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 (see below).

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 IRP5 code used for retirement fund contributions is code 4001. This code is used to report any contributions made by an employee to a retirement fund, such as a pension or provident fund.

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.

For tax calculation purposes only the deduction is limited to 5% of the taxable remuneration. The deduction may not exceed 5% of the remuneration after deducting pension-, provident-, and retirement annuity fund contributions. The deduction is only allowed if the employee has provided the employer with a receipt which reflects the details as prescribed in section 18A(2)(a).

The code used for donations on an IRP5 is code 4030.

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

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 of R242 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.
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 (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:
https://www.sars.gov.za/FAQs/Pages/2303.aspx

From 1 March 2017 the employer cannot claim backdated claims for any period. The last month available to the employer to make that 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:
Sep ETI: 500 (not claimed)
Oct ETI: 500
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 means 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

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
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 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).

TAX LAW: ALLOWANCES AND BENEFITS
Adjusting taxable benefit value

In terms of paragraph 3(3) of the Seventh Schedule the employee may refer the matter to SARS if it appears that the determination of the taxable benefit should be adjusted.

(3) If the employee concerned is dissatisfied with any determination or proposed determination by his employer of the cash equivalent of the value of any taxable benefit included in the remuneration of the employee for employees tax purposes, the employee or the employer may refer the matter to the Commissioner and the Commissioner may, if it appears to him that the determination or proposed determination should be adjusted, issue a directive to the employer as to the manner in which such determination should be made and the employer shall be obliged to act upon such directive: Provided that nothing in this subparagraph contained shall be construed as preventing the Commissioner from making a re-determination of such cash equivalent under the provisions of subparagraph (2)

In terms of paragraph 3(2) of the Seventh Schedule SARS may make a correction on the determination of the taxable benefit on assessment if such determination made by the employer is incorrect.
(2) The Commissioner may, if no determination is made, or if such determination appears to him or her to be incorrect, re-determine such cash equivalent—
(a) and issue the employer with a notice of the assessment in terms of section 96 of the Tax Administration Act for the unpaid amount of employees’ tax that is required to be deducted or withheld from such cash equivalent; or
(b) upon the assessment of the liability for normal tax of the employee to whom such taxable benefit has been granted.

In order to do this, the individual should make an appointment with SARS to discuss this and provide the relevant supporting documents. It is suggested that this appointment be made with a SARS auditor.

Bursaries / Scholarships

The provisions of section 10(1)(q) of the Income Tax Act, which relates to bursaries/scholarships, refer to a bursary granted by an employer to an employee, and does not place any limitation on an employee who is a relative of the employer.

The “no value” provision of the bursary benefit will be applicable until the tax year in which the conditions for the granting of the bursary are not met.
These conditions are normally, repayment if the study was not successfully completed, and/or repayment if the employee has not completed employment for a certain number of years (has to work for employer for a fixed period of time), etc.

The year when the conditions are not met, this bursary will become a taxable fringe benefit which must be added to the remuneration of the employee.
The year when the conditions are met, this bursary transaction will be finalised and no value will be taxable in the hands of the employee.

Furthermore, the “no value” will ONLY apply if –
• The remuneration proxy of the employee DOES NOT exceed R600 000; AND
• The bursary for the year DOES NOT exceed R20 000 in respect of grade R to grade 12 as contemplated in the definition of “school” in Section 1 of the South African Schools Act.

The preamble to section 10(1)(q) provides that the institution must be a recognised educational institution. If it is not one, the bursary exemptions do not apply.

In our opinion, the services provided for children not yet in grade R would not qualify for the bursary exemption.

In principle, if the bursary exemption does apply, this could be structured into the parent’s package with two main provisos:
1. That remuneration that has accrued is not reduced
2. That the reduction to remuneration is applied consistently, and will then potentially impact on contributions to retirement funds, etc.

According to SARS interpretation note, a salary sacrifice is not allowed and the following is clear:
• That remuneration that has accrued is not reduced if it is structured into the employee’s package.

Company cars

The employer must tax the use of a company vehicle according to the provisions prescribed in the Seventh Schedule to the Income Tax Act. To do this the determined value of the vehicle is used and either 3.25% or 3.5% of this value is a monthly taxable benefit. However, if the vehicle relates to an operating lease, then the cost for the employer is the monthly taxable benefit.

In terms of the provisions of paragraph 7 of the Seventh schedule to the Income Tax Act, the employer needs to determine the “determined value of the vehicle”.

