly payroll information record in the June declaration file will therefore be -R10 000 (negative).
The YTD value reported to SARS for code 3601 on the employee’s tax certificate will however be R20 000, which is still positive.
Example 2:
An employee receives a ‘sign-on’ bonus of R5 000 in March. The employee’s contract stipulates that the employee will have to repay a pro rata portion of the sign-on bonus to the employer if the employee is terminated within the first six months of service. The employee is subsequently terminated in June, so needs to pay back R2 000 of the sign-on bonus to the employer.
The employer is refunded the R2 000 in June by adding a negative income item with a value of -R2 000 under code 3605 to the employee’s June payslip, thereby reducing the YTD value of code 3605 by R2 000.
Since the employee did not have any other income under code 3605 in the June pay period against which the clawback could be offset, the net value of code 3605 in June will be -R2 000 (negative).
The value of code 3605 reported to SARS in the employee’s monthly payroll information record in the June declaration file will therefore be -R2 000 (negative).
The YTD value reported to SARS for code 3605 on the employee’s tax certificate will however be R3 000, which is still positive.

Clawbacks Under Different Codes
Without laboring the point and providing a multitude of very similar examples using different income source codes, it should be evident how the above scenario could apply not only to normal income under code 3601 or bonuses under code 3605, but to any number of income source codes.
For instance:
• An insurance broker might be paid commission on policies sold, following which clawbacks might need to be processed under code 3606 if the policies lapse.
• An employer might pay for an employee’s training or accreditation based on certain conditions being met, following which clawbacks might need to be processed under codes 3801 or 3808.
• An employee might receive any number of fringe benefits as a sign-on bonus or provided he/she achieves a set target or goal, following which clawbacks might need to be processed under codes 3802, 3805 or 3806.
• An employee or his/her family or dependants might be awarded a bursary or scholarship on condition that the employee remains employed with the employer for a given number of years, following which clawbacks might need to be processed under codes 3809, 3815, 3820, 3821, 3829, 3830, 3831 or 3832.
It’s not hard to imagine how clawbacks could potentially be processed under any income source code to reduce the YTD value of that code, and in each of those cases the value of the relevant codes reported to SARS in the monthly payroll information records for those employees might need to be negative.
In all those cases however the values of the relevant codes on the employees’ tax certificates will never be less than zero.

