INTERPRETATION NOTE: NO. 72 (3 of 3)

5. Conclusion
The use of a company car for private or domestic purposes gives rise to a taxable benefit under the Seventh Schedule of the Act. The cash equivalent of the taxable benefit which must be included in the employee’s gross income is equal to the value of the private use less any consideration paid by the employee for that benefit.
The value of private use of a vehicle held by an employer otherwise than under an “operating lease” is generally equal to 3,5% per month of the determined value of the motor vehicle. The amount calculated must be apportioned if the motor vehicle is only used for part of a month (that is, 3,5% of the determined value of the motor vehicle multiplied by the number days of use of the motor vehicle in the month divided by the number of days in the month). The percentage may be reduced to 3,25% if the motor vehicle was the subject of a maintenance plan when it was acquired by the employer. The value of private use may not be reduced for temporary absences such as when the employee is away on work or the car is in for a car service.
The value of private use of a vehicle held by an employer under an “operating lease” is equal to the actual cost incurred under the operating lease plus the cost of fuel incurred on the same vehicle.
The calculation of the value of private use assumes the employee only uses the motor vehicle for private purposes and that the employer bears all the operating costs. However, on assessment an employee may, depending on the circumstances, qualify for a reduction in the value of private use to the extent the motor vehicle:
• is used for business purposes;
• to the extent the employee has borne the full costs of licence, insurance or maintenance (reduction not available if the vehicle is held under an operating lease); and
• to the extent the employee has borne the cost of fuel for private use (reduction not available if the vehicle is held under an operating lease).

Employees must maintain detailed records of business travel if they wish to claim these reductions, this is generally done in the form of a logbook. Special rules apply to an employee who has the right of use of more than one company car, and potentially, if the company car is a pool vehicle available to employees in general, or if the employee is regularly required to perform duties outside of normal office hours.
Employers are required to calculate and withhold employees’ tax on a monthly basis. With effect from 1 March 2011 when calculating the monthly employees’ tax withholdings, employers must include 80% of the cash equivalent of the taxable benefit as remuneration. This reduced withholding (previously 100% was included) takes into account potential reductions which may take place on assessment, for example, the business reduction. However, in the event that an employer is satisfied that at least 80% of the use of the motor vehicle during a year of assessment will be for business purposes, then only 20% of the cash equivalent of the taxable benefit is included as remuneration and is subject to employees’ tax.
Legal and Policy Division
SOUTH AFRICAN REVENUE SERVICE

Annexure A – The law

Section 1(1) Definition of the term “gross income”
“gross income”, in relation to any year or period of assessment, means—
(i) . . .
(ii) . . .
…but including, without in any way limiting the scope of this definition, such amounts (whether of a capital nature or not) so received or accrued as are described hereunder, namely—
(a) – (h). . .
(i) the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit or advantage granted in respect of employment or to the holder of any office, being a taxable benefit as defined in the said Schedule, and any amount required to be included in the taxpayer’s income under section 8A;

Paragraph 1 of the Fourth Schedule
“remuneration” means 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, including—
(a) any amount referred to in paragraph (a), (c), (cA), (d), (e), (eA) or (f) of the definition of “gross income” in section 1 of this Act;
(cA) 80 per cent of the amount of any allowance or advance in respect of transport expenses referred to in section 8(1)(b), other than any such allowance or advance contemplated in section 8(1)(b)(iii) which is based on the actual distance travelled by the recipient, and which is calculated at a rate per kilometre which does not exceed the appropriate rate per kilometre fixed by the Minister of Finance under section 8(1)(b)(iii): Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of the amount of such allowance or advance must be included;

Paragraph 1 of the Seventh Schedule
“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 established solely or mainly for providing benefits for employees or former employees of the employer or for employees or former employees of the employer and any company which is in terms of paragraph (a) or (b) an associated institution in relation to the employer, but excluding any fund established by a trade union or industrial council and any fund established for postgraduate research otherwise than out of moneys provided by the employer or by any associated institution in relation to the employer;
“consideration”, as respects any reference in this Schedule to any consideration given by an employee, does not include any consideration in the form of services rendered or to be rendered by the employee;

Paragraph 2(b) of the Seventh Schedule
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) . . .
(b) the employee has been granted the right to use any asset (other than any residential accommodation or household goods supplied with such accommodation) for his or her private or domestic purposes either free of charge or for a consideration payable by the employee which is less than the value of such use, as determined under paragraph 6 in the case of an asset other than a motor vehicle or under paragraph 7 in the case of a motor vehicle; or

Paragraph 4 of the Seventh Schedule
4. Where any associated institution in relation to any employer has given any employee of that employer, by reason of the fact that the employee is in the employment of the employer, or as a benefit or advantage of such employment or as a reward for services rendered or to be rendered by the employee to the employer any benefit or advantage which, if such benefit or advantage had been given to the employee directly by the employer in the circumstances contemplated in paragraph 2, would have constituted a taxable benefit, such benefit or advantage shall for the purposes of this Schedule be deemed to be a taxable benefit granted by the employer to the employee and the cash equivalent of the value of such taxable benefit shall be determined accordingly.

Paragraph 7 of the Seventh Schedule
(1) For the purposes of this paragraph, “determined value”, in relation to a motor vehicle, means—
(a) where such motor vehicle (not being a vehicle in respect of which paragraph (b)(ii) of this definition applies) was acquired by the employer under a bona fide agreement of sale or exchange concluded by parties acting at arm’s length, the original cost thereof to the employer (excluding any finance charge or interest payable by the employer in respect of the employer’s acquisition thereof); or
(b) where such motor vehicle—
(i) is held by the employer under a lease (other than an “operating lease” as defined in section 23A (1)); or
(ii) was held by the employer under a lease (other than an “operating lease” as defined in section 23A (1)) and the ownership thereof was acquired by the employer on the termination of the lease,
the retail market value thereof at the time the employer first obtained the right of use of the vehicle or, where at such time such lease was a lease contemplated in paragraph (b) of the definition of “instalment credit agreement” in section 1 of the Value-added Tax Act, 1991 (Act No. 89 of 1991), the cash value thereof as contemplated in the definition of “cash value” in the said section; or
(c) in any other case, the market value of such motor vehicle at the time when the employer first obtained the vehicle or the right of use thereof:
Provided that—
(a) where an employee has been granted the right of use of such motor vehicle as contemplated in subparagraph (2) (other than a motor vehicle acquired under an operating lease as defined in section 23A (1)) and such vehicle, or the right of use thereof, was acquired by the employer not less than 12 months before the date on which the employee was granted such right of use, there shall be deducted from the amount determined under the foregoing provisions of this subparagraph a depreciation allowance calculated according to the reducing balance method at the rate of 15 per cent for each completed period of 12 months from the date on which the employer first obtained such vehicle or the right of use thereof to the date on which the said employee was first granted the right of use thereof; and
(b) where such motor vehicle was acquired by the employer from an associated institution in relation to the employer and the employee concerned had, prior to such acquisition, enjoyed the right of use of such motor vehicle, the determined value shall be the determined value as at the date on which the employee was granted the right of use of such motor vehicle for the first time.
(1A) . . . . . .
(2) Where an employee has been granted the right to use any motor vehicle as contemplated in paragraph 2(b), the cash equivalent of the value of the taxable benefit shall be so much of the value of the private use of such vehicle (as determined under this paragraph in respect of the period of use) as exceeds any consideration given by the employee to the employer for the use of such vehicle during such period, other than consideration in respect of the cost of the licence, insurance, maintenance or fuel in respect of such vehicle.
(3) (a) Where an employer’s rights and obligations under a lease in respect of a motor vehicle are transferred to his employee the employer shall for the purposes of this Schedule be deemed to have granted the employee the right to use such vehicle for the remainder of the period of the lease.
(b) In such case—
(i) any rentals becoming payable by the employee under the lease shall be deemed to be a consideration payable by him for the said right; and
(ii) the determined value of the vehicle shall be deemed to be an amount determined in accordance with the provisions of subparagraph (1)(b);
(4) Subject to subparagraph (10), the value to be placed on the private use of such vehicle shall be determined for each month or part of a month during which the employee was entitled to use the vehicle for private purposes (including travelling between the employee’s place of residence and his or her place of employment) and the said value shall—
(a) as respects each such month—
(i) be an amount equal to 3,5 per cent of the determined value of such motor vehicle: Provided that where the motor vehicle is the subject of a maintenance plan at the time the employer acquired the motor vehicle or the right of use thereof, that amount shall be reduced to an amount equal to 3,25 per cent of the determined value of the motor vehicle; or
(ii) where such vehicle is acquired by the employer under an “operating lease” as defined in section 23A (1) concluded by parties transacting at arm’s length and that are not connected persons in relation to each other, be—
(aa) the actual cost to the employer incurred under that operating lease; and
(bb) the cost of fuel in respect of that vehicle; and
(b) as respects any such part of a month, be an amount which bears to the appropriate amount determined in accordance with item (a)(i) or (ii) for a month the same ratio as the number of days in such part of a month bears to the number of days in the month in which such part falls.
(5) No reduction in the value determined under subparagraph (4) shall be made for the purposes of item (b) of that subparagraph by reason of the fact that the vehicle in question was during any period for any reason temporarily not used by the employee for private purposes.
(6) Where more than one motor vehicle is made available by an employer to a particular employee at the same time and the Commissioner is satisfied that each such vehicle was used by the employee during the year of assessment primarily for business purposes, the value to be placed on the private use of all the said vehicles shall be deemed to be the value of the private use of the vehicle having the highest value of private use or such other vehicle as the Commissioner may direct: Provided that the preceding provisions of this subparagraph shall not apply where the provisions of subparagraph (7) or (8) are applied.
(7) Where it is proved to the satisfaction of the Commissioner that accurate records of distances travelled for business purposes in such vehicle are kept, the Commissioner must upon the assessment of the employee’s liability for normal tax for the year of assessment reduce the value placed on the private use of the vehicle, calculated under subparagraph (4), by an amount that bears to that calculated value the same ratio as the number of kilometres travelled for business purposes bears to the total amount of kilometres travelled in such vehicle during that year of assessment.
(8) Where it is proved to the satisfaction of the Commissioner that accurate records of distances travelled for private purposes in such vehicle (other than a vehicle acquired as contemplated in subparagraph (4)(a)(ii)) are kept and the employee bears—
(a) (i) the full cost of the licence for such vehicle, the Commissioner must upon the assessment of the employee’s liability for normal tax for the year of assessment reduce the value placed on the private use of such vehicle calculated under subparagraph (4) by an amount that bears to the amount of the cost of the licence for such vehicle the same ratio as the number of kilometres travelled for private purposes bears to the total number of kilometres travelled in such vehicle during that year of assessment;
(ii) the full cost of the insurance of such vehicle, the Commissioner must upon the assessment of the employee’s liability for normal tax for the year of assessment reduce the value placed on the private use of such vehicle calculated under subparagraph (4) by an amount that bears to the amount of the cost of the insurance for such vehicle the same ratio as the number of kilometres travelled for private purposes bears to the total number of kilometres travelled in such vehicle during that year of assessment; or
(iii) the full cost of the maintenance of such vehicle, the Commissioner must upon the assessment of the employee’s liability for normal tax for the year of assessment reduce the value placed on the private use of such vehicle calculated under subparagraph (4) by an amount that bears to the amount of the cost of the maintenance for such vehicle the same ratio as the number of kilometres travelled for private purposes bears to the total number of kilometres travelled in such vehicle during that year of assessment;
(b) the full cost of fuel for private use of such vehicle, the Commissioner must upon the assessment of the employee’s liability for normal tax for the year of assessment reduce the value placed on the private use of the vehicle during that year of assessment calculated under subparagraph (4) by an amount determined for the total kilometres travelled for private purposes by applying the rate per kilometre for fuel fixed by the Minister in the Gazette for the purposes of section 8(1)(b)(ii) and (iii).
(8A) For the purposes of subparagraphs (7) and (8), if the employee contemplated in those subparagraphs is a “judge” or a “Constitutional Court judge” as defined in section 1 of the Judges’ Remuneration and Conditions of Employment Act, 2001 (Act No. 47 of 2001), the kilometres travelled between the judge’s place of residence and the court over which the judge presides must be deemed to be kilometres travelled for business purposes and not for private purposes.
(9) . . . . . .
(10) For the purposes of this paragraph the private use by an employee of a motor vehicle shall be deemed to have no value, if—
(a) (i) the vehicle is available to and is in fact used by employees of the employer in general;
(ii) the private use of the vehicle by the employee concerned is infrequent or is merely incidental to its business use; and
(iii) the vehicle is not normally kept at or near the residence of the employee concerned when not in use outside of business hours; or
(b) the nature of the employee’s duties are such that he or she is regularly required to use the vehicle for the performance of those duties outside his or her normal hours of work, and he or she is not permitted to use that vehicle for private purposes other than—
(i) travelling between his or her place of residence and his or her place of work; or
(ii) private use which is infrequent or is merely incidental to its business use.
(11) For the purposes of this paragraph, “maintenance plan”, in relation to a motor vehicle, means a contractual obligation undertaken by a provider in the ordinary course of trade with the general public to underwrite the costs of all maintenance of that motor vehicle, other than the costs related to top-up fluids, tyres or abuse of the motor vehicle, for at least a period of not less than three years and a distance travelled by the motor vehicle of not less than 60 000 kilometres from the date that the provider undertakes the contractual obligation: Provided that the contractual obligation may terminate at the earlier of—
(a) the end of the period of three years; or
(b) the date on which the distance of 60 000 kilometres is travelled by that motor vehicle.

