RC – 2023 Annual Payroll Tax Update Presented in March 2023 – Chapter12 – The Payroll Authors Group of South Africa

05Dec

Chapter 12. Archive: Long Service Awards
This chapter has been updated as a result of the interest shown and the many queries submitted on these changes since I first presented them in the Annual Payroll Tax Update Webinars in March 2022, and again in subsequent webinars in June 2022.

A Long Service Cash Award given to an employee that complies with the initial 15 years and any subsequent 10 years unbroken period of service requirement – par (vii) of the proviso under par (c) of “gross income” in section 1 of the Income Tax Act should be reported under IRP5 code (code) 3622 (3672 for foreign services income) from the 2023 tax year. Prior to the 2023 tax year a cash value was not allowed as a long service award for the R5000.00 non taxable reduction.

The value of the long service award included in IRP5 code (code) 3622 (3672 for foreign services income) must be added under IRP5 code (code )3696 only if the sum of 3622/3672 and 3835/3885 does not exceed R5000. If it exceeds R5000.00 the full value of he sum of 3622/3672 and 3835/3885 should be included under IRP5 code (code) 3699 on the employee tax certificate regardless if there is a non taxable value included.

A Long Service Award given to an employee that complies with the initial 15 years and any subsequent 10 years unbroken periods of service requirement should be reported under IRP5 code (code) 3835 (3885 for foreign services income) from the 2023 tax year.

The value of the long service award included in IRP5 code (code) 3835 (3885 for foreign services income) must be added under IRP5 code (code 3696) only if the sum of 3622/3672 and 3835/3885 does not exceed R5000. If it exceeds R5000.00 the full value of he sum of 3622/3672 and 3835/3885 should be included under IRP5 code (code) 3699 on the employee tax certificate regardless if there is a non taxable value included.

The changes to the Long Service Award requirements (discussed in sections below) looked rather innocuous, but they resulted in renewed focus by employers on their long service award policies and triggered many queries.
SARS have kindly assisted the PAGSA with the answers to some of these queries and have also provided a legal opinion on one aspect of the long service award provisions.
In addition the codes for long service award tax certificate reporting have now been finalised and are explained towards the end of this chapter.
Principles of the Long Service Award Requirements
Paragraphs 2(a) and 5 of the Seventh Schedule provide that a taxable fringe benefit arises when an employee acquires an asset from an employer either for no consideration or for a consideration that is less than the value of the asset.
The fringe benefit value is either the cost to the employer or the market value depending on the circumstances.
If an asset is granted to the employee as an award in recognition of long service, the fringe benefit value of the asset is the cost to the employer, and importantly, if the conditions for long service are met (discussed below), the taxable fringe benefit value can be reduced by the lower of the asset value and R5 000.
2021 Budget Proposal to Amend the Long Service Award Requirements
The 2021 Budget Review pointed out that over the years it had come to the attention of the legislators that some employers reward employees for long service in ways other than granting the acquisition of an asset.
A very welcome pragmatic approach was then taken.
Instead of SARS clamping down on these non-compliant employers, the budget proposed that the legislation should be amended to allow the taxable value of these other forms of awards to be made available as options for long service awards on condition that the long service conditions are met, and that the total value of all awards granted to an employee is reduced by up to R5 000.