The determined value of a vehicle is normally the cost price of the vehicle (refer to paragraph 4.3.3 of SARS Interpretation Note 72.

Depreciation of 15% on the reducing balance is allowed only if the vehicles in allocated from one employee to another employee where the 1st employee has used the vehicle for 12 months or more. This depreciation is also only applicable to 12-month periods, which means that if the 1st employee only used the vehicle for 15 months, only 12-month depreciation will be allowed at 15% for the 12 months. The balance will then be the determined value of the vehicle for the 2nd employee.

When the monthly benefit value is determined, then this amount is subject to the deduction of PAYE at either 20% or 80% depending the business use of the vehicle.

When the individual needs to do his income tax annual return, he must use his logbook to claim against the taxable benefit. This claim uses the total kilometers travelled during the year and the business kilometers travelled during the year as well as the value of the vehicle.

Where the employer has deducted PAYE at a 80% rate of the taxable benefit and the business kilometers compared to the total kilometers results in more than 80% of the total kilometers, this individual will get a tax refund from SARS with the submission of his income tax return.

Where the employer has deducted PAYE at a 20% rate of the taxable benefit and the business kilometers compared to the total kilometers results in less than 20% of the total kilometers, this individual will get have a debit due to SARS with the submission of his income tax return.

In terms of the provisions of paragraph 7 of the Seventh Schedule to the Income Act, where an employee has the use of a motor vehicle for a part of a month, the taxable benefit must be determined in the same ration as the number of days the employee had the use of the vehicle to the total number of days in the month.

In other words, if the employee had the use of 4 vehicles during the year at different periods in the year, and any of the period in the month of use for any of the vehicles is not for a full month, a pro-rata calculation must be done.

The value as calculated should be reported either against code 3802 or 3816 (operating lease).

Code 3701 is only used where a travel allowance is paid to an employee for the use of his private vehicle.

The PAYE BRS and the Guide for Employers in respect of Fringe benefits clearly indicate that the use of a company vehicle must be reported under the relevant codes 3802 or 3816.

Please refer to SARS interpretation note 72 explaining the taxability of the use of a motor vehicle and the individuals assessment claim.

Loans to employees

In terms of paragraph 2(f) of the Seventh Schedule to the Income Tax Act, a fringe benefit occurs if an employer grants a loan to an employee at an interest rate at less than the official rate of interest.

The difference between the interest rate paid by the employee and the official rate of interest, will constitute the value of the fringe benefit which must be included in the remuneration of the employee.

There are certain loans which does not have a value and is deemed to be “no value” fringe benefits, such as:
• Short-term debts not exceeding R3000
• Loans granted to acquire immovable property Which does not exceed R450000, provided that it complies with the conditions.

The official rate of interest can be found on the SARS website: https://www.sars.gov.za/AllDocs/LegalDoclib/Rates/LAPD-Pub-IRT-2012-03%20-%20Interest%20Rate%20Table%203.pdf

The code that must be used to report this fringe benefit on the tax certificate is code 3801.

Long services awards
The PAYE BRS is silent as to whether the long service award (code 3835) is regular or periodic in nature just as it is silent on other cash payments such as commission and arbitration awards.
To determine whether to tax it as an annual payment or not one must look at how it was actually paid in practice.
Before an award can be reduced by up to R5,000 for tax calculations, the conditions of long service that specify a minimum of 15 years continuous service for the first award, followed by 10-year continuous periods of service for the following awards, must be met.
My understanding is that the long service award can be paid at any stage, or stages, in the tax year in which the long service conditions are met.
No requirement prescribes that a single award must be made (which would be an annual payment and taxed accordingly). If the employer wants to, the award can be made split into two awards, or quarterly, or even every month for 12 months.
You would tax it according to how it was actually paid.
Lastly, if the long service conditions are met, then the lesser of the value of the awards and R5,000 reduces the award value for tax calculation purposes.
The value reported under code 3835 is the total i.e. combined value of the awards.
The payroll reduces the total value by up to R5,000 as described above, and SARS will reduce it by R5,000 for the income tax calculation.
Remuneration proxy