Annexure B – Extract of income tax regulation: Fixing of rate per kilometre in respect of motor vehicles for the purposes of section 8(1)(b)(ii) and (iii) with effect from 1 March 2012

Where the value of the vehicle does not exceed R60 000:
• Fixed cost (Rand) – 19 492
• Fuel cost (c/km) – 73.7
• Maintenance cost (c/km) – 25.7

Where the value of the vehicle exceeds R60 000, but does not exceed R120 000:
• Fixed cost (Rand) – 38 726
• Fuel cost (c/km) – 77.6
• Maintenance cost (c/km) – 29.0

Where the value of the vehicle exceeds R120 000, but does not exceed R180 000:
• Fixed cost (Rand) – 52 594
• Fuel cost (c/km) – 81.5
• Maintenance cost (c/km) – 32.3

Where the value of the vehicle exceeds R180 000, but does not exceed R240 000:
• Fixed cost (Rand) – 66 440
• Fuel cost (c/km) – 89.6
• Maintenance cost (c/km) – 36.9

Where the value of the vehicle exceeds R240 000, but does not exceed R300 000:
• Fixed cost (Rand) – 79 185
• Fuel cost (c/km) – 102.7
• Maintenance cost (c/km) – 45.2

Where the value of the vehicle exceeds R300 000, but does not exceed R360 000:
• Fixed cost (Rand) – 91 873
• Fuel cost (c/km) – 117.1
• Maintenance cost (c/km) – 53.7

Where the value of the vehicle exceeds R360 000, but does not exceed R420 000:
• Fixed cost (Rand) – 105 809
• Fuel cost (c/km) – 119.3
• Maintenance cost (c/km) – 65.2

Where the value of the vehicle exceeds R420 000, but does not exceed R480 000:
• Fixed cost (Rand) – 119 683
• Fuel cost (c/km) – 133.6
• Maintenance cost (c/km) – 68.3

Where the value of the vehicle exceeds R480 000:
• Fixed cost (Rand) – 119 683
• Fuel cost (c/km) – 133.6
• Maintenance cost (c/km) – 68.3

INTERPRETATION NOTE: NO. 72 (2 of 3)

4.5 Reduction of the value of private use on assessment
The value of private use calculation (that is, fixed % per month x determined value of the motor vehicle or actual costs incurred under an “operating lease” plus fuel) is based on the assumption that the motor vehicle is only used for private purposes (the employee does not use it for any business purposes) and that the employer bears all of the operating expenses.
The Act, however, recognises that employees may use the motor vehicle for business purposes and may bear some of the costs associated with the motor vehicles. Accordingly, the Act provides that the value of private use may be reduced in specific circumstances at the end of the tax year when the employee submits a tax return and is assessed – see 4.5.1 – 4.5.3.
None of these reductions may reduce the value of private use to a value which is less than zero.

4.5.1 Right of use of more than one motor vehicle for private purposes
An employer may grant an employee the right to use more than one motor vehicle at the same time. Each motor vehicle represents a separate taxable fringe benefit and on a monthly basis the employer will have to calculate the value of the taxable benefit for each motor vehicle, as discussed in 4.3 and 4.4, for employees’ tax purposes (see 4.8).
However, if the Commissioner is satisfied that during the year of assessment the employee used each motor vehicle primarily for business purposes, the value of private use on all the motor vehicles will be deemed to be that of only the vehicle having the highest value of private use or such other motor vehicle as the Commissioner may direct. “Primarily for business purposes” means that more than 50% of the total distance travelled during the tax year in the motor vehicle concerned was for business purposes. This reduction is claimed in the tax return and is not available if the employee applies the business use or expense reductions in 4.5.2 or 4.5.3.
In order to qualify for this reduction, employees must maintain actual records of business travel, generally done in the form of a logbook.

Example 7 – Employee has the use of more than one company car

Facts:
Company ABC provided one of its employees, Z, with the use of a company car in 2009. During the 2013 tax year, Z had the use of the motor vehicle for the full year but was also granted the use of a new company car on 15 February 2013.
The 2009 company car cost Company ABC R200 000 (including VAT). Z travelled 8 000 km during the 2013 year of which 6 500 km were for business purposes.
The 2013 company car cost Company ABC R300 000 (including VAT). Z travelled 500 km during the month of February of which 300 km were for business purposes.
Company ABC is not entitled to an input tax claim for VAT.
Z maintains a logbook detailing business-related travel.

Result:
The 2009 company car was used 81% for business purposes (6 500 km / 8 000 km) and the 2013 company was used 60% for business purposes (300 km / 500 km).
On the basis that accurate logbooks were kept and that both motor vehicles were primarily used for business purposes, at year-end when submitting a tax return, Z may elect to calculate the cash equivalent of the taxable value of the benefit for both motor vehicles on the highest calculated value of private use of the two motor vehicles. Z may, however, only do this if the business reduction (see 4.5.2) or cost reduction (see 4.5.3) alternatives are not applied.

Value of private use for February 2013
The value of the private use for February 2013 is equal to the value of private use for the 2009 company car from 1 February 2013 to 14 February 2013 + the highest calculated value of private use of the 2009 and 2013 company car from 15 February 2013 to 29 February 2013.

Value of private use of the 2009 company car from 1 February R 3 500
2013 to 14 February 2013 (3,5% x R200 000 x 14 / 28)
Value of private use from 15 February to 28 February 2013:
• 2009 company car = 3,5% x R200 000 x 14 / 28 = R3 500
• 2013 company car = 3,5% x R300 000 x 14 / 28 = R5 250
• Therefore, highest value of private use for the period R 5 250
Value of private use 1 February to 28 February 2013 R 8 750

Value of the taxable benefit for February 2013
Value of the private use February 2013 R 8 750
Less consideration (nil)
Cash equivalent of the value of the taxable benefit for February 2013 R 8 750

Value of the taxable benefit for the 2013 tax year

Value of private use 1 March 2012 to 31 January 2013 (3,5%
x R200 000 x 11 months) R 77 000
Value of private use for February 2013 R 8 750
Less consideration (nil)
Cash equivalent of the value of the taxable benefit for the 2013 tax year R 85 750

4.5.2 Reduction for business use
SARS will, upon assessment of the employee’s liability for normal tax for the year of assessment, reduce the value placed on the private use of the motor vehicle if it is proved to the satisfaction of the Commissioner that a taxpayer has kept accurate records of the distances travelled for business purposes.
The amount of the business use reduction is determined by applying a ratio of business kilometres travelled to total kilometres travelled in the motor vehicle to the value of private use. Namely, business reduction = (business mileage / total mileage) x value of private use.
The answer (which is the value of the business use) is then subtracted from the value of private use on assessment.
It is crucial that employees keep accurate records (for example, in the form of a logbook) of business mileage travelled. SARS will not permit a reduction for the business use of the motor vehicle if accurate records are not kept.
Logbooks must include, at a minimum, the following information:
• The odometer reading on the first day of the tax year.
• The odometer reading on the last day of the tax year.
• For all business travel –
the date of the travel;
the kilometres travelled; and
business travel details (where and reason for trip).

It is not necessary to record details of private travel (for example, that the recipient went to the movies on “x” date and the distance travelled was “y” kilometres) or daily opening and closing odometer readings. A logbook which taxpayers may use is available on the SARS website (www.sars.gov.za).
The accurate determination of what constitutes business travel is critically important and is determined by looking at the purpose of the trip and assessing whether it is for business purposes or private purposes.

Example 8 – Business use reduction

Facts:
Employer DEF purchased a motor vehicle for R300 000 (VAT inclusive) for the sole use by the General Manager, C, as from 1 March 2012. C maintains a logbook indicating 40 000 km travelled, of which 10 000 km are business kilometres. The employer pays all costs. C pays DEF R1 000 per month for the use of the motor vehicle. The employer was not entitled to an input tax claim for VAT.

Result:
The value of the taxable benefit for C will be determined as follows:
The monthly private value of the fringe benefit is R300 000 x 3,5% R 10 500
Annual value of private use (R10 500 x 12) R 126 000
Less: Business use reduction R (31 500)
= value of private use x business km / total km
= (R126 000 x 10 000 km / 40 000 km)
Adjusted value of private use R 94 500
Less: Consideration R (12 000)
Cash equivalent of the value of the taxable benefit R 82 500
(that is, the value of the benefit subject to income tax on assessment)

4.5.3 Reduction when the employee incurs expenditure in relation to the motor vehicle
An employee who bears the full cost of the licence, insurance or maintenance of the motor vehicle or the full cost of the fuel for the private use of the motor vehicle, may be entitled to a reduction of the value of private use provided the Commissioner is satisfied that accurate records of distances travelled for private purposes have been retained.
The reductions discussed in this paragraph are not applicable if the vehicle is held by the employer under an “operating lease”.
The logbook referred to in 4.5.1 and 4.5.2 is an acceptable record to SARS of private mileage travelled. Note that this reduction can only take place upon assessment for normal tax.
The employee bearing the “full cost” means that the employee must bear 100% of the cost, without any form of reimbursement, for the entire period the employee had the use of the motor vehicle during the year of assessment.
An employee who bears the full cost of the above-mentioned expenses may receive an allowance for the expenditure from his or her employer. The receipt of the allowance does not alter the fact that the employee has borne 100% of the expense. The allowance is fully taxable without any allowable deductions,5 however when calculating the value of private use for the company car fringe benefit, an employee may be entitled to claim a deduction if the employee does not receive any reimbursement (full or partial) from the employer.
5 See 4.9.3 which refers to a “travel allowance”, but the same principle applies equally to specific allowances, for example, a maintenance-focussed allowance.
Licence, insurance and maintenance costs
An employee who bears the full cost of the licence or insurance or maintenance may obtain a reduction for the private element of the relevant full costs incurred by applying a ratio of private mileage travelled over total mileage travelled to the actual costs incurred. Namely:
Expense reduction = (private mileage / total mileage) x full cost of licence, insurance or maintenance (as appropriate).
The expense reduction is subtracted from the value of private use on assessment.

Example 9 – Employee bears part of the maintenance costs

Facts:
Z, an employee of Company Y, has been granted the right to use Company Y’s motor vehicle. Company Y is responsible for all licence, insurance and fuel costs. In relation to maintenance costs, Company Y introduced a company policy aimed at encouraging employees to look after company motor vehicles which stipulates that employees are responsible for any maintenance expenses in excess of R2 000 a year. Z maintains a logbook.
During the 2013 year of assessment, the maintenance costs totalled R2 500. Z agreed with Company Y to pay R500 over five months with the first payment of R100 per month due at the end of March 2012.

Result:
Z will not be entitled to a deduction for the R500 because Z has not borne the full cost of maintenance on the company car.
Fuel costs
An employee who carries the full cost of fuel for private purposes is entitled to a reduction for the private element of the fuel cost based on the deemed rate per kilometre for fuel, as fixed by the Minister of Finance in the Gazette.6 This deemed rate per kilometre is applied to the total private kilometres travelled in the motor vehicle. Namely:
Private fuel reduction = private mileage x deemed fuel rate per kilometre as per the Gazette.
Upon assessment, the private fuel reduction must be deducted from the value of private use.
The determination of whether an employee has borne the full cost of fuel only takes place on assessment. The employee is responsible for making this determination (provision is made in the ITR12 income tax return).

Example 10 – Employee bears costs

Facts:
Y, an employee of Company ABC, has been granted the right to use Company ABC’s motor vehicle. The motor vehicle was acquired by Company ABC at a cost of R400 000 (including VAT) and included a maintenance plan. Y maintains a logbook which proves that 36 000 km were travelled during the year of assessment, of which 17 000 km are business kilometres. Y is responsible for all licence, insurance and fuel costs incurred on the motor vehicle, which amounted to R650, R16 200 and R30 000, respectively. Y also pays Company ABC R1 000 per month for the use of the motor vehicle. Company ABC is not entitled to an input tax claim for VAT.
Y had the use of the motor vehicle for the full year of assessment. 16
Result:
The cash equivalent of the value of the taxable benefit for Y is calculated as follows:

The monthly value of private use is R400 000 x 3.25% R 13 000
Annual value of private use (R13 000 x 12) R 156 000
Less: Business use reduction R (73 667)
= value of private use x business km / total km
= (R156 000 x 17 000 km / 36 000 km)
Less: Licence cost reduction R (343)
= actual costs x private km / total km
= (R650 x 19 000 km / 36 000 km)
Less: Insurance cost reduction R (8 550)
= actual costs x private km / total km
= (R16 200 x 19 000 km / 36 000 km)
Less: Maintenance cost reduction R (0)
= not applicable as Y did not bear the full maintenance costs
Less: Fuel cost reduction: R (22 667)
= private km x fuel rate per kilometre per Gazette
= (19 000 km x R1,193ª)
Adjusted value of private use R 50 773
Less: Consideration R (12 000)
Cash equivalent of the value of the taxable benefit R 38 773
(that is, the value of the benefit subject to income tax on assessment)

ª As per the cost table in Annexure B.

Note: The cash equivalent is calculated at 3,25% because the motor vehicle was subject to a maintenance plan at the time of acquisition. Y did not therefore incur the full cost of maintenance and may not claim a reduction in respect of any maintenance costs.