These proposals were turned into draft amendments, issued for comment in July 2021, promulgated in the final Taxation Laws Amendment Act on 19 January 2022, and made effective from 1 March 2022.
12.1 Changes to the Long Service Award Legislation
Effective from 1 March 2022, the definition of ‘gross income’ and the Long Service Award (LSA) provisions in Seventh Schedule of the Income Tax Act were amended to extend the long service award options for employers.
The amendments have added three new types of awards for long service that can be paid or granted in addition to the long-standing ‘acquisition of an asset’ award.
The four types of awards for long service whose taxable value can be reduced by up to R5 000 from 1 March 2022 are summarised below, with a reference to the applicable legislation for each award.
The existing award type available:
1. Acquisition of an Asset [Seventh Schedule par 5(2)(b)]
The three new award types 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)(e)]
4. Cash [“Gross income” – Section 1 of the Act, par (c), proviso (vii)]
These changes are welcome and legitimise what some employers have been doing for years, but they do result in some interesting new developments.
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 change.
Being potentially free of tax (up to the lower of the award value and R5 000), the long service award paid in cash 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.
In case you want to read through the legislation itself, the amendments to the long service provisions are included in a later section titled “Extract of the Amendment Legislation” for your convenience.
12.2 The ‘Long Service’ Conditions
It is very important to understand the two long service conditions, at least one of which must be satisfied before the taxable value of the long service award that was paid or granted can be reduced by up to R5 000.
If one of the two conditions are not satisfied when an award is granted to an employee, the value of the award will be taxed in full and reported on the tax certificate as normal according to ‘what it is’ i.e. the type of award (see the ‘Tax Certificate Codes for Long Service Awards’ section beneath).
The ‘Long service’ conditions are:
1. An initial unbroken period of service of not less than 15 years, OR
2. Any subsequent unbroken period of service for the same employer of not less than 10 years.
Here are the actual words of the legislation in paragraph 5(4) of the Seventh Schedule:
Paragraph 5(4)
For the purposes of this paragraph, “long service” means an initial unbroken period of service of not less than 15 years or any subsequent unbroken period of service of not less than 10 years.
The conditions themselves are easy to understand but applying the law in the employment environment is often not as straightforward as what it seems.
12.3 Understanding the Long Service Conditions
‘Unbroken Period of Service’
If the periods of service of an employee are ‘broken’ then this would make it more difficult for the employee to meet the initial 15-year or the subsequent 10-year condition of an ‘unbroken period of service’ and any award would then not qualify for the ‘up to R5,000’ reduction.
What then is an “unbroken period of service” in practical terms?
SARS came to the assistance of the PAGSA with the following legal interpretation:
“The phrase “unbroken period of service” is not defined.
SARS interprets it to mean continuous employment with a single employer without a lawful termination of the employment contract by either party.
Having regard to the definitions of “employer” and “employee” in paragraph 1, transfers between employers who are “associated institutions”, as defined in paragraph 1 [of the Seventh Schedule], will not qualify as an unbroken period of service.
However, should an event take place when continuous service is deemed to occur under law, [for example, transfers under section 197 of the Labour Relations Act, 1995 ‘Going Concern’] this will constitute an unbroken period of service.”