It is easier and quicker to explain if you copy the definition of the ‘remuneration proxy’:
“remuneration proxy”, in relation to a year of assessment, means the remuneration, as defined in paragraph 1 of the Fourth Schedule, derived by an employee from an employer during the year of assessment immediately preceding that year of assessment, other than the cash equivalent of the value of a taxable benefit derived from the occupation of residential accommodation as contemplated in subparagraph (3) of paragraph 9 of the Seventh Schedule in the application of that subparagraph: Provided that—
(a) where during a portion of such preceding year the employee was not in the employment of the employer or of any associated institution in relation to the employer, the remuneration proxy as respects that employee must be deemed to be an amount which bears to the amount of the employee’s remuneration for the portion of such preceding year during which the employee was in such employment the same ratio as the period of 365 days bears to the number of days in such last-mentioned portion;
(b) where during the whole of such preceding year, the employee was not in the employment of the employer or of any associated institution in relation to the employer, the remuneration proxy as respects that employee must be deemed to be an amount which bears to the employee’s remuneration during the first month during which the employee was in the employment of the employer the same ratio as 365 days bears to the number of days during which the employee was in such employment;

I have highlighted the areas of the definition that relate to your questions.
So you must:
1. Exclude the value of the residential accommodation from the remuneration proxy value.
2. Where not employed by you in the previous tax, then use the rem proxy value for the first month of employment in the current tax year, and annualise that amount for the formula calculation
3. Apply the formula specified in Seventh Schedule paragraph 9(3).

Seventh Schedule Paragraph 9(3)

The taxable value of the accommodation is calcualted with a formula. The forumla is: (A-B) x (C/100) x (D/12)

(3) Subject to the provisions of subparagraph (3C) and (4), the taxable value to be placed on such accommodation for any year of assessment shall be an amount determined in accordance with the formula: (A-B) x (C/100) x (D/12)
in which formula—
(i) “A” represents the remuneration proxy as determined in relation to the year of assessment;
(ii) “B” represents an abatement equal to an amount of R83 100: Provided that in any case where—
(aa) the employer is a private company and the employee or his spouse controls the company or is one of the persons controlling the company, whether control is exercised directly as a shareholder in the company or as a shareholder in any other company; or
(bb) the employee, his spouse or minor child has a right of option or pre-emption granted by the employer or by any other person by arrangement with the employer or any associated institution in relation to the employer whereby the employee, his spouse or minor child may become the owner of the accommodation, whether directly or indirectly by virtue of a controlling interest in a company or otherwise,
the said abatement shall be reduced to zero;

(iii) “C” represents a quantity of 17: Provided that where the accommodation consists of a house, flat or apartment consisting of at least four rooms—
(aa) “C” represents a quantity of 18 if—
(A) such accommodation is unfurnished and power or fuel is supplied by the employer; or
(B) such accommodation is furnished but power or fuel is not supplied; or
(bb) “C” represents a quantity of 19 if such accommodation is furnished and power or fuel is supplied by the employer; and
(iv) “D” represents the number of months in relation to a year of assessment during which the employee was entitled to occupation of such accommodation.

Therefore, in terms of the definition of remuneration proxy no deductions can be made, it is therefore “remuneration” as defined in the Fourth Schedule.

Furthermore, it depends on the employment date of the employee:
• If employee was not employed in the previous year, it is this year’s remuneration grossing up in relation to the pay periods in tax year and pay periods worked.
• If the employee was employed for the full previous tax year, it is the remuneration received for that year.
• If the employee was employed for a portion of the previous tax year, it is the remuneration received during that portion which must be gross-up in relation to the full year.

The original response explain the above, see below:

Paraphrasing the definition in section 1 of the Income Tax Act for easier understanding, “remuneration proxy” in relation to the current year of assessment is remuneration as defined by the Fourth Schedule, and must be applied as follows –
1. If the employee was employed by the same employer for the whole of the year of assessment immediately preceding the current year of assessment, it is the employee’s remuneration that was paid in respect of the preceding year of assessment
2. If the employee was employed by the same employer for a portion of the year of assessment immediately preceding the current year of assessment, it is the employee’s remuneration that was paid in respect of the portion of the preceding year of assessment, ‘grossed-up’ to represent the full year’s remuneration
3. If the employee was not employed by the same employer during the year of assessment immediately preceding the current year of assessment, it is the employee’s remuneration that was paid for the first month of employment in the current year of assessment, ‘grossed-up’ to represent the full year’s remuneration.