Example 11 – Employee receives a travel allowance and pays the costs

Facts:
Y, an employee of Company ABC, has been granted the right to use Company ABC’s motor vehicle. The motor vehicle was acquired by Company ABC at a cost of R400 000 (including VAT) and included a maintenance plan. Y maintains a logbook which proves that 36 000 km were travelled during the year of assessment, of which 17 000 km are business kilometres. Y is responsible for all licence, insurance and fuel costs incurred on the motor vehicle, which amounted to R650, R16 200 and R30 000 respectively. Y also pays Company ABC R1 000 per month for the use of the motor vehicle. Company ABC pays all employees who travel for work (including Y) a travel allowance of R2 000 per month. Company ABC is not entitled to an input tax claim for VAT.
Y had the use of the motor vehicle for the full year of assessment.

Result:
Allowance included in taxable income
(section 8(1) – no deduction for costs incurred) R 24 000
The cash equivalent of the value of the taxable benefit for Y,
which will also be included in taxable income, is calculated as follows:
The monthly value of private use is R400 000 x 3,25% R 13 000
Annual value of private use (R13 000 x 12) R 156 000
Less: Business use reduction R (73 667)
= value of private use x business km/total km
= (R156 000 x 17 000km / 36 000 km)
Less: Licence cost reduction R (343)
= actual costs x private km/total km
= (R650 x 19 000km/36 000km)
Less: Insurance cost reduction R (8 550)
= actual costs x private km / total km
= (R16 200 x 19 000 km / 36 000 km)
Less: Maintenance cost reduction R (0)
= not applicable as Y did not bear the full maintenance costs
Less: Fuel cost component R (22 667)
= private km x fuel rate per kilometre per Gazette
(19 000km x R1,193ª)
Adjusted value of private use R 50 773
Less: Consideration R (12 000)
Cash equivalent of the value of the taxable benefit R 38 773
(that is, the value of the benefit subject to income tax on assessment)

ª As per the cost table in Annexure B.
The cash equivalent is calculated at 3,25% because the motor vehicle was subject to a maintenance plan at the time of acquisition. Y did not incur the full cost of maintenance and may not claim a reduction in respect of any maintenance costs.

4.6 Circumstances under which the value of private use is deemed to be nil

4.6.1 Available for use by employees in general
The value of private use of the motor vehicle by an employee is deemed to be nil, if all three of the following requirements are met:
• The motor vehicle is available and used by employees of the employer in general (that is, the motor vehicle is a pool car generally used by employees for business purposes and which is not allocated to a particular employee);
• The private use of the motor vehicle by the employee is infrequent or merely incidental to business use; and
• The motor vehicle is not normally kept at or near the residence of the employee when not in use outside of business hours.

4.6.2 Nature of employee duties
The value of private use of the motor vehicle by an employee is deemed to be nil, if –
• the nature of the employee’s duties are such that the employee is regularly required to use the motor vehicle for the performance of those duties outside normal hours of work; and
• the employee is not permitted to use that motor vehicle for private purposes other than –
travelling between his or her place of residence and his or her place of work; or
private use which is infrequent or is merely incidental to its business.

For this purpose, “normal working hours” are considered to be the regular, usual or typical hours that the employee who is provided with the right of use of the motor vehicle renders his or her services. Normal working hours will, therefore, be different for each person and must be determined with reference to a particular employee’s terms and conditions of employment.
The no-value rule will only apply if the use outside of an employee’s normal working hours occurs “regularly”. The Concise Oxford Dictionary7 defines “regularly” to mean “done or happening frequently”. What constitutes regular performance of duties outside normal work hours is not standard and must be assessed on a case-by-case basis taking into account the particular job and its responsibilities. A motor vehicle that is only used occasionally outside normal work will not be frequent enough to constitute regular use.
7 Concise Oxford English Dictionary. Edited by Catherine Soanes, Angus Stevenson. 11th ed. rev. New York: Oxford University Press, 2006.
The onus rests on an employer to prove that the requirements for the nil value provisions have been met.

Example 12 – No value is placed on the private use of a company motor vehicle

Facts:
Y is employed by Superior Lift Maintenance Pty Ltd (Superior Lift Maintenance) as a lift engineer and lift maintenance expert. Y works 8am – 4pm, Monday to Friday, and is always on call after hours for emergency lift repairs. Superior Lift Maintenance has provided Y with the use of a company car as Y is regularly called out after normal working hours to conduct emergency lift repairs. Y uses the company car when attending to any work call.
Y is allowed to use the motor vehicle to travel between work and home and to park it at home when not using it for work. Y has a private motor vehicle for other private travel and the logbook indicates that Y rarely uses the company motor vehicle for any private travel (other than home to office and vice versa).

Result:
Y will not qualify for a nil value of private use under the provision discussed in 4.6.1 because the motor vehicle is not available to or used by employees in general and the motor vehicle is kept at Y’s home outside office hours.
However, Y may qualify for a nil value of private use under the provision discussed in 4.6.2 because the nature of Y’s duties regularly requires Y to go out to clients after normal work hours. Y’s private use is limited to travelling between work and home.

4.7 Consideration
“Consideration”, defined in paragraph 1, does not include any consideration in the form of services rendered by the employee. It would generally include any form of compensation, reimbursement, payment or recompense given by the employee to the employer for being given the right of use of the motor vehicle. The most common form of consideration involves a cash payment by the employee to the employer.

4.8 Employees’ tax
Taxable benefits are included as “remuneration” in the Fourth Schedule to the Act and are subject to the deduction of employees’ tax. In order to more closely align the travel allowance and company car taxation rules, the definition of “remuneration” in the Fourth Schedule to the Act was amended with effect from 1 March 2011 to include 80% of the cash equivalent of the taxable benefit as remuneration. This reduced inclusion for the right of use of a motor vehicle (previously 100% was included) takes into account potential adjustments for business travel on assessment for normal tax.
However, in the event that an employer is satisfied that at least 80% of the use of the motor vehicle during a year of assessment will be for business purposes, only 20% of the cash equivalent of the taxable benefit is included as remuneration and is subject to employees’ tax.
This does not mean that only a portion (80% or 20%, as the case may be) is subject to income tax. The full taxable benefit (that is, 100%) is potentially taxable when the employee or office holder submits an annual tax return and the employee is unable to claim sufficient reductions for business travel or the cost of the expenses borne. It is only for the purposes of employees’ tax that 80% or 20%, as the case may be, is subject to tax.
Employers that are satisfied that at least 80% of the use of the motor vehicle is for business purposes should include only 20% of the cash equivalent in “remuneration”. The word “satisfied” suggests that the employer must actively look into the facts of each employee’s circumstances and objectively weigh up and apply its mind to whether or not the employee would qualify.
Employers can satisfy themselves that employees will use their vehicles for at least 80% business use by –
• regularly reviewing employees’ logbooks which detail business and private travel; and
• taking into consideration changes in the role or function of the employee.

Example 13 – Determination of whether an employer can be satisfied that an employee will use the company car for business purposes at least 80% of the time

Facts:
M is employed by JKL (Pty) Ltd. In terms of M’s employment duties M is required to provide services to all of JKL (Pty) Ltd’s clients who are based in Gauteng. During the previous full year of assessment M maintained a logbook which disclosed the distance travelled as 61 015 km, of which 53 092 km were attributable to business travel. M and the financial director of JKL (Pty) Ltd agree that M’s functions will remain much the same during the current year of assessment.

Result:
Determination of expected percentage business travel:
53 092 km / 61 015 km = 87%
87% of M’s travel in the previous year of assessment was conducted for business purposes. As the logbook discloses more than four months of accurate data and M’s job profile and responsibilities are not expected to change, JKL (Pty) Ltd is likely to be satisfied that at least 80% of the use of M’s motor vehicle for the current year of assessment will be for business purposes.
Accordingly, only 20% of the cash equivalent of the value of the taxable benefit must be included in M’s remuneration for employees’ tax purposes. The full cash equivalent of the value of the taxable benefit will need to be included in M’s taxable income when submitting the tax return (subject to qualifying for any of the reductions discussed previously).

The method set out above is not the only method that an employer can use to assess whether an employee will travel more than 80% for business purposes. There may be other acceptable methods that an employer can use to satisfy itself of the 80% requirement based on the particular employee’s circumstances. SARS will, if applicable, consider whether other methods applied by an employee demonstrate that the employer did in fact properly apply its mind to the particular case. For example, with new employees or employees who change job positions, a prior year logbook may not necessarily be appropriate.
If employees’ tax has been withheld on 20% of the cash equivalent of the value of the taxable benefit and the circumstances change such that the employer realises that the employee will no longer use the vehicle more than 80% for business purposes, the inclusion rate must be adjusted to 80% immediately in the month that the circumstances change. The inclusion rate need only be adjusted from the month during which the employer reasonably became aware of the change in the employee’s circumstances and not for the entire year of assessment.
Paragraph 2(2) of the Fourth Schedule provides that an employer may, at the written request of any employee, deduct or withhold additional amounts of employees’ tax from an employee’s remuneration. This is relevant for employees who are concerned that they will not be able to claim a sufficient reduction for business use discussed in 4.5.2 or as a result of incurring the expenses discussed in 4.5.3 with the result that they may be burdened with an unexpected tax cash flow on assessment. Employees in this situation may request that the employer include 100% (or any percentage above 80%) of the cash equivalent of the value of the taxable benefit in their remuneration as opposed to the 80% required by legislation. Employees must submit the request in writing to the employer before the employer implements the increased employees’ tax withholding.
4.9 Sundry provisions

4.9.1 Transfer of employer’s rights and obligations under a lease
An employer is deemed to have granted an employee the right to use a motor vehicle if the employer leased a motor vehicle and subsequently transferred its rights and obligations under that lease to the employee. The deemed right of use arises on the date the rights and obligations were transferred to the employee and continues for the remainder of the period of the lease. The cash equivalent of the value of the taxable benefit is calculated as discussed above, however, it is noted that –
• any rentals becoming payable by the employee under the lease shall be deemed to be consideration payable by that employee for the said right, for example, if the value of private use of the motor vehicle amounts to R2 500 and the employee pays a monthly rental (under the lease) of R1 900, the value of private use to be included in the employee’s income will be R600 per month (R2 500 less R1 900);
• the determined value of the motor vehicle shall be deemed to be the retail market value at the time the employer first obtained the right of use of the motor vehicle under a finance lease or the “cash value” thereof under a lease contemplated in paragraph (b) of the definition of an “instalment credit agreement” (see 4.3.3); and
• if the employee acquires the motor vehicle at the end of the lease the employee may have received an additional taxable benefit (see 4.9.4).

4.9.2 Motor vehicle rented to the employer by the employee, his or her spouse or child – section 8(1)(b)(iv)
In circumstances when –
• a motor vehicle which is owned or leased by an employee, his or her spouse or his or her child (whether directly or indirectly by virtue of an interest in a company, trust or otherwise) has been let to the employer or an associated institution; and
• the employer then grants the right of use of that motor vehicle back to the employee concerned,
• the sum of the rental paid by the employer, plus any expenditure on the motor vehicle borne by the employer, will be deemed to be a travelling allowance in the hands of the employee.

In such a case –
• the deemed travelling allowance less the deductions permitted under section 8(1) must be included in the employee’s taxable income;
• the travel allowance is ‘remuneration’ in the hands of the employee and must be included in the monthly employees’ tax calculations;
• no deductions may be claimed against the rental income under the general deduction formula; and
• the motor vehicle is not treated as a company car in the employee’s hands.

4.9.3 Company car and travelling allowance in respect of the same motor vehicle
Generally, an employee who is granted a travelling allowance may claim a deduction for the portion of the allowance expended during the year of assessment for business purposes. The amount of the deduction is determined using actual costs or a deemed rate per kilometre.
A deduction is not, however, available when an employee is granted the right of use of the employer’s motor vehicle and a travelling allowance in respect of the same motor vehicle. In this situation the employee is not permitted to claim any deduction for business travel against the travel allowance. Any adjustments to taxable income must be made to the cash equivalent of the value of the taxable benefit of the company car under the business use reductions set out in 4.5.2.
The treatment of allowances and the allowable deductions are discussed in detail in Interpretation Note No. 14 (Issue 3) (20 March 2013).
4.9.4 Acquisition of an asset – paragraph 2(a) and 5(2)
In some circumstances, employers allow employees to acquire a motor vehicle that they previously had the right to use. Generally, should the disposal to the employee occur for no consideration or for consideration that is less than the market value of the motor vehicle, a taxable benefit will arise under paragraphs 2(a) and 5(2). Paragraph 2(a) applies when an employee acquires an asset from the employer, an associated institution or any person by arrangement with the employer.
The taxable benefit is equal to the value of the motor vehicle less any consideration paid by the employee. The value of the motor vehicle is equal to market value at the time it was acquired by the employee or if it was specifically acquired by the employer to dispose of to the employee then the cost thereof or if the employer is in the motor industry and the vehicle constitutes trading stock then the lower of cost or market value.
Any consideration paid by the employee for the use of that motor vehicle whilst it was a company car may not be offset against the taxable benefit arising on acquisition.