The Seventh Schedule defines an “associated institution” as follows:
“associated institution”, in relation to any single employer, means—
(a) where the employer is a company, any other company which is associated with the employer company by reason of the fact that both companies are managed or controlled directly or indirectly by substantially the same persons; or
(b) where the employer is not a company, any company which is managed or controlled directly or indirectly by the employer or by any partnership of which the employer is a member; or
(c) any fund … [the wording of this clause deleted to reduce the complexity of the definition]
If an employee’s services are terminated (i.e. the contract of employment comes to an end), it is obvious that the period of service has ended, but what about ‘transfers’ of employees?
Applying the SARS interpretation, my opinion is that the period of service is broken if the transfer is between:
1. Two separate legal entities (this would imply termination of the employment contract)
2. Two companies (separate legal entities) even if they are controlled by the same company
3. Two companies that are ‘associated institutions’.
Alternatively, my opinion is that the period of service is unbroken if the transfer is between:
1. Two branches of a company that are not separate legal entities
2. Two separate legal entities as a result of LRA section 197 (‘going concern’) transfer of business.
The relevant subsections of LRA section 197 (Transfer of contract of employment):
(1) In this section and in section 197A—
(a)
(b) “transfer” means the transfer of a business by one employer (“the old employer”) to another employer (“the new employer”) as a going concern.
(2) If a transfer of a business takes place, unless otherwise agreed in terms of subsection (6)—
(a) the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;
(b)
(c)
(d) the transfer does not interrupt an employee’s continuity of employment, and an employee’s contract of employment continues with the new employer as if with the old employer.
Variation to the Years of Service
The following aspects of long service awards are at the discretion of the employer’s long service award policy:
• The value of the award,
• Which award (or awards) are granted, and
• The number of years’ service that must be provided before qualifying for an award.
However, the tax rules are not influenced in any way by the employer’s policy.
The employer’s policy can prescribe longer periods of service than the legislated periods and still benefit from the ‘up to R5 000’ reduction but cannot prescribe shorter periods of service and still access the reduction benefit.
For example, employees who received their initial long service award in their 18th year of service will still benefit from the ‘up to R5 000’ reduction but must wait for a further minimum of 10 years (i.e. after at least 28 years of unbroken service), before a second award can be made that benefits from the reduction of ‘up to R5 000’.
Employers can grant or pay long service awards at any intervals that they choose, for example, after every 5 years of unbroken service.
There is no problem with this (in fact it can be a good thing), but any long service award paid or granted at service intervals that don’t meet the long service conditions, must be taxed in full.
To illustrate this scenario, assume that the employer’s policy is to pay a long service award in cash after every 5 years of service. The tax result is shown in the following table, including the tax certificate codes that are still to be discussed in a later section.
Table: Long Service Awards every 5 Years
Period of Service Cash Award Amount Is the Award Taxed? IRP5 Code
5 Years R3,000 Yes 3605
10 Years R4,000 Yes 3605
15 Years R5,000 Up to R5,000 tax free 3622
20 Years R6,000 Yes 3605
25 Years R7,000 Up to R5,000 tax free 3622
30 Years R8,000 Yes 3605
35 Years R9,000 Up to R5,000 tax free 3622
Code 3605 is used and not code 3601, because the award is by nature an ‘annual’ payment and must be treated as such by the payroll’s annualisation calculation. The only code that currently is an ‘annual’ code is code 3605.
Note that in the latest version of the SARS BRS, the following highlighted wording has been added to the description of code 3605:
“An amount paid or payable to an employee which is defined as an annual payment excluding any Long Service Cash Award required to be declared under code 3622/3672.”
The highlighted wording is correct for qualifying long service awards but is incorrect for awards made in recognition of long service but that don’t meet the long service conditions.
These amounts are not ‘long service awards’ in terms of the legislation requirements and must not be reported under a long service code that identifies them as such and that will result in SARS incorrectly applying the R5,000 reduction before calculating income tax.
Incidentally, the reporting of ‘annual’ amounts on tax certificates is under discussion with SARS for the future.
In what Month of the year are the Long Service Conditions Met?
It is clear that the reduction of the value of the long service award by the lesser of R5,000 or the value of the award can be applied during the tax year in which one of the two long service award conditions are met.
But the question is: In what month of the qualifying year can the reduction be applied in the payroll?
The answer from SARS Legal is logical and applies a ‘semi-accrual’ principle:
The reduction can be applied in the payroll in a month in the qualifying tax year from the anniversary month of the employee’s date of appointment onwards.
For example, if the anniversary month of the 15-year/10-year qualifying service period is:
1. March: Then the reduction can be applied in any month of that tax year from March until February
2. February: Then the reduction can only be applied in the February payroll, etc.
If the employee’s anniversary date is November, and the award was granted 5 months earlier in June, then this is does not meet the long service conditions and the reduction is not compliant.
Also, if the employee’s services come to an end between June and November, the reduction applied in June will have to be reversed.