Remuneration proxy increase with retirement benefits

When the retirement reform amendments were introduced on 1 March 2016, as you know the employer-paid contribution to a retirement fund resulted in a fringe benefit equal to the value of the employer-paid contribution.
The bigger the value of the employer contribution, the bigger the value of this taxable fringe benefit, therefore potentially more PAYE.
I remember that at the time there certain categories of employers (municipalities come to mind) came to light that prior to 1 March 2016, were contributing exorbitantly large amounts to the retirement fund in an attempt to give their employees some sort of a tax advantage under the old tax rules.
The new tax rules leveled the playing field and resulted in the balance of remuneration being increased considerably in these cases.
At the same, the rules for the deduction available to the employee were also changed, in some cases resulting in a larger deduction and therefore potentially less PAYE.
The result of this was that more PAYE was withheld for some employees of certain employers, and this was described as an unavoidable consequence of the retirement reforms, but the bottom line was that the employee was being taxed correctly on the benefit to the employee.
I also remember reading or being told at the time that an analysis of the balance of remuneration (looking at retirement fund contributions in isolation from other income and deductions) showed that by far the majority of employees were either tax neutral, or better off, in Mar 2016 compared to Feb 2016.
There is certainly no intention to change the legislation.

Retirement fund contributions paid by employer

In terms of paragraph 2(l) of the Seventh Schedule to the Income Tax Act, 1962, a taxable benefit incurs when an employer had contributed towards a retirement fund on behalf of an employee.

In terms of paragraph 12D(2) of the said Schedule prescribed that the value of the taxable benefit where it consist SOLELY of defined contribution components, is the value of the amount contributed by the employer.

Paragraph 12D(3) prescribed that where it consist of components OTHER THAN ONLY defined contribution components, the cash equivalent of the benefit is determined in accordance with the formula: X = (A x B) – C.
As this formula takes the fund member category factor as well as the retirement funding income into consideration, it means that the result (taxable benefit) may be less than the amount actually paid by the employer to the fund.

The following IRP5 certificate codes will be applicable when an employer contribute towards a pension fund on behalf of an employee:
• Code 4774 = actual contribution paid by the employer
• Code 3825 = taxable benefit determined in terms of paragraph 12D(2) or (3) whichever is applicable
• Code 4003 = value of code 3817 plus the contributions made by the employee
The taxable benefit is deemed to be paid by the employee and should therefore be included in code 4003.

I am using the example below:
Gross pay: 4725.00
Employer provident fund contributions: 418.74
Employee provident fund contributions: 244.43

Therefore in the example above: if it consist SOLELY of defined contribution components, the value of the codes will be as follows:
• 4474 = 418.74
• 3825 = 418.74
• 4003 = 418.74 + 244.43 = 663.17

If it consists of components OTHER than defined contribution components, then you must use the prescribed formula to determine the taxable benefit portion which will change the value of code 3825 and 4003.

Severance benefits
References in this response to sections are to sections of the Income Tax Act, 1962 (the Act).
A “severance benefit” as defined in section 1(1) arises, once the general definition thereof has been met, in one of three instances:
• The person is at least 55 years old;
• The relinquishment, termination, loss, repudiation, cancellation or variation of employment has resulted from the person being permanently incapable of continuing with his or her employment due to, amongst others, sickness or incapacity; or
• The termination or loss of employment is due to the person’s employer having ceased or intending to cease carrying on a trade for which the person was employed, or due to the person having been made redundant by the employer, unless, where the person’s employer is a company, that person holds more than 5% of the shares or members’ interest in that company.
Note that the exclusion in reference to a person who holds more than 5% of the shares or members’ interest in that company, will only apply in respect of the provisions of paragraph (c) above. In other words, in the case of a person who is made redundant or whose termination or loss of employment was due to his or her employer ceasing trade, the lump sum received by or accrued to that person will not be regarded as a severance benefit as defined if the person (whether a director or any other employee) holds more than 5% of the shares or members’ interest in that employer company. The exclusion will, however, not apply in respect of the provisions of paragraphs (a) and (b) above, regardless of that person’s shareholding or members’ interest in the employer company.
In cases where the exclusion in paragraph (c) applies, the lump sum received by or accrued to the person in respect of the termination or loss of office or employment will not be a severance benefit as defined. However, the amount will still fall to be included in the person’s “gross income” under paragraph (d)(i) of that definition in section 1(1). Accordingly, this amount is “remuneration” as defined in paragraph 1 of the Fourth Schedule to the Act (the Fourth Schedule) and will be subject to normal rates of tax applicable to natural persons. Paragraph 9(3)(a) of the Fourth Schedule further requires an employer to obtain a directive from SARS with respect to this lump sum in order to determine the employees’ tax to be deducted or withheld therefrom.
A severance benefit, although payable as a lump sum, is not a “lump sum benefit” as defined in section 1(1), since it is not paid by the person’s retirement fund under the Second Schedule to the Act. As such, the “Guide on the calculation of the tax payable on lump sum benefits” will not apply to the lump sum paid to the employee. Kindly refer to paragraphs 11 and 12.5 of the “Guide for Employers in respect of Employees’ Tax (2021 Tax Year)” for additional guidance in this regard.