INTERPRETATION NOTE: NO. 72 (1 of 3)

INTERPRETATION NOTE: NO. 72
DATE: 22 March 2013
ACT : INCOME TAX ACT NO. 58 OF 1962 (the Act)
SECTION : PARAGRAPH 7 OF THE SEVENTH SCHEDULE TO THE ACT
SUBJECT : RIGHT OF USE OF MOTOR VEHICLE
CONTENTS
PAGE
Preamble ………………………………………………………………………………………………………………2
1. Purpose………………………………………………………………………………………………………2
2. Background ………………………………………………………………………………………………… 2
3. The law……………………………………………………………………………………………………….2
4. Application of the law……………………………………………………………………………………. 3
4.1 Taxable benefit……………………………………………………………………………………………. 3
4.2 Value of the taxable benefit …………………………………………………………………………… 3
4.2.1 Value of private use……………………………………………………………………………………… 3
4.3 Fixed percentage per month x determined value ………………………………………………. 4
4.3.1 Fixed percentage…………………………………………………………………………………………. 4
4.3.2 Per month……………………………………………………………………………………………………5
4.3.3 Determined value ………………………………………………………………………………………… 5
4.4 Vehicle held under an operating lease…………………………………………………………… 10
4.5 Reduction of the value of private use on assessment ………………………………………. 10
4.5.1 Right of use of more than one motor vehicle for private purposes ……………………… 11
4.5.2 Reduction for business use …………………………………………………………………………. 12
4.5.3 Reduction when the employee incurs expenditure in relation to the motor vehicle… 13
4.6 Circumstances under which the value of private use is deemed to be nil…………….. 17
4.6.1 Available for use by employees in general……………………………………………………… 17
4.6.2 Nature of employee duties…………………………………………………………………………… 18
4.7 Consideration ……………………………………………………………………………………………. 19
4.8 Employees’ tax ………………………………………………………………………………………….. 19
4.9 Sundry provisions………………………………………………………………………………………. 21
4.9.1 Transfer of employer’s rights and obligations under a lease ……………………………… 21
4.9.2 Motor vehicle rented to the employer by the employee, his or her spouse or child – section 8(1)(b)(iv) ……………………………………………………………………………………. 21
4.9.3 Company car and travelling allowance in respect of the same motor vehicle……….. 22
4.9.4 Acquisition of an asset – paragraph 2(a) and 5(2) …………………………………………… 22
5. Conclusion ……………………………………………………………………………………………….. 22
Annexure A – The law…………………………………………………………………………………………… 24
Annexure B – Extract of income tax regulation: Fixing of rate per kilometre in respect of motor vehicles for the purposes of section 8(1)(b)(ii) and (iii) with effect from 1 March 2012……………………………………………………………………………………………………………………29
Annexure C – Extract from the Value-Added Tax Act No. 89 of 1991……………………………. 30

Preamble
In this Note unless the context indicates otherwise –
• “employee” includes the holder of any office; and
• “paragraph” means a paragraph of the Seventh Schedule to the Act;
• “section” means a section of the Act;
• any word or expression bears the meaning ascribed to it in the Act.

1. Purpose
This Note provides guidance on the income tax consequences that arise for an employee when an employer (or an associated institution in relation to an employer) grants that employee the right of use of a motor vehicle, commonly known as a “company car fringe benefit”, with specific reference to the latest legislative amendments to the Fourth and Seventh Schedules to the Act.

2. Background
Employers often grant employees a travelling allowance or the use of an employer-provided motor vehicle (or both) by virtue of the employees’ employment, as a reward for services rendered by the employees or due to the employees’ duties. The right of use of a motor vehicle provided by an employer to an employee for private or domestic purposes is regarded as a taxable benefit in the hands of the employee. The value of this benefit is included in the employees’ gross income under paragraph (i) of the definition of “gross income” in section 1(1).
Paragraph 2(b) read with paragraph 7 deals with the cash equivalent of the value of this taxable benefit.
The latest legislative changes to employer-provided motor vehicles (company cars) are effective from 1 March 2013 and are applicable to years of assessment commencing on or after that date (that is, from the 2014 year of assessment).

3. The law
For ease of reference, the relevant sections of the Act relating to the taxation of the company car fringe benefit are quoted in Annexure A.

4. Application of the law

4.1 Taxable benefit
A taxable benefit arises when an employer, or associated institution in relation to the employer, has granted an employee the right of use of a motor vehicle1 for private or domestic purposes and such use has been granted –
1 A “motor vehicle” includes a motor cycle.
2 See 4.4 for a definition of an “operating lease”.
• free of charge; or
• for a consideration payable by the employee which is less than the value of the private or domestic use.

For a taxable benefit to arise the employee must have been given the right to use the company car for private or domestic purposes. The absence of such private use means a taxable benefit does not arise.
Private use includes travelling between the employee’s place of residence and place of employment unless the employee is a “Constitutional Court judge” or a “judge”, as defined in section 1 of the Judges’ Remuneration and Conditions of Employment Act, 2001. Travel by Constitutional Court judges and judges between their home and the court over which they preside is deemed to be business travel for a state-owned vehicle.
Interpretation Note No. 14 (Issue 3) “Allowances, Advances and Reimbursements” (20 March 2013), discusses and provides examples of what constitutes business travel and private travel. The same principles apply to distances travelled in company cars.
An employee will be deemed to have been granted a taxable benefit if as a result of the employee’s employment, the employer directly or indirectly grants a relative of the employee or another person a benefit, which if granted directly to the employee would have constituted a taxable fringe benefit. In this Note a benefit granted to an employee will include direct and indirect benefits falling within this category.

4.2 Value of the taxable benefit
The cash equivalent of the value of the taxable benefit, which is included in gross income, is equal to:
Value of private use less any consideration given by the employee to the employer for the private use (excluding any consideration given for the cost of licences, insurance, maintenance or fuel)

4.2.1 Value of private use
The value of private use is equal to –
• where the vehicle is held by the employer other than under an “operating lease”:2

Fixed percentage per month x the determined value of the motor vehicle

OR

• where the employer holds the vehicle under an “operating lease”:

Actual cost incurred under the operating lease + cost of fuel incurred on the same vehicle
These aspects are examined in more detail below.

4.3 Fixed percentage per month x determined value

4.3.1 Fixed percentage
The fixed percentage is generally 3,5% per month. However, the fixed percentage may be reduced to 3,25% of the determined value per month if the motor vehicle was the subject of a maintenance plan when it was acquired by the employer.
A maintenance plan is –
• a contractual obligation undertaken by the provider in the ordinary course of trade with the general public;
• to underwrite the costs of all maintenance of that motor vehicle (other than top-up fluids, tyres or abuse of the motor vehicle);
• for a period of at least three years or a distance of 60 000 kilometres, whichever comes first.

In order for the fixed percentage to be reduced, the maintenance plan must commence at the same time that the motor vehicle is acquired by the employer. A motor vehicle is not the subject of a maintenance plan if the maintenance plan is either a top-up or an add-on plan that was taken out after the acquisition of the motor vehicle. In these circumstances the rate of 3,5% must be used.

Example 1 – Value of private use if maintenance plan is included

Facts:
Employer XYZ grants the right of use of a motor vehicle to its employee from 1 March 2012. The employer purchased the motor vehicle for R250 000 (including VAT). XYZ was not entitled to an input tax claim for the VAT. The motor vehicle comes standard with a maintenance plan at no extra charge. The employee pays R500 per month for the use of the motor vehicle.

Result:
The “determined value” of the motor vehicle is R250 000.

The monthly value of private use is R250 000 x 3,25% R 8 125
Less: Consideration paid by employee for benefit R (500)
Cash equivalent of the value of the taxable benefit per month: R 7 625

The rate does not increase to 3,5% once the maintenance plan expires, but remains at 3,25%.

4.3.2 Per month
The value to be placed on the private use of a motor vehicle is determined for each month or part of a month during which an employee was entitled to use the motor vehicle for private purposes. A “month” is defined in paragraph 1 as any of the 12 portions into which any calendar year is divided.
An employee, who only had the use of a motor vehicle for part of a month, must apportion the private value according to the number of days that the employee had the use of the motor vehicle. For example, if an employee is first granted the right to use a motor vehicle in the middle of a month (for example, 15 June), the value of private use must be based on the total number of days that the employee had the right to use that motor vehicle. In other words, 15 days in June divided by the total number of days in that month, that is, 30 days.
The value of private use of the motor vehicle may not be reduced if, for whatever reason, the employee does not temporarily use the motor vehicle for private purposes.

Example 2 – Temporarily not used for private purposes

Facts:
Employee Z has the use of a company car. During the 2013 tax year, Z had a serious car accident and did not drive the motor vehicle for three months while it was being repaired and while Z was recovering from injuries. During the three-month period the motor vehicle was parked in the office garage for part of the time and at Z’s house for part of the time.

Result:
The three-month period represents a period when Z temporarily did not use the motor vehicle for private purposes. The value of private use for those months may not be reduced to take account of the period when Z did not use the motor vehicle.

Example 3 – Temporarily not used for private purposes

Facts:
Employee Z, who lives and works in Johannesburg, has the use of a company car. Z goes to Kenya for two months and had to return the company car to the employer for use by other employees during the two-month absence.

Result:
During the two-month period, Z did not have the right of use of the motor vehicle because the benefit was given to other employees. The fringe benefit ceases for the period Z is away.

4.3.3 Determined value
“Determined value” in relation to a motor vehicle means –
• the original cost to the employer (excluding any finance charge or interest payable) if the motor vehicle was acquired under a bona fide agreement of sale or exchange concluded between parties acting at arm’s length;
• the “cash value”3 of the motor vehicle if the motor vehicle is or was held under a lease contemplated in paragraph (b) of the definition of “instalment credit agreement”;4
• the retail market value of the motor vehicle (at the time the employer first obtained the right to use the motor vehicle) if the motor vehicle was held or held and then acquired by the employer under any other lease (other than an “operating lease”); or
• the market value of the motor vehicle at the time when the employer or associated institution first obtained the motor vehicle or the right of use thereof, if the motor vehicle was acquired or held in any other case.

The original cost includes the cost of add-on items, for example, tow bars, media players, air conditioners, smash-and-grab window tinting and security alarms. The original cost does not include the cost of insurance products such as the monthly service fee for vehicle tracking or roadside assistance.
With effect from 1 March 2011, any VAT borne by an employer must be included in the determined value of the motor vehicle. Any determined value calculation performed after 1 March 2011 will include VAT borne by an employer even if the motor vehicle was acquired before 1 March 2011 and irrespective of the fact that, if applicable, the determined value calculation for previous months did not include VAT. ‘Borne’ means that if VAT was applicable the employer was not entitled to an input tax credit for the related VAT. The VAT component must, however, be excluded if the employer was entitled to a deduction of VAT input tax, for example, if the employer is a car dealer that is a registered VAT vendor.
The determined value of the motor vehicle is reduced when the employee is first granted the right of use of the motor vehicle 12 months or more after the employer first acquired the motor vehicle or the right of use thereof. The reduction is by means of a depreciation allowance of 15% according to the reducing-balance method for each completed 12-month period from the date the employer acquired the motor vehicle.

Example 4 – Depreciation allowance

Facts:
An employer, Company XYZ, purchased a motor vehicle for R228 000 (VAT inclusive) on 1 January 2010. An employee who subsequently resigned initially used the motor vehicle. The right of use of the motor vehicle was then granted to another employee, A, on 1 April 2012. Company XYZ was not entitled to a VAT input tax credit on the acquisition of the motor vehicle.

Result:
The “determined value” to be used to calculate the value of the taxable benefit is the original cost to the employer (including VAT) less a depreciation allowance of 15% on the reducing balance method for each completed year that Company XYZ had the motor vehicle. The determined value is calculated as follows:

Original cost on acquisition incl. VAT (1 Jan 2010) R 228 000
Less: Depreciation allowance: 1 Jan 2010 to 31 Dec 2010 R (34 200)
(R228 000 x 15%)
R 193 800
Less: Depreciation allowance: 1 Jan 2011 to 31 Dec 2011 R (29 070)
(R193 800 x 15%)
R 164 730
Adjusted “determined value” R 164 730

The determined value is not adjusted for depreciation in the 2012 calendar year because the requirement of a completed 12-month period was not met (only three months were completed).
VAT is included in the determined value calculation as from 1 March 2011 even though the motor vehicle was purchased before that date because the employer was not entitled to a VAT input tax claim at the time of purchase. For purposes of calculating the determined value, VAT is included in the cost of the motor vehicle and is also subject to the depreciation allowance.
A motor vehicle that was acquired by an employer from an associated institution in relation to that employer retains its original determined value if the employee concerned had, before the acquisition, enjoyed the right of use of that motor vehicle. The “original determined value” is the determined value that was calculated when the employee first obtained the right of use of the motor vehicle. The effect of this provision is that the value of private use included in the employee’s gross income will not change.

Example 5 – Employee and motor vehicle both transferred

Facts:
Company ABC is an associated institution in relation to Company DEF. Company ABC acquired a motor vehicle (at a cost of R250 000, including VAT) on 1 March 2010 and immediately granted the right of use of this motor vehicle to its employee, T. Company ABC was not entitled to an input tax claim for the VAT. On 1 June 2012, T was transferred to Company DEF together with this motor vehicle which Company DEF acquired from Company ABC for R140 000.

Result:
The “determined value” for Company ABC at the date T first obtained the right of use of the motor vehicle was R250 000 (adjusting for the inclusion of VAT as required from 1 March 2011). The determined value will remain R250 000 for Company DEF because T previously enjoyed the use of the motor vehicle under Company ABC, which is an associated institution in relation to Company DEF.