 
SARS’s Proposed Solution of a “Clawback Code” [section 11(nA) deduction]
In previous meetings between SARS and stakeholders, SARS indicated that it would introduce a “clawback code” that would in future have to be used to process and report clawbacks in the payroll.
SARS indicated that amounts reported under this “clawback code” would not reduce the value of other remuneration that accrued to the employee in the same pay period as the period in which the clawback is processed.
The clawback code would therefore in essence be an after-tax deduction from an employee’s net pay, if employers and payrolls are not permitted to allow this new deduction code for purposes of calculating PAYE, SDL and UIF contributions, the value of which will then be reported to SARS to be claimed as a deduction against taxable income on assessment.
Note that the value of this “deduction” in the payroll would be the gross value of the amount being clawed back before any PAYE had been deducted from the amount.
Since the value of the clawback code would not reduce the value of taxable remuneration that accrued to the employee in the current pay period, but would reduce the value of the employee’s net pay, an employee who earned R400 000 commission and also had a clawback of R300 000 in the same pay period would therefore be taxed on the full R400 0000 in that pay period, resulting in the PAYE calculated in that pay period possibly exceeding the employee’s “net income after clawback” of R100 000, from which the PAYE on the R400 000 would then still have to be deducted.
With the preceding examples of the current process and the proposed new process in mind:
• Would SARS want clawbacks to be reflected under this code even if sufficient remuneration existed in the relevant pay period against which the clawback could have been offset, or only those clawbacks where there was no remuneration present in the pay period in which the clawback was processed?
• Would it not create a problem for SARS if an employee had multiple income source codes on a tax certificate but only a single “clawback code” which reduces the employee’s taxable income on assessment, as SARS would then have no idea which of the income source codes that are present on the employee’s tax certificate were reduced by the clawback?
• Would SARS be happy with the fact that the totals under the various income source codes on an employee’s tax certificate would now no longer accurately represent the remuneration received by the employee, but would instead represent the value of remuneration that accrued to the employee during the tax year even though some (or all) of that remuneration might have been refunded to the employer?
• Would SARS allow payroll systems to take the value of the “section 11(nA) deduction” represented by the “clawback code” into account on a month-to-month basis to reduce any tax surplus to zero (i.e.: to effectively refund the surplus PAYE to the employee by offsetting the PAYE in subsequent pay periods against the value of the tax deduction represented by the clawback code)?
If employers and payrolls are permitted to allow the new “clawback code” [section 11(nA) deduction] to be considered for purposes of calculating PAYE, SDL and UIF contributions and the clawback code refers to an income source code / amount which is not fully liable to PAYE or is exempt from tax, it will impact the SARS monthly ETV calculations if not linked to the relevant income code!
The ‘Bottom-line’ is that it –
• will result in the overstatement of income under the relevant income source codes and not fix the actual detail contained in the Employee Monthly Record and Employee YTD Certificate,
• may impact the PAYE calculation on an annual payment if it was over-paid and subsequently refunded to the employer,
• may impact on the calculation of the “remuneration proxy”
• may impact the limitation of section 11F Deduction in respect of contributions to Retirement funds, and
• may impact the calculation of the maximum remuneration for purposes of UIF contributions.
There may be more areas impacted not yet thought of!
Recommendation:
To facilitate the processing of Clawbacks [section 11(nA) deductions], it is recommended that the validation rules of the monthly BRS be changed to allow for the value of all income codes to be reported as negative values in the monthly payroll information records, provided that the associated YTD value of the relevant income code may never be less than zero.
No income source code will therefore be reported on an employee’s tax certificate with a value of less than zero.
This change does not preclude the introduction of a clawback code should SARS still wish to do so – it would simply be an information code (if implemented).
It is further recommended that payrolls be allowed to offset any PAYE surplus that may arise because of clawbacks against the PAYE payable in subsequent pay periods in order to achieve a net zero PAYE liability at the end of the tax year, thereby avoiding unnecessary refunds by SARS.
Allowing PAYE to be Reported as a Negative Amount
One of the main advantages of modern payroll systems is that they are self-correcting when it comes to the deduction of PAYE. In each new pay period, the PAYE liability for the year is calculated based on the latest estimate of an employee’s annual taxable income and is then compared to the actual PAYE deducted for the year (YTD).
Any tax surplus or shortfall is then compensated for by adjusting the PAYE payable in the current pay period either up or down. In most instances this results in the actual PAYE deducted for the year of assessment being exactly equal to the final PAYE (Tax) liability at the end of the year, which results in fewer assessments and refunds.
In some instances however, the value of a YTD PAYE surplus might be greater than the value of the PAYE payable in the current pay period resulting in the value of the PAYE payable in the current pay period becoming negative.
NB: It is important to note that this practice should not be equated to a “refund” of PAYE that is due or payable by the employee – it is in essence a recalculation. By offsetting the PAYE payable in the current pay period against a YTD PAYE surplus the payroll is simply reducing the YTD PAYE surplus (i.e.: PAYE that the employee is not liable to pay).
It is not refunding the employee for any amount of PAYE that the employee is liable to pay for the YTD.
Example 1:
Suppose an employee working nightshift receives a basic salary of R 7 000 per month and a nightshift allowance of R 1 000 per month. The employee’s estimated annual income is therefore R 96 000 per annum.
Since this is above the tax threshold, PAYE of R 3.75 per month is deducted from the employee’s income in both March and April. In May the employee moves from nightshift to dayshift and therefore no longer receives the R 1 000 nightshift allowance.
The employee’s estimated annual income therefore changes from R 96 000 to R 86 000. Since the employee’s total annual income is now estimated to be below the tax threshold, it becomes apparent that no PAYE should have been deducted from the employee in March and April.
Instead of waiting 10 months for the employee to be assessed and refunded by SARS, it is common practice in payrolls to correct the over-deduction by adding a negative PAYE deduction (to the value of -R 7.50 in this case) to the employee’s payslip in the current pay period.
The employee’s PAYE deduction in the payroll for May is therefore processed as -R 7.50, which reduces the total PAYE payable to SARS in May by R 7.50 and brings the employee’s YTD total for PAYE to R0.00.
The value of code 4102 reported on the employee’s monthly payroll information record for May would therefore be -R 7.50 (negative), but the value for code 4102 reported on the employee’s tax certificate would be R 0.00 (not negative).

Example 2:
Taking the exact same scenario as in Example 1 above, if the payroll was not allowed to process the negative PAYE amount of -R 7.50 in May there would be no other way to correct the R 7.50 PAYE over-deduction.
Since no PAYE will be deducted in any of the remaining pay periods in the year, there will be no opportunity to offset the PAYE payable in future pay periods against the YTD PAYE surplus, so the R 7.50 PAYE surplus would still be present at the end of the year.
The only way to resolve the PAYE surplus in such a case would then be for SARS to process a refund on assessment.
Example 2
An employee earns a salary of R7 000 per month, which is below the tax threshold. In June, overtime of R5 000 was incorrectly paid to the employee and PAYE of R195 was withheld.
The employer recovers the R5 000 overpayment from the July remuneration. In practice, the employer would correct the overpayment of PAYE (of R195) in July, instead of the employee having to claim a refund on assessment due to a bona fide error.

Recommendation
To facilitate the correction of over-deductions of PAYE in the current processing month it is recommended that the validation rules of the monthly BRS be changed to allow for the value of deduction codes to be reported as negative values in the monthly payroll information records, provided that the associated YTD value of the relevant deduction code may never be less than zero.
No deduction source code will therefore ever be reported on an employee’s tax certificate with a value of less than zero.
Motivation
As mentioned earlier, one of the main advantages of modern payroll systems is that they are self-correcting.
If payrolls are no longer allowed to adjust the YTD PAYE up or down in response to YTD PAYE surpluses or shortfalls, including the processing of negative PAYE amounts where necessary, the result would be tens of thousands of unnecessary assessment and refunds having to be processed by SARS.

In Closing
Once SARS has built up a history of employee monthly record data from the monthly payroll submissions, remuneration and PAYE trends can be analysed and ‘red flags’ can be raised that will enable SARS to audit suspicious transactions.
I trust that the above feedback will be of help to you, and that serious consideration is given to finding a pragmatic solution for all to the problems discussed above.
We are available at any time to clarify points made in this document, and to discuss the matter further.