A severance benefit is defined in section 1 of the Income Tax Act as any amount (other than a lump sum benefit or an amount contemplated in paragraph (d)(ii) or (iii) of the definition of ‘gross income’) received by or accrued to a person by way of a lump sum from or by arrangement with the person’s employer in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s office or employment or of the person’s appointment to any office or employment, if such person has attained the age of 55 years.
If the retirement package complies with the severance benefit definition above, the employer should apply for a tax directive at SARS to ensure that the retirement lump sum package is correctly taxed.
Due to the fact that the employee will not comply with the no-value provisions of paragraph 12A(5) of the Seventh Schedule, the contribution that the employer pay towards to the retirement fund will be fully taxable in terms of the provisions in paragraph 12A of the said Schedule and need to be recorded on the IRP5 under the relevant code for this taxable benefit.
12A (5) No value shall be placed in terms of this paragraph on the taxable benefit derived from an employer by—
(a) a person who by reason of superannuation, ill-health or other infirmity retired from the employ of such employer

In terms of the definition of “normal retirement age” in section 1 of the Income Tax Act, “normal retirement age” means –
(a) in the case of a member of a pension fund or provident fund, the date on which the member becomes entitled to retire from employment for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body;
(b) in the case of a member of a retirement annuity fund, a pension preservation fund or a provident preservation fund, the date on which the member attains 55 years of age; or
(c) in the case of a member of any fund contemplated in this definition, the date on which that member becomes permanently incapable of carrying on his or her occupation due to sickness, accident, injury or incapacity through infirmity of mind or body

Subsistence allowance

In terms of section 8(1)(c) of the Income Tax Act, a subsistence allowance which does not exceed the Daily rates as published by SARS in respect of meals and incidental costs relating to outside the RSA will be deemed to be expended and will not be included in his taxable income.

However, if the recipient received an allowance for accommodation, the allowance will be included in his taxable income and the actual expenses needs to be claim for assessment purposes.

No limitation on the number of days is placed on a subsistence allowance.

In order to qualify for a subsistence allowance under section 8(1)(a)(i)(bb) of the Income Tax Act, the employee must be away from his usual place of residence in the Republic for at least one full period from sunset to sunrise of the next day.

A few years ago, the SARS guide to employers in respect of employees’ tax had a limitation of 60 days, however, since then this limitation has been removed by SARS.

Please refer to SARS Interpretation Note 14 for more details.

Transfer costs

The expenses borne by the employer in respect of purchasing a bed, dining room table, crockery and cutlery for the employee do not qualify as “settling-in” costs for purposes of paragraph (ii) of the exemption in section 10(1)(nB) of the Income Tax Act, 1962 (the Act).

The following expenditure, incurred by the employee and reimbursed by the employer, is envisaged as qualifying costs for purposes of section 10(1)(nB)(ii) of the Act:
• Bond registration and legal fees paid in respect of a new residence that has been purchased;
• Transfer duty paid in respect of the new residence;
• Cancellation fees paid for bond cancellation on previous residence;
• Agent’s commission paid on sale of previous residence;
• New school uniforms;
• Replacement of curtains;
• Motor vehicle registration fees; and
• Telephone, water and electricity connections.

The expenditure borne by the employer in respect of purchasing a bed, dining room table, crockery and cutlery for the employee will give rise to a taxable benefit that will not qualify for exemption under section 10(1)(nB) of the Act. The nature of the taxable benefit will further depend on the specific facts and circumstances of each case.

Travel allowance: Portion of package

There is no official percentage of the package prescribed as acceptable for a travel allowance.

However, in general where the total percentage exceeds 25%, SARS would normally conduct an audit and the employee must have proof available in order to satisfy that he travels extensively for business purposes.

Furthermore, the travel allowance must at least be of such a value that it covers the business travel costs. This means that if you give the employee a R10000 travel allowance but the total business costs (total business costs ÷ total km travelled x business km travelled) is less than the travel allowance, such employee might find that he has a debit when his final tax assessment is processed.

Travel allowance: with fuel paid by employer or petrol card paid by employer

The combination of a travel allowance with a petrol card (where the company pays the petrol card) is treated as a travel allowance (code 3701) in the payroll.