Original cost to the employer
Employees of dealers in new and used motor vehicles and employees of employers in the motor vehicle rental industry may use several “company motor vehicles” over short periods. In these circumstances, as an alternative to determining the actual cost of the particular motor vehicle used during each period, SARS will accept that the cost of the motor vehicle is equal to the average cost of all stock in trade or rental vehicles on hand at the end of the immediately preceding year of assessment of the employer. The method of calculating the average cost must be appropriate to the dealer’s circumstances. For example, if the dealer sells new and used motor vehicles but employees only have the use of new motor vehicles or only have the use of used motor vehicles then it may be appropriate to have an average cost for new motor vehicles or an average cost for used motor vehicles.
The average cost of a motor vehicle may not be used if a specific employee is granted the right of use of a specific motor vehicle or if the right of use of a motor vehicle has been granted to a specific employee as a reward for performance or a motivational tool. SARS is of the view that an employee, who has been granted the right of use of a motor vehicle for a period of time which is not considered to be short, will have been granted the use of a specific motor vehicle.
The facts of each case must be considered in deciding whether the period that the employee has the use of a particular motor vehicle is short.

Example 6 – Motor vehicles used by employees of dealers

Facts:
Z Cars (Pty) Ltd (Z Cars) has a pool of demo vehicles that are used to take potential customers for test drives. In addition, the pool demo vehicles are generally available to and are used by all employees all the time.
Employees do not have the dedicated use of a particular demo vehicle and use whichever motor vehicles are available. They accordingly use a variety of motor vehicles over a short period. Salesperson X, for example, uses on average three different motor vehicles in a month.
In addition to its standard and luxury motor vehicle range, Z Cars recently entered the superior luxury market and sells a top brand sports car. The sports car is not part of the pool of demo vehicles. Salesperson Y was, however, awarded the right of use of a sports car for a month as a reward for being the salesperson with the highest total sales value in February 2013.
One of Z Cars’ top branch managers, Manager A, does not like potential daily motor vehicle changes and is granted permission to use a pool demo vehicle for a month before rotating it with another pool demo vehicle. Z Cars agreed that Manager A could rotate motor vehicles he uses on a monthly basis because he is their top manager and Z Cars wants to retain Manager A’s services.

Result:
Z Cars may use the average cost method for calculating the determined value for Salesperson X because the motor vehicles Salesperson X uses are part of the pool of demo vehicles which are available to and used by all employees all of the time.

In relation to Salesperson Y’s right of use of the sports car, the determined value will be equal to the actual cost of the motor vehicle because Salesperson Y was awarded the dedicated use of the sports car for a month as a reward for performance.
In relation to Manager A the determined value will also be equal to the actual cost of the motor vehicle because under the circumstances the one month period is considered to be of sufficient duration to constitute the granting of the right of use of a specific motor vehicle to a specific employee.
Cost for Z Cars excludes VAT as Z Cars is a motor dealer and will be entitled to a VAT input tax claim on motor vehicles purchased from manufacturers.
In the past, manufacturers of motor vehicles have been permitted to use the cost of manufacture as the determined value of a motor vehicle. Manufactured motor vehicles are, however, not acquired under an agreement of sale or exchange. Accordingly, the determined value of a manufactured motor vehicle will be equal to the market value of the motor vehicle at the time the employer first obtained the right to use the motor vehicle. This paragraph takes effect from the date of this Note.
SARS will accept the “Dealer Billing Price” of the motor vehicle as the market value of the vehicle in the case of manufacturers of motor vehicles.
In certain circumstances, an employee may make a contribution towards the cost of a motor vehicle. For example, an employer may place a limit on the cost price of the motor vehicle but allows the employee to select a motor vehicle that exceeds that limit on the basis that the employee contributes the difference between the full cost price of the motor vehicle and the limit set by the employer. In these circumstances when determining “the original cost to the employer”, the employer may deduct the employee’s contribution from the full cost price of the motor vehicle.
In the context of determined value, “cost to the employer” is only relevant when the employer acquired the motor vehicle under an agreement of sale or exchange. In all other situations, the determined value is equal to either the “retail market value”, the “cash value” or the “market value” of the motor vehicle. The determined value may not be reduced by any contribution paid by the employee towards the cost of the vehicle.
Use of the same vehicle by more than one employee
The grant of a right to use a motor vehicle is the fringe benefit that is subject to taxation. An employer who allows more than one employee to use the same motor vehicle for private or domestic purposes is granting each of the employees a right to use the vehicle. Each employee must therefore be taxed on the full value of the benefit as calculated under 4.3 or 4.4 (assuming the no value rules in 4.6 do not apply).
4.4 Vehicle held under an operating lease
The number of vehicles held by employers under “operating leases” has increased.
An “operating lease” relates to moveable property and is defined in section 23A. In order for a vehicle lease arrangement to constitute an “operating lease” the lease arrangement must contain the following elements:
• The employer must lease the vehicle from a lessor in the ordinary course of the lessor’s business (not being a banking, financial services or insurance business);
• The vehicle must be available to lease to the general public for a period of less than a month;
• The costs of maintaining the vehicle (including any repairs to the vehicle necessary due to normal wear and tear) must be borne by the lessor; and
• Subject to the claim a lessor may have against a lessee for failing to take proper care of the vehicle, the risk of loss or destruction of the vehicle must not be assumed by the lessee.

Any lease which does not satisfy these requirements (for example, a “finance lease”) is not an “operating lease”, as defined.
The value of private use of a vehicle which is held by the employer under an “operating lease” and which was concluded by parties who are not connected persons and who transacted at arm’s length is –
• the actual cost incurred by the employer under the operating lease; and
• the cost of fuel in respect of that vehicle.

In circumstances where the above-mentioned requirements are not met, the fixed percentage per month of determined value method must be used to calculate the value of private use (see 4.3).

The following is knowledge that has been shared from Rhona van Taak on previous TERS (Temporary Employee Relief Scheme) queries

TERS (Temporary Employee Relief Scheme)
TERS benefit is a benefit payable under the UIF Act, and will thus qualify for exemption under section 10(1)(mA) of the Income Tax Act, and is therefore not subject to the deduction of PAYE, SDL or UIF.

The employer is ONLY an intermediary who receives the benefit NOT for its own beneficial use, but for the beneficial use of its employees, so there is no “received” for gross income purposes in the hands of the employer (no accrual either), and there is therefore no obligation for the employer to issue or include the benefit on an IRP5/IT3(a) certificate.

No new IRP5 code or payroll code is therefore required for purposes of the COVID 19 TERS benefit due to the fact that the employer ONLY acts as an intermediary and that these benefits is NOT remuneration.

As it is not remuneration, it is not part of the remuneration figures reported for UIF purposes.

The following is knowledge that has been shared from Rhona van Taak on previous VAT (Value Added Tax) queries

VAT (Value Added Tax)

VAT on company vehicles

Interpretation Note 72 states that any VAT borne by the employer must be included in the determined value of the vehicle. It goes further by explaining what VAT borne means… by saying that if VAT was applicable the employer was not entitled to an input tax credit for the related VAT.
It further stats that the VAT component must be excluded if the employer was entitled to a deduction of VAT input tax (registered VAT vendor).

This means that if the employer (VAT vendor) bought a bakkie that qualifies for input VAT credit, then the determine value will exclude the VAT.
If a non-VAT vendor bought this bakkie, he did not claim the input VAT credit, therefore, the determine value will include VAT.

In other words, if he borne the VAT, he would not claim it as input VAT credit. If he claims it as input VAT credit, he did not borne the VAT.

Even with wear and tear deductions, the value to be used is excluding VAT if the VAT was not borne by the employer and vice versa.

The following is knowledge that has been shared from Rhona van Taak on previous UIF (Unemployment Insurance Fund) queries

UIF (Unemployment Insurance Fund)

Payment of contributions

Section 8 and 9 of the Unemployment Insurance Contributions Act, prescribed to the employer to which Commission he is obliged to pay the UIF monthly contribution.

Section 8 prescribed that if the employer is registered at SARS for payroll taxes, then such employer is obliged to pay the UIF contribution to SARS monthly by using the process associated to the EMP201 monthly return.

Section 9 prescribed that if the employer is not registered at SARS for payroll taxes, has not registered voluntarily at SARS for said taxes and is not liable for SDL, such employer is obliged to pay the UIF contribution to UIF Commissioner monthly.

Furthermore, section 8(3) and 9(4) both prescribed that if the employer has made the UIF contribution payment to either SARS or UIF Commissioner incorrectly, that he must be refunded.

Therefore, as a result of the above, the UIF contributions should be made to the relevant authority prescribed in section 8 and 9. Where the contribution was made in error to the incorrect authority, the situation should be corrected by declaring the correct UIF contribution amount to the corrected authority.
This action would then result in penalties and interest being levied by the authority for the late payment of the contribution, however, a request for the waiving of this penalties and interest must be made with the proof that the contribution was originally paid to the incorrect authority.
Furthermore, the incorrect authority should be requested to refund the UICF contributions paid incorrectly to them to the employer.

The UIC Act does not give the employer any permission to pay UIF where the employer was obliged to pay SARS.

In terms of the Unemployment Insurance Act (not the Unemployment Insurance Contributions act), the employer must also register at UIF for purposes of section 56 of that Act:

56. Information to be supplied by employer.—
(1) Every employer must, as soon as it commences activities as an employer, provide the information referred to in subsection (2) regarding its employees to the Commissioner, irrespective of the earnings of such employees.
(2) The information contemplated in subsection (1) must—
(a) include the street address of the business, and any of its branches, of the employer;
(b) if the employer is not resident in the Republic, or is a body corporate not registered in the Republic, include the particulars of the authorised person who is required to carry out the duties of the employer in terms of this Act; and
(c) include the names, identification numbers and monthly remuneration of each of its employees, and must state the address at which the employee is employed.
(3) Every employer must, before the seventh day of each month, provide the Commissioner with all information for the previous month in terms of subsection (1).
(3A) The Minister will issue regulations on a special dispensation applicable to domestic employers and small businesses or enterprises regarding the submission of information in subsection (3).
(4) The Commissioner may request the employer to provide such additional particulars as may reasonably be required to give effect to the purpose of this Act within 30 days of the request, or within such extended period as the Commissioner may allow.

Therefore, if you are obliged to pay UIF to SARS, you are still obliged to register for UIF declaration purposes at UIF as per section 56 above.

Furthermore, in terms of section 10(2) of the Unemployment Insurance Contributions Act, the Minister has made a regulation that employers must submit information of their employees to the UI Commissioner on a monthly basis (irrespective of where the employer is obliged to register for UIF purposes). This regulation was published in Government Gazette Notice No. 23651 (R987) dated 19 July 2002).

UIF claim when retire

An employee who has contributed towards UIF and is obligated to retire at the age of 65 are eligible to claim UIF.

Should such an employee re-enter the employment market after retirement, such employee will again be obligated to contribute towards UIF.

The Unemployment Insurance Contributions Act, does not provide an exemption for previous retired employees or due to age.

Remuneration

In order to explain this, we have to look at the legislation.

Worked or employed is not part of the criteria of determining whether a person is an employee. The only component that must be determine is whether or not such a person receive remuneration. If such a person received remuneration he/she is defined as an employee in terms of the relevant Acts.

An employee is defined in the Unemployment Insurance Contributions (UIC) Act as:
“employee” means any natural person who receives any remuneration or to whom any remuneration accrues in respect of services rendered or to be rendered by that person, but excludes an independent contractor

This means that whether or not they worked for the company, if they receive remuneration as defined, then they are an employee.

Remuneration is defined in the UIC Act as:
“remuneration” means remuneration as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act, but does not include any amount paid or payable to an employee

This definition basically refers you to the definition in the Fourth Schedule which is:
“remuneration” means 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, including-….

This means, if you pay a person an allowance for services (attending of meetings, etc.), such an allowance is remuneration as defined and such a person is an employee as defined due to the fact that such a person are paid remuneration.

Therefore, if the person is employed for more than 24 hours a month, UIF is deductible from the remuneration so paid. The word employed is referred to in the UIC (Unemployment Insurance Contributions) Act and not physical working hours. This is the main reason why you need to have an employment contract stipulating what the hours are than an person is employed for any specific month/period.

The dictionary definition of employed means to hire or engage the services of a person. By using family members to attend meetings, the company are engaging the services of such members.

In terms of the provisions of the UIC Act and the Fourth Schedule, the person does not have an option to elect whether or not to be an employee as defined in the relevant definition of the Act, therefore, the statement that “the persons do not want to be regarded as employees is not a fact that can be taken into consideration as the Act is clear on when it is defined as an employee.

Mutual separation agreement court cases

A growing trend of terminating the employment relationship is the conclusion of a mutual separation agreement (“MSA”), which envisages the termination of employment by mutual consent between the employer and the employee. This is neither a resignation, nor a dismissal. In his book entitled Workplace Law 8 ed (Juta Cape Town 2005) at pages 84 and 85, Professor John Grogan remarked as follows regarding this form of termination of employment:

“Just as the consensus of the parties brings the employment contract into existence, so too consensus may end a contract… [this] does not constitute a dismissal for the purposes of the common law or the LRA.”

Section 16(1)(a) of the Unemployment Insurance Act 63 of 2001 (the “UIA”) provides that a contributor is entitled to claim unemployment benefits only for the reason for the unemployment due to termination of a fixed term contract, dismissal or insolvency. Since the termination of employment in terms of an mutual separation agreement does not constitute dismissal, does it then mean that the employee cannot claim unemployment benefits? This issue was brought before the Labour Court in the recent case of Swanepoel v KPMG Services (Pty) Ltd (J494/19) [2021] ZALCJHB 457.

The facts, briefly, of the Swanepoel matter are that Swanepoel was terminated in terms of an MSA as a means to avoid potential disciplinary process for his poor work performance. His employer, KPMG, recorded “involuntary resignation” as reason for termination on his UI19 form, whereupon which Swanepoel approached the Labour Court to compel KPMG to amend the reason for termination on his UI19 form to ‘retrenchment’, to enable him to claim unemployment benefits.