This means that an employer’s long service policy that, for administrative convenience, seeks to grant the awards and apply the reduction to all qualifying employees in any fixed month of the year other than February, is incorrect.
Alternatively, if the employer wants to process all the long service awards in the same month, then this month must be February.
12.4 Application in the Payroll of the Long Service Awards
There are four types of awards that can be granted, three of which are fringe benefits, and one a cash payment:
1. Acquisition of an Asset [Seventh Schedule par 5(2)(b)]
2. Right of Use of an Asset [Seventh Schedule par 6(4)(d)]
3. Free or Cheap Services [Seventh Schedule par 10(2)(e)]
4. Cash [“Gross income” – Section 1 of the Act, par (c), proviso (vii)]
The employer can choose which award (or awards) to grant to the employee.
Multiple Long Service Awards
More than one type of award can be granted to a qualifying employee.
For an extreme example, the employer grants an R8,000 long service award in total, split up into R2,000 for each of the four types of awards.
• The tax calculation will reduce the R8,000 by R5,000 and R3,000 will be added to remuneration for the PAYE calculation.
• Tax certificate reporting is important and is explained in the next section, but in short, the R6,000 total of the three fringe benefit awards must be reported under code 3835, and the R2,000 cash award must be reported under code 3622.
Gift Vouchers (see SARS Interpretation Note 71)
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.
Gift vouchers must be reported on the tax certificate as an ‘acquisition of asset’ that would normally be reported under code 3801 but qualifying long service awards that are fringe benefits are now reported under code 3835 (see the ‘Long Service Tax Certificate Codes’ section below).
Krugerrands (see SARS Interpretation Note 71)
Krugerrands are considered to be goods or commodities rather than “money” because a Krugerrand does not have a face value (as does a R5 coin for example) 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 can be reduced by up to R5 000 provided that the long service conditions are met.
Krugerrands must be reported on the tax certificate as an ‘acquisition of asset’ that would normally be reported under code 3801 but qualifying long service awards that are fringe benefits are reported under code 3835 (see the ‘Long Service Tax Certificate Codes’ section below).
Tax Certificate Reporting Principles
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 that is an annual payment by nature, cash would normally be reported under code 3605 but because the reason that it is paid is a qualifying long service award, R10 000 must be reported as a cash long service award (code 3622) on the tax certificate.
This is the same principle that is applied to overtime, commission, bonuses, etc. that are also cash payments. In other words, for tax certificate reporting, if there is an award for long service, the type of payment (cash) or the type of benefit granted changes its nature from ‘how is it paid or what fringe benefit is it’ to ‘why is it paid’.
It this is not clear, the codes that are explained in the next section should be of help.
12.5 Tax Certificate Codes for Long Service Awards
The latest PAYE BRS (SARS PAYE Business Requirements Specification) version 21.0.1 for the 2023 tax year includes the new codes and rules for long service award reporting on tax certificates that provide for the amended long service award requirements from 1 March 2022.
Long Service Award Codes
Note the following:
1. In all cases, the long service amounts reported under the codes indicated below must be the ‘gross’ amount before the ‘up to’ R5 000 reduction. SARS will apply the reduction in the assessment income tax calculation by reducing the total of code 3622 and code 3835 by the lesser of this total and R5 000.
2. Only qualifying long service award amounts that meet the long service conditions must be reported according to the long service codes discussed below. If the amount doesn’t qualify as a long service award, it must be reported against its normal tax certificate code.
Code 3601 – Income
Long service awards paid in cash are excluded from code 3601 and must be reported under code 3622.
Code 3622 – Long Service Cash Award
Long service awards paid in cash must be reported under code 3622.
Code 3801 – General Fringe Benefits
Long service awards granted as an ‘Acquisition of an Asset’ benefit or as a ‘Use of an Asset’ benefit must be reported under new code 3835. An ‘Acquisition of an asset’ 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.
It follows, for example, that it is possible for two benefits to be granted as an ‘Acquisition of an asset’, 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).
Code 3806 – Free or Cheap Services
Long service awards granted as a ‘Free/Cheap Services’ benefit must be reported under new code 3835.
Code 3835 – Long Service Fringe Benefit Awards
The total of the fringe benefit long service awards must be reported under code 3835.
12.6 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 in 2021, the PAGSA took the opportunity to request an inflation increase to the R5 000 reduction.
Correctly so, our request was not considered because the 2021 Budget did not propose an increase to the R5 000, and the legislators are not allowed to go outside of what was proposed in the budget.
However, I noticed in the 2022 Budget Review, hidden away, that there is a proposal to review the value of all thresholds in the coming year.
This might be as a result of our request but in any event, we hope to see some increases being included in the July 2022 draft Amendment Bills – if the state of the economy permits.
12.7 Extract of the Final Amendment Legislation
Paragraph 2(a)
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
Paragraph 5(2)
(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;”;
Paragraph 5(2)(b)
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.”.
Paragraph 5(4)
(4) For the purposes of this paragraph, “long service” means an initial unbroken period of service of not less than 15 years or any subsequent unbroken period of service of not less than 10 years.
Paragraph 6(4)(d)
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.”.
Paragraph 10(2)(e)
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.”.