The court scrutinised the background and wording of the MSA and concluded that it was clear that the contract of employment terminated on a mutual basis. The court further referred to section 64(1) of the UIA which stipulates that it is a criminal offence for employers to misrepresent the nature of the reason for termination in order to assist the employee in qualifying for the fund benefits, and that Swanepoel was asking the court to compel KPMG to commit the said criminal act. The court made it clear that it cannot compel an employer to commit a criminal offence by way of such misrepresentation and concluded that it lacked jurisdiction to adjudicate the matter.

The Labour Court dismissed Swanepoel’s claim, holding that it was ill-conceived and unjustified. Notably, the court observed that KPMG’s recordal of “involuntary resignation” of Swanepoel’s UI19 also constituted false entry and, consequently, a criminal act in terms of section 64.

This decision not only serves as a caution to employees seeking to enjoy unemployment insurance benefits consequent to termination of employment in terms of an MSA but also to employers against misrepresenting the true reason for termination.

The following is knowledge that has been shared from Rhona van Taak on previous SDL (Skills Development Levy) queries

SDL (Skills Development Levy)

SDL Deregistration

Where the employer determines that his total remuneration paid to all employees will not exceed R500 000 for the following 12 months, the employer is exempt from paying SDL for the relevant periods. This means that the employer need to complete a 0.00 in the SDL field on the monthly EMP201 returns.
4. Exemptions.—The levy is not payable by—
(b) any employer where section 3 (1) (a) or (b) applies and during any month, there are reasonable grounds for believing that the total amount of remuneration, as determined in accordance with section 3 (4), paid or payable by that employer to all its employees during the following 12 month period will not exceed R500 000;

However, it is not recommended to deregister for SDL if the employer is not certain that the business will not exceed this limit for the following few years.
However, if the employer is sure that the threshold will not be reach in the coming years, the employer/representative can visit the SARS branch to request a deregistration of SDL.
According to the information available at SARS, the representative must visit the SARS branch, to request the deactivation of the payroll taxes.

The following can be found in paragraph 28.1 by using the link ; https://www.sars.gov.za/wp-content/uploads/Ops/Guides/GEN-REG-01-G04-How-to-Complete-the-Registration-Amendments-and-Verification-Form-RAV01-External-Guide.pdf

Click on the details on the right-hand side which will open the registration details for the payroll taxes.
Click on the deactivate block next to the SDL tax type.

The following is knowledge that has been shared from Rhona van Taak on previous EMP501 Reconciliations queries

RECONCILIATIONS

IRP5 cancel or removal from EMP501 reconciliation
In order to remove the IRP5 from the reconciliation, you need to
• cancel the specific IRP5 (which will remove the IRP5 from the totals of the IRP5; AND
• adjust the (PAYE, UIF and SDL) liabilities on the EMP501 for each month to reduce it with the amounts relating to the specific IRP5

When this cancellation and adjusted EMP501 is then submitted to SARS, SARS will adjust the employer account accordingly (the new liabilities on the EMP501). This will result in a credit in the specific months (if the amounts were paid over by SARS).
The credit will result in an unallocated payment which can be utilised in future months.

Process: SARS processing the EMP501
The PAYE reconciliation is a final declaration in terms of the PAYE, SDL and UIF liabilities of the employer.

The declaration part of the EMP501, indicates that the employer submitting the EMP501 accepts liability for any differences between the monthly EMP201 submitted and this EMP501 reconciliation.

During the processing of the EMP501 submitted by the employer, SARS will compare the PAYE, SDL and UIF liabilities declared on the EMP501 to the SARS employer account liabilities. If it is found to be different a reconciliation assessment will be raised on the employer account to match the final liabilities declared.

In cases where the employer has not submitted an EMP201 monthly return for any period, SARS will create a EMP201 return with a liability declared on the EMP501. This return will be created as a “Recon declaration” in the statement of account.

This means that although the employer has not submitted a EMP201 monthly return, the EMP501 return will correct the situation. Furthermore, if the employer has not made any payments in terms of these liabilities, the employer account will be part of the normal collection process in SARS.

As soon as an EMP501 reconciliation was submitted to SARS, the SARS system locks the EMP201 returns and no revise EMP201’s can be requested to correct any liability amounts declared on these EMP201’s.

In order to correct the liability amounts for PAYE, UIF and SDL in relation to a period for which an EMP501 reconciliation return was submitted, the employer must submit a revised EMP501 reconciliation return with the corrected liabilities as well as the IRP5 tax certificates.

In cases where the PAYE Statement of account reflects unallocated payments, the user may request the SARS processing centre to allocated these payments against the debits on the account.

You need to send an Email or fax one of SARS centres (depending on the area in which the business is located).

The following is knowledge that has been shared from Rhona van Taak on previous Deductions and Employers Contributions towards Deductions Tax Law queries

TAX LAW: DEDUCTIONS AND EMPLOYERS CONTRIBUTIONS TOWARDS DEDUCTIONS

Donations

Only payments made to a section 18-A-approved organization will be allowed as a deduction from taxable income if such donation is supported by the necessary section 18A receipt issued by the organization to whom the donation is made.

It must be noted that although the payment made by the employee may exceed the allowable deduction of the donation in terms of paragraph 2(4), the full amount of the donation deducted and paid over the organization must be reflected on the IRP5 and not only the allowable portion of the payment made. This is only done if the section 18A requirements are met and the donation is allowed by the payroll against the remuneration of the employee before the determination of employees’ tax.

Home office expenses

Certain home office expenditure could be claimed under section 11(a) of the Act, subject to section 23(b) and (m). For more detail, please refer to SARS’s guidance in Interpretation Note 28 “Deductions of Home Office Expenses Incurred by persons in Employment or Persons Holding an Office”.

Section 23(b) has two provisos, called proviso (a) and proviso (b) to section 23(b). Proviso (b) deals with employment, and it is split into 2 categories. I have quoted the proviso below so that it is easier to reference:
“Provided that –
(a) …
(b) no deduction shall in any event be granted where the taxpayer’s trade constitutes any employment or office unless—
(i) his income from such employment or office is derived mainly from commission or other variable payments which are based on the taxpayer’s work performance and his duties are mainly performed otherwise than in an office which is provided to him by his employer; or
(ii) his duties are mainly performed in such part;”

Proviso (b)(i) and (b)(ii) are separated by “or”. This means that (i) and (ii) are alternatives, they do not both need to be satisfied in order to satisfy the proviso: meeting either one of them will suffice to meet the requirement of “unless” in the introductory words of proviso (b).

Proviso (b)(i) deals with employees who earn mainly (more than 50%) commission, they may claim a home office deduction if their duties are mainly performed outside of an office provided by the employer. This scenario would cater for the likes of, for example, commission-earning travelling salesmen who work out of their car, or commission-earning IT consultants who spend most of their time at their clients. They do not have to render services mainly at the home office.

Proviso (b)(ii) deals with an employee whose duties are performed mainly (more than 50%) in a home office. This category does not need to be mainly commission earners, the test is simply a factual test of whether any employee actually worked more than 50% of the year out of a home office. It can apply to ordinary salary earners. However, the deductions are limited in terms of section 23(m) to rental, repairs and expenses relating to the dwelling house/premises and wear-and-tear allowances.

The test that an employee mainly worked from a home office during a year of assessment, is an objective factual test which the employee must prove on a balance of probabilities. An employment contract requiring the employee to work from home may assist an employee in satisfying the burden of proof, but it would not be conclusive proof that the employee did in fact work from home. A letter from the employer confirming that this was the case for a specific employee may also assist, but factors such as type of job, etc. may also play a part.
This means that the employee who does not earn mainly commission needs to be working from home more than 50% during the year of assessment.

Proviso (a) deals with the general requirements that need to be satisfied in order to qualify for any home office deduction. These are dealt with in the Interpretation Note and so I won’t repeat them here.

The limitation prescribed in section 23(m) of the Income Tax Act, clearly indicate that a deduction will be limited unless the remuneration is MAINLY in the form of commission based on sales or turnover attributed to the individual.

The work “mainly” used in this section means more than 50% of the total income of the individual. Therefore all income must be added together in order to determine if the commission portion of the income exceeds 50% of the total.

Although the above limitation will be applicable, the salary only individual will be allowed to claim certain home office expenses.

SARS has updated their Interpretation Note 28 on 14 May 2021 to explain the salary only employee expenses related to a home office.

The limitation of section 23(m) will be applicable to salary only employees which means that they would only be able to claim rental, wear-and-tear, etc. under section 11.

However, in order to claim the allowable expenses, certain criteria must be met, namely:
• Must be occupied for purpose of trade;
• Must be specifically equipped for purpose of trade;
• Must be regularly and exclusively used by the employee ONLY for purpose of the trade (if spouse or children use the same area, it will disqualify)
• Duties must be mainly (50%+) performed in that space in the private premises

The office claim will then be apportionment by calculating the office space in relation to the total area of the private premises.

On page 13 of the Interpretation Note, an example is provided to give the reader a clear idee of what expenses may be claimed by the salary only employee if all the qualifying criteria (as in bullets above) is met.

Medical Aid late joiner fees
The term “fees paid” in the context of section 6A(2)(a) of the Income Tax Act, is wide enough to include medical aid later joiner penalties and would therefore be treated as a contribution to the Medical Scheme.

Medical tax credit (MTC)

An employer has an obligation in terms of paragraph 2(4) of the Fourth schedule to the Income Tax Act, to allow the applicable medical tax credits when calculating the PAYE deductible.

The IRP5 codes relating to medical contributions, are as follow:
• Code 4005 = employee contributions as well as deemed contributions made by the employer (code 3810)
• Code 4474 = employer contributions made for an employee which will result in a fringe benefit
• Code 4493 = employer contributions made for an retired employee which will NOT result in a fringe benefit (no value)
• Code 3810 = medical contribution fringe benefit
• Code 4116 = medical tax credit(MTC) – (depending on number of dependants on the medical scheme)
• Code 4120 = additional medical tax expenses if employee is 65 years and older
• Code 4025 – medical contributions allowed as a deduction for PAYE purposes

Assuming that the employer is not paying any portion to the medical scheme, the applicable codes for this employee, will then be 4005, 4116, 4120 and 4025

In terms of paragraph 2(4), the employer must calculate the additional medical tax expenses, as follows:
33,3% of the fees paid by the person to a registered medical scheme (or similar qualifying foreign fund) as exceeds three times the amount of the MTC to which that person is entitled

This calculation will then be added to code 4025 and 4120

If the employer is also contributing, it will mean that codes 4474/4493, 3810 (if applicable) will also be reported.

Section 6A of the Income Tax Act does not limit the medical tax credit ‘rebate’ to the medical contributions made by the taxpayer. However, the income tax brochure (IT-BR009) states that the ‘medical tax credit’ is not refundable and cannot exceed the tax liability.

In terms of Section 6A of the Income Tax Act, the taxpayer only qualifies for medical tax credit if the contributions is made to a MEDICAL SCHEME registered under the Medical Schemes Act. Therefore, in order to determine if it qualifies, you need to check whether the scheme is registered in terms of the Medical Schemes Act.

The Income Tax Act does not limit the medical tax credit to the medical contributions made by the taxpayer. This means that even if the taxpayer paid a total contribution of R10 per month (R120 per annum), the full medical tax credit per month for the taxpayer only should be allowed against his normal tax liability. This medical tax credit rebate is limited in terms of section 6A to the normal tax liability. This means that if it exceeds his normal tax liability, the rebate will only be allowed to such an extent that no normal tax is payable (i.e. zero tax result).

If an employee is employed for a part of a month, he is eligible for the MTC value for the full month.
The value of the MTC that is actually applied against employees’ tax for the year must be reported against the new code 4116.

In other words, in respect of a ‘short’ month (i.e. the employee was not employed for the full month):
• For monthly PAYE calculations, the full value of the MTC is allowed to reduce PAYE in the ‘short’ month.
• The full value of the MTC for that month is accumulated for tax certificate reporting.

Theoretically, but very unlikely, the employee could double-dip on two MTC credits in one month.
The scenario would be that the employee resigns from employer A at the end of the first week of a certain month, and is employed by employer B from the third week of the same month. The employee would then be in a ‘short’ month scenario at both employer A and B for the same month, and would benefit twice from the MTC in that month.

This would mean that the combined two tax certificates for the employee would reflect 13 months of MTC for the year.

Then there is another scenario: Where the MTC value exceeds the PAYE value for a certain month.

The PAYE will then be zero, and any unused MTC (due to not sufficient PAYE in a specific month being available to deduct it against) may be off-set against PAYE in future months in the same tax year.

Tax paid on behalf of employee (Tax on tax benefit) or PAYE not recovered from employee

Employer paying PAYE and not recover it from employee(gross-ups)

Where the employer elects to not recover the PAYE under-deducted from the employee, a fringe benefit incurred to the employee, namely “payment of employee’s debt” in terms of the provisions of the Seventh Schedule to the Income Tax Act.

This means that the PAYE paid on behalf of the employee, will result in additional PAYE on the fringe benefit amount, and so forth. The rule is that PAYE on this “tax-on-tax” benefit must be calculated up to ten times rolling balance.
For example: PAYE amount resulted in fringe benefit is originally R10000 and the PAYE on this benefit is R2500 – the total benefit now amounts to R12500. Tax must then be calculated on this total benefit again less the PAYE (R10000) already taken into account up to ten-times.

In order to simplify this tax-on-tax benefit calculation, the following method should be use when grossing-up a benefit to account for the “tax on tax” paid by the employer:

In order to simplify this tax-on-tax benefit calculation, the following method should be use when grossing-up a benefit to account for the “tax on tax” paid by the employer:

Formula: (Taxable amount X 100) ÷ (100 — employee’s marginal tax rate) = Taxable amount plus tax-on-tax benefit.
• The TAXABLE AMOUNT represents the value of the remuneration in respect of which the employer wishes to regularise the PAYE
• The full TAXABLE AMOUNT plus tax-on-tax benefit represents remuneration
• The difference between the full TAXABLE AMOUNT plus tax-on-tax benefit and the TAXABLE AMOUNT represents the tax attributable to the tax-on-tax benefit (e.g. payment of employees debt).
NOTE: Where the gross-up of the taxable remuneration results in an increase in the tax rate (marginal tax rate) from one tax bracket to the next, the marginal tax rate in the above formula must be increased by 1%, for example, marginal rate equals 18%, increase by 1% to 19%.

The tax on tax benefit falls within the provisions of the Seventh Schedule describing “Payment of an employee debt” and must be reported on the tax certificate under the code applicable to “Payment of employee debt”.

ETI (also referred to as Employment tax incentive)

Backdated ETI
SARS has provided a period of time until 1/3/2017 for employers to implement ETI. Until this period, employers were allowed to claim backdated ETI calculated. Please refer to the following link for more information on bacdated ETI:
https://www.sars.gov.za/FAQs/Pages/2303.aspx

From 1 March 2017 the employer cannot claim backdated ETI claims for any period. The last month available to the employer to make backdated ETI claim was February 2017 EMP201 return. The ETI amounts which the employer did not claim despite it being available at that time will be forfeited.

In terms of Section 7 of the ETI Act, the employer must calculate the ETI for each month during which he employs a qualifying employee. This calculated amount (ETI available for employer) must then be completed on the EMP201. If the amount is not completed on the monthly EMP201, it simply means that the employer has a 0.00 calculated ETI amount for that specific month.

Should an employer after the submission of the monthly EMP201, then calculates ETI for any of these backdate months, it will not be allowed by SARS, unless it is in the same reconciliation period (either March to August or September to February).

In order to claim the ETI, the employer must complete the calculated ETI field with the amount of the ETI that he calculated up to that month in the same reconciliation period during the current month in which the EMP201 is completed.

For example:
For the October EMP201
Sep ETI: R500 (not claimed)
Oct ETI: R500
EMP201 for October will have to reflect R1000 (500 for Sep + 500 for Oct) as calculated.

Section 9(4) of the ETI Act: However, if the ETI falls within the same reconciliation period. E.g. 1 March to 31 August OR 1 September to 28 February, then the employer may claim the backdated calculation in that period in the current month.

Please note that if the employer only applies ETI from September, it will mean that he will not be allowed to claim ETI for the previous interim reconciliation period (e.g. 1 March to 31 August) in terms of the provisions of section 9(4), such amount will be forfeited.

Section 9 of the ETI Act deals with the Roll-over amounts in cases where the ETI was available but could not be claimed due to non tax compliance or limited PAYE available to off-set the available ETI.
The ETI claim field may not exceed the PAYE liability on the EMP201.

Connected person in terms of ETI

One of the criteria for a qualifying employee in terms of section 6(c) of the Employment Tax Incentive Act, is:
“In relation to the employer, is not a connected person as defined in section 1 of the Income Tax Act”. The first question which must be established is whether or not the employer is a company or a sole proprietor (individual). Where the employer is an individual, then section 1 of the Income Tax Act is clear that “any relative” is a connected person. Where the employer is a company, then section 1 of the Income Tax Act state the following:
“in relation to a company-
(i) Any other company that would be part …
(iv) Any person…, holds directly or indirectly, at least 20% of the equity shares in the company or the voting rights in the company
(v) Where such company is a close corporation-
(aa) any member
(bb) any relative of such member … Which is a connected person in relation to such member; and
(e) in relation to any person who is a connected person in relation to any other person in terms of the foregoing provisions of this definition …

Sub-paragraph e of the definition makes it clear that a son of the director (who manage the company) will be deemed to be connected person and therefore not qualify in terms of section 6 of the ETI Act.

Learners in terms of ETI
The purpose of the ETI Act is to encourage employers to hire young people between the ages of 18 and 29 by subsidising their wage cost. At the heart of the intention of the Employment Tax Incentive Act is that the incentive should lead to employment or ‘actual jobs’. The legislation is premised on the individual that ‘qualifies’ to generate the tax incentive for an ‘eligible’ employer being an employee of that employer.
The ETI is therefore an employment incentive, not a training incentive.
As an aside, Government subsidises the cost of training employees in two ways that I am aware of:
1. Learnership Incentive (Allowance)
If the studies are in the form of a SETA-provided learnership in terms of the Skills Development Act, the Learnership Incentive (as it is now called) has been available from 2001 to assist employers with these costs.
2. Bursaries and Scholarships
Bursary schemes reduce the taxable value of the fringe benefit that results from the payment by the employer on behalf of the employee to a recognised training institution for the training of either the employee, or the relatives of the employee.
The bursary training expenses paid by the employer on behalf of the employee are allowed as a deduction in the hands of the employer.
Background to “ETI schemes”:
Several years ago SARS became aware of what is now referred to as ‘ETI Schemes’, and after investigation, the action that Treasury and SARS decided to take first appeared in the public domain in the 2021 Budget Review, as follows:
“Some taxpayers have devised certain schemes using training institutions to claim the ETI for students. To counter this abuse, it is proposed that the definition of an “employee” be changed in the Employment Tax Incentive Act (2013) to specify that work must be performed in terms of an employment contract that adheres to record‐keeping provisions in accordance with the Basic Conditions of Employment Act (1997).
The problem with “ETI Schemes”:
According to the final Explanatory Memorandum issued by National Treasury and SARS on 25 January 2022, these schemes while varying in nature, are broadly along the following lines.
“Eligible participants are recruited by a recruitment agency and employed by a participating employer for a fixed term period of 12 to 24 months.
Participating employers engage with the recruitment agency to recruit eligible participants. Contracts signed by the eligible participants indicate the receipt of remuneration while ‘employed’ by the participating employer.
Once ‘employed’, participants are trained by a training institution (over the 12 to 24 month period) and, in some cases, enrolled in Sector Education and Training Authority (SETA) accredited courses.
The training institution is contracted by the participating employer at a cost equal to the remuneration stated in the eligible participant’s contract. The remuneration stipulated in the contract is paid to the training institution as opposed to being paid to the eligible participant.
In some cases, the eligible participants are exposed to work-based exercises and activities by an independent company.
The independent company is able to utilise the eligible participants for a fixed monthly fee, which similar to the remuneration, is not paid to the eligible participant.
Once the training programme is completed, the eligible participant may work for the participating employer for the remainder of the 12 to 24 month period.
In accordance with said scheme, the participating employer is then able to claim the ETI for the 12 to 24 month period that the eligible participant is supposedly ‘employed’ by the employer.”
Intention of the Amendments to the ETI Act effective from 1 March 2022
Quoting further from the Explanatory Memorandum of 25 January 2022.
In order to address the above-mentioned contraventions, it is proposed that changes be made in the ETI Act to clarify that substance over legal form will be considered when assessing an employer’s ability to claim the ETI.
As such, ‘work’ must actually be performed in terms of an employment contract and the employee must be documented in the employer’s records as envisaged in the record keeping provisions contained in section 31 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997).
Further to the above, the employee must, in lieu of services rendered, receive cash remuneration from the employer.
The last (underlined) sentence of the final Explanatory Memorandum of 25 January 2022 was not in the Explanatory Memorandum issued on 28 July 2021 for public comment.
It was added to the final Explanatory Memorandum to explain the new proviso to the definition of ETI monthly remuneration in the ETI Act (discussed below) that was added by the Standing Committee on Finance just before the final TLAB (Taxation Laws Amendment Bill) was tabled in the National Assembly for approval towards the end of 2021.
The solution: The definition of an Employee in the ETI Act
The TLAA (Taxation Laws Amendment Act) of 19 January 2022 has expanded the definition of an employee in the ETI Act by inserting the underlined wording, as follows:
‘employee’ means a natural person—
(a) who works for another person and in any other manner directly or indirectly assists in carrying on or conducting the business of that other person
(b) who receives, or is entitled to receive remuneration from that other person; and
(c) who is documented in the records of that other person as envisaged in the record keeping provisions in section 31 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997),
but does not include an independent contractor
The policy makers have looked to labour law principles to tighten up on the definition of an employee in the ETI Act.
In my opinion, the insertion of the underlined wording in subsection (a) of the definition does not contribute much towards curbing ETI abuse, but the addition of subsection (c) does go some way to ensure an employment relationship by specifying that an employee must be recorded by the employer as required by BCEA section 31.
The record keeping requirements of BCEA section 31 are not extensive and are satisfied by the employee information that is recorded in a payroll system.
In simple terms, the ETI Act defines an employee as a natural person who works for another person and receives remuneration from that other person (the employer) in return for services rendered. This is the work/reward labour principle that is at the heart of an employment relationship, and it stands strongly on its own.
Changes to section 6 (Qualifying employee criteria)
The wording of the final proviso in the TLAA of 19 January 2022 that has been inserted in section 6 is underlined:
Section 6. An employee is a qualifying employee if the employee—
[subsections (a), (b), (c), (d), (e), (f), and (g) i.e. the 7 x qualifying tests, are not listed here to keep it short]
Provided that the employee is not, in fulfilling the conditions of their employment contract during any month, mainly involved in the activity of studying, unless the employer and employee have entered into a learning programme as defined in section 1 of the Skills Development Act, 1998 (Act No. 97 of 1998), and, in determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed.
Comments on the proviso
‘Mainly’ is interpreted to mean ‘more than 50%’.
The proviso specifies that “mainly involved in the activity of studying” (as opposed to ‘mainly’ providing services to the employer), must be measured “based on actual hours spent studying and employed”.
Keeping track of these hours will no doubt add a significant administration burden on the employer’s shoulders.
SARS have kindly interpreted the portion of the proviso that was added from “unless” to accommodate learnerships:
The way that we read the last part of the proviso to section 6, namely “in determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed”, it does not apply to learning programmes as defined in section 1 of the Skills Development Act (legitimate learnership agreements).
This is also in accordance with the purpose of the amendments – to curb the training related ETI abuse. We do not want to discourage legitimate learnership agreements.
In other words, the words:
“unless the employer and employee have entered into a learning programme as defined in section 1 of the Skills Development Act, 1998 (Act No. 97 of 1998)”,
removes the employee from the “mainly” proviso, and the employer of the learner is not required to track the actual hours worked and studying.
However, the words:
“in determining the time spent studying in proportion to the total time for which the employee is employed, the time must be based on actual hours spent studying and employed”,
are applicable when the employer and employee have not entered a learning programme as defined in section 1 of the Skills Development Act.
In this case, the employer is required to track the actual hours worked and studying.
The amendments to the ETI Act to curb the abuse of ETI are complex, difficult to understand, and administratively burdensome, but they will help to close the loophole of ‘false’ employment that has been exploited by some ETI schemes.
Lastly, be aware that Sars have made it clear that they will apply the principle of ‘substance over form’ when checking the validity of employer ETI claims. In other words, is the relationship a genuine employment relationship, or does the employer simply say that it is employment?

Monthly remuneration
Included below is the result of the PAGSA’s discussions with SARS in the form of an extract from the NBPO (Non-Binding Private Opinion) that was issued by SARS dated 7 March 2022. The issuing of the NBPO was followed by an investigation by the PAGSA Exco into the practical application of the NBPO, resulting in an example of the calculation of ETI ‘monthly remuneration’ that is included, after approval by SARS, in a later section of this newsflash as guidance for the payroll supplier members of the PAGSA.
The correct calculation of ETI ‘monthly remuneration’ is of huge importance to all parties. If ‘monthly remuneration’ is incorrectly calculated, the ETI amount will be calculated incorrectly, resulting in an incorrect reduction of the employer’s PAYE liability on the EMP201.
The final changes to the ETI Act were made in October/November 2021 by the Standing Committee on Finance and were published in the TLAA (Taxation Laws Amendment Act) that was issued on 19 January 2022, accompanied by a final Explanatory Memorandum that was issued a week later on 25 January 2022. The limited amount of time available between the publication of the TLAA on 19 January 2022 and the effective date of 1 March 2022, coupled to the fact that ETI is calculated monthly, has put a lot of pressure on everybody.
Remuneration for the purpose of the definition of an employee in the ETI Act has been interpreted by SARS to be ‘monthly remuneration’ as discussed in a section that follows.
This is explained in the SARS NBPO section 3.3:
“Section 1(2) states that “for the purposes of the definition of “monthly remuneration” in subsection (1), “remuneration” has the meaning ascribed to it in paragraph (1) of the Fourth Schedule to the Income Tax Act”.
This means that “remuneration” as defined may only be used for purposes of the definition of “monthly remuneration” under section 1(1) and nowhere else in the ETI Act.” [My emphasis]
The solution: Definition of monthly remuneration in the ETI Act
The draft TLAB (Taxation Laws Amendment Bill) of 28 July 2021 that was open for comment did not propose any changes to the definition of ‘monthly remuneration’.
It was only towards the end of 2021 that the definition of ‘monthly remuneration’ was extended by inserting the underlined wording starting from “provided that” (referred to as ‘the proviso’ in this Newsflash), as follows:
‘monthly remuneration’—
(a) where an employer employs and pays remuneration to a qualifying employee for at least 160 hours in a month, means the amount paid or payable to the qualifying employee by the employer in respect of a month; or;
(b) where the employer employs a qualifying employee and pays remuneration to that employee for less than 160 hours in a month, means an amount calculated in terms of section 7(5):
Provided that in determining the remuneration paid or payable, an amount other than a cash payment that is due and payable to the employee after having accounted for deductions in terms of section 34(1)(b) of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997), must be disregarded
It is this late change to the definition of ‘monthly remuneration’ that has caused the difficulties for payroll suppliers, coupled to wording that is not easily understood.
With the help of the SARS NBPO, the new definition of monthly remuneration is explained by breaking the definition into logical chunks and discussing these one by one.
Paragraphs (a) and (b) of the definition
Paragraphs (a) and (b) are unchanged and their wording reflects the labour law work/reward principle “where an employer employs and pays remuneration to a qualifying employee” to emphasise again that there must be a legitimate employment relationship.
The difference between the two paragraphs is that paragraph (b) provides that remuneration must be ‘grossed-up’ if less than 160 hours are worked for the month.
The definition of ‘monthly remuneration’ in subsection 1 of the ETI Act definitions is followed by subsection (2):
“For the purposes of the definition of “monthly remuneration” in subsection (1), “remuneration” has the meaning ascribed to it in paragraph (1) of the Fourth Schedule to the Income Tax Act.”
Therefore the ‘remuneration’ referred to in paragraphs (a) and (b) of the definition of ‘monthly remuneration’ is remuneration as defined by the Fourth Schedule, but its value can be changed:
• Firstly, by the proviso that potentially reduces the base value of Fourth Schedule remuneration,
• Secondly, by the ‘grossing-up’ requirement specified in paragraph (b) if less than 160 hours are worked.
Note that the requirements of the proviso must be applied first (potentially reducing the value of Fourth Schedule remuneration), before ‘grossing-up’ the reduced remuneration amount if necessary.
‘Monthly remuneration’ is therefore the value of:
• The reduced remuneration amount after applying the proviso, if 160 hours or more are worked, or
• The ‘grossed-up’ reduced remuneration amount after applying the proviso, if less than 160 hours are worked.
The proviso to the definition of monthly remuneration
The proviso is copied here for convenience for this section:
Provided that in determining the remuneration paid or payable, an amount other than a cash payment that is due and payable to the employee after having accounted for deductions in terms of section 34(1)(b) of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997), must be disregarded
The wording of the proviso is discussed in logical chunks, starting with the preamble to the proviso.
“Provided that in determining the remuneration paid or payable …”
This means that the base amount of Fourth Schedule remuneration referred to in paragraphs (a) and (b) can potentially be reduced by the requirements of the proviso that follow this preamble to the proviso.
“an amount other than a cash payment … must be disregarded”
Fourth Schedule remuneration amounts that are not a cash payment are the taxable fringe benefits specified by the Seventh Schedule to the Income Tax Act. If there are any taxable fringe benefits, their value must be ‘disregarded’ when calculating the value of ETI monthly remuneration.
This much is clear but unfortunately shares and dividends are two other types of remuneration that may or may not have a non-cash value that must be disregarded.
Shares
NBPO Section 3.1.1 states that
“Non-cash amounts related to shares paid to employees should not form part of monthly remuneration” but does not go on to explain what the ‘cash’ and ‘non-cash’ amounts could be that are related to shares and that could be paid to an employee as income.
The question comes down to whether it is possible for tax certificate codes 3707, 3717, and 3718 to have either a cash or a non-cash value. After querying this with SARS, they have been investigating the complex matter of shares for quite some time, but at the time of writing had not yet reached a conclusion.
As soon as we get clarity, a Newsflash will be issued.
Dividends
NBPO Section 3.1.2 states that
“Dividends can be paid in cash or in kind (in specie [shares can be granted instead of a cash payment – Rob]). Dividends made in cash payments (which is normally the case) and not excluded from the definition of “remuneration” must be included in monthly remuneration.”
SARS will still provide clarity on dividends, but as stated by the NBPO, normally dividends are a cash amount paid to the employee. This means that dividends paid in cash, if remuneration, must be included in ETI monthly remuneration.
The tax certificate codes for dividends are: 3719, 3720, 3721, and 3723.
“a cash payment that is due and payable to the employee”
NBPO Section 3.2 states that
“Monthly remuneration is therefore limited to cash amounts paid to the employee plus any amount that the employer has legally deducted under section 34(1)(b) of the BCEA.” [BCEA section 34(1)(b) is explained on the next page]
The NBPO clarifies that the wording of the proviso: “a cash payment that is due and payable to the employee”, refers to the remuneration portion of cash net pay after deductions, and not to the total cash remuneration before deductions.
In other words, the proviso essentially states that “an amount other than (the net cash remuneration) after having accounted for deductions in terms of section 34(1)(b) of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997), must be disregarded”
Note that if “an amount other than (the net cash remuneration)” were to be disregarded, all that would be left would be the net cash remuneration itself. Had that been the case, the proviso would have meant that “monthly remuneration” was equal to the employee’s “net cash remuneration”.
However the last part of the proviso must still be considered.
“after having accounted for deductions in terms of section 34(1)(b) of the Basic Conditions of Employment Act”
In this context, “after having accounted for” means that instead of simply deeming “monthly remuneration” to be equal to the “cash payment that is due and payable” (i.e. the net cash remuneration), the “cash payment that is due and payable” must be increased by the value of any deductions in terms of BCEA section 34(1)(b) that were made from the employee’s remuneration.
A simpler way of putting this would be to say that “monthly remuneration” means the value of the employee’s net cash remuneration increased by the value of any BCEA section 34(1)(b) deductions that were made.
BCEA section 34(1)(b) states that:
(1) An employer may not make any deduction from an employee’s remuneration unless—
(b) the deduction is required or permitted in terms of a law, collective agreement, court order or arbitration award.
Note that SARS cannot give an interpretation of section 34(1)(b), not because they don’t want to help but because the BCEA is not administered by SARS, so the explanations of section 34(1)(b) that follow are the opinion of the PAGSA.
“the deduction is required or permitted in terms of a law”
The words “a law” is very wide and if effect, means “any law”. This would without doubt include the Fourth Schedule to the Income Tax Act.
Therefore any deductions from remuneration that are allowed by the Fourth Schedule for the purpose of the PAYE calculations, are also deductions that are permitted by BCEA section 34(1)(b).
These deductions would be:
1. Allowable donations
2. Employee-paid contributions to retirement funds in terms of section 11F.
In addition, other deductions that are permitted by BCEA section 34(1)(b) are the payments to statutory bodies that reduce an employee’s net pay, including:
1. PAYE
2. Voluntary PAYE
3. Employee-paid UIF contribution (1%).
“the deduction is required or permitted in terms of a … collective agreement, court order or arbitration award”
Hopefully these remaining types of deductions that are “required or permitted” by section 34(1)(b) would be familiar to the employer and should be easily recognised if they are present in the payroll.
As examples, “collective agreements” would include Bargaining council agreements, “court orders” would include garnishee orders, and “arbitration awards” are just that.
SUMMARY of the proviso
To summarise the result of the proviso, “monthly remuneration” is equal to the cash remuneration paid to the employee, increased by the value of any deductions permitted in terms of section 34(1)(b).
This is aligned with the SARS NBPO section 3.2 that states:
“Monthly remuneration is therefore limited to cash amounts paid to the employee plus any amount that the employer has legally deducted under section 34(1)(b) of the BCEA.”
Application of the defined concepts of remuneration and monthly remuneration
It is important to know when to use ‘remuneration’ and when to use ‘monthly remuneration’.
Subsection (2) of the definitions section of the ETI Act states:
“For the purposes of the definition of “monthly remuneration” in subsection (1), “remuneration” has the meaning ascribed to it in paragraph (1) of the Fourth Schedule to the Income Tax Act.”
Section 3.3 of the SARS NBPO clarifies as follows:
Section 1(2) [of the ETI Act] states that “for the purposes of the definition of “monthly remuneration” in subsection (1), “remuneration” has the meaning ascribed to it in paragraph (1) of the Fourth Schedule to the Income Tax Act”. This means that “remuneration” as defined may only be used for purposes of the definition of “monthly remuneration” under section 1(1) and nowhere else in the ETI Act. [my emphasis]
Section 6(g) refers to “remuneration….in respect of a month” and thus monthly remuneration must be [used] when applying this requirement.”
Section 6(g) is the qualifying test that checks an employee’s “remuneration” against the R6 500 pm threshold.
Despite the use of the word “remuneration” in section 6(g), the SARS NBPO clarifies that ‘monthly remuneration’ as explained above (i.e. the potentially reduced remuneration amount) must be used for the R6 500 qualifying test in terms of subsection (2) of the definitions section of the ETI Act.
Lastly, ETI Act section 7 states specifically that “monthly remuneration” must be applied in the formulas to calculate the ETI amount, so there is no doubt about this.
Examples of the calculation
With reference to the proviso to “amounts other than a cash payment”, and to BCEA section 34(1)(b) deductions that are “required or permitted by a law” (being the Fourth Schedule), all cash income amounts, fringe benefits, and deductions allowed by the Fourth Schedule, as well as statutory payments, can be identified programmatically by using the tax certificate codes specified by the SARS PAYE BRS.
On the other hand, labour law does not have a coding system equivalent to the SARS PAYE BRS.
Presumably, these deductions are captured by the employer in the payroll in a ‘free format’ manner and could include deductions in terms of:
• BCEA section 34(1)(a) -not part of the exclusions,
• BCEA section 34(1)(b), and
• BCEA section 34(2) -not part of the exclusions.
Some payrolls might have difficulty in being able to programmatically identify the BCEA section 34(1)(b) deductions that are “required or permitted in terms of a … collective agreement, court order or arbitration award”.
In the absence of codes, this means that the employer will have to ‘flag’ section 34(1)(b) deductions (or alternatively ‘flag’ deductions that are not section 34(1)(b) deductions) in the payroll to identify them for use in the payroll’s calculation of ETI monthly remuneration.
If the employer gets this ‘flagging’ wrong, the payroll system can do nothing about it, and monthly remuneration and the ETI amount itself will be incorrectly calculated, resulting in potentially incorrect ETI claims in the EMP201.
Alternative Methods of Calculation of ETI Monthly remuneration
After receiving the SARS NBPO, a member of the PAGSA Exco created an example of how to calculate ETI monthly remuneration that shows two alternative methods of calculation of the ETI monthly remuneration amount.
The calculation shows that it is possible to arrive at the correct ETI monthly remuneration amount of R1 750,00 (see the example) by either:
1. Using a ‘top-down’ calculation (Starting from ‘Total remuneration’ and working downwards), or
2. Using a ‘bottom-up’ calculation (Starting from ‘Net pay’ and working upwards).
The ‘top-down’ and the ‘bottom-up’ calculation options are indicated by the red arrows in the frame at the bottom of the calculation example.
Both methods of calculation are aligned with the outcome envisioned in the SARS NBPO section 3.2 of which extracts have been copied in below for convenience:
The example shows that ETI monthly remuneration = R1 750,00 for both the ‘top-down’ and the ‘bottom-up’ method.
This result has been approved by SARS as being the correct value of ETI monthly remuneration in this scenario:
We agree with the basic framework of your calculations and that the result is in line with our purposive interpretation of the proviso to the definition of “monthly remuneration”. We are still not in a position to express an opinion on what constitutes deductions under section 34(1)(b) of the BCEA, but agree with the way that these deductions are treated in your calculation.
The compliance issues and suggestions mentioned in your email have been given through to the applicable staff members. We will keep them in mind as well when being asked to provide inputs for further legislative amendments.
Note that in the example, the value of ETI monthly remuneration that would have been R5 250 before the change to the new definition of monthly remuneration, is now R1 750 – a significant reduction in value.
Monthly remuneration (simple answer)
BCEA section 34(1)(b) states that:
(1) An employer may not make any deduction from an employee’s remuneration unless—
(b) the deduction is required or permitted in terms of a law, collective agreement, court order or arbitration award.
Note that SARS cannot give an interpretation of section 34(1)(b), not because they don’t want to help but because the BCEA is not administered by SARS, so the explanations of section 34(1)(b) that follow are the opinion of the PAGSA.
“the deduction is required or permitted in terms of a law”
The words “a law” is very wide and in effect, means “any law”. This would without doubt include the Fourth Schedule to the Income Tax Act.
Therefore, any deductions from remuneration that are allowed by the Fourth Schedule for the purpose of the PAYE calculations, are also deductions that are permitted by BCEA section 34(1)(b).
These deductions would be:
• Allowable donations
• Employee-paid contributions to retirement funds in terms of section 11F.
In addition, other deductions that are permitted by BCEA section 34(1)(b) are the payments to statutory bodies that reduce an employee’s net pay, including:
• PAYE
• Voluntary PAYE
• Employee-paid UIF contribution (1%).
“the deduction is required or permitted in terms of a … collective agreement, court order or arbitration award”
Hopefully these remaining types of deductions that are “required or permitted” by section 34(1)(b) would be familiar to the employer and should be easily recognised if they are present in the payroll.
As examples, “collective agreements” would include Bargaining council agreements, “court orders” would include garnishee orders, and “arbitration awards” are just that.
In terms of the Fourth Schedule of the Income Tax Act, neither employer-paid nor employee-paid contributions to a medical scheme are allowable deductions, therefore not allowed as deductions by BCEA section 34(1)(b).