Employees who receive a travel allowance and additional to this allowance is provided with a petrol or garage card (account paid by the employer) by their employer, have to be treated as follows for payroll purposes:
• The amount expended on these cards is included in the employee’s travel allowance (code 3701 on the IRP5) and the appropriate portion thereof (80% or 20%) is subject to the deduction of PAYE, SDL, and UIF.
• The amount expended on these cards is a company expenses. Care must be taken that this expenses in not duplicated on the financial records of the company, for example, as part of the total salary expenses and as part of the fuel expenses of the company.

The reason why these expenses relating to the use of the cards are included in the travel allowance of the employee is due to the fact that the employee’s travel includes a private travel portion and in order to ensure that the correct business claim is made and that the employee is correctly taxed on any private portion.

For more information regarding this please refer to the SARS Interpretation Note 14 as well as the BGR 23.

Travel reimbursement

SARS has issued an Interpretation note (no. 14 – issue 3) which provides clarity on the tax treatment of allowances, advances and reimbursements. Paragraph 5.2 specifically indicated that reimbursements and advances must be excluded from taxable income with the exception of “travel reimbursements” where an employer reimburses an employee for the actual business kilometers travelled at an employer-agreed rate per kilometer.

If the rate at which the employer reimburses the employee for travel expenses does not exceed the rate as published in the Gazette, there is not PAYE deductible from such reimbursement and the reimbursement will be deemed to be expended on assessment in terms of section 8.

The rate at which the employer reimbursed an employee for travel expenses should be determined in terms of the employer’s policy.

The rate published by the Minister in the Gazette is the rate that should be used to compare the actual reimbursement rate for purposes of determining whether the reimbursement is subject to the deduction of PAYE.

The published rate is not a rate which force the employer to pay an reimbursement by using this published rate. The accrual reimbursement rate is determined in terms of company policy.

Paragraph 5.4 of the interpretation note specifically deals with deductions from travel allowances and advances and it is stated that in the context of travel, an allowance or advance includes both a travel allowance and a travel reimbursement.

A recipient who receives a travel allowance and a travel reimbursement must add the amount of the travel reimbursement to the amount of the allowance and calculate the allowable deduction for the number of business kilometers travelled.

A recipient who only receives a travel reimbursement must still go through the process of determining the allowable deduction because, depending on the facts, the rate at which the recipient was actually reimbursed may exceed the allowable deduction. The allowable deduction is determined by applying the actual cost, deemed rate per kilometre method or the specified rate per kilometre (see 5.4.3 and 5.4.4).

The amount of the allowable deduction which may be deducted from the travel allowance, advance or reimbursement has two components, namely, the business kilometres travelled (see 5.4.2) and the expenditure per kilometre.

Expenditure per kilometre may be determined using actual costs (see 5.4.3) or according to the deemed rate per kilometre as determined by the Minister of Finance by notice in the Gazette (see 5.4.4).

With effect from 1 March 2010 the deemed kilometre method was deleted from the Act. Taxpayers wishing to claim the cost of business travel must base their claim on the actual business kilometres travelled and are required to prove the business kilometres travelled to the satisfaction of the Commissioner.

Should the employee not maintain a logbook and/or declare the business kilometres travelled for the year in his income tax return, a tax debit will be due by the employee to SARS with the processing of his income tax return as this amount will become fully taxable and no claim is allowed against this amount.

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

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

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

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

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

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

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

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

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

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

Calculating PAYE

Where an employee earns fluctuating income during a tax year, the best option to determine the PAYE is to work on year-to-date earnings.

The year-to-date earnings needs to be annualised (annual equivalent) by using the formula:
Year to date yearnings ÷ pay periods worked in tax year x total pay periods in tax year

Pay periods worked in tax year = all periods the employee was working in the tax year (eg. months) irrespective of whether or not he has been paid any remuneration during any of the periods.

For example:
Month Remuneration YTD remuneration Annual equivalent PAYE YTD PAYE UIF 1% Nett pay
Mar R9 000.00 R9 000.00 R108 000.00 R310.50 R310.50 R90.00 R8 599.50
Apr R9 000.00 R18 000.00 R108 000.00 R310.50 R621.00 R90.00 R8 599.50
May R0.00 R18 000.00 R72 000.00 R0.00 R621.00 R0.00 R0.00
Jun R0.00 R18 000.00 R54 000.00 R0.00 R621.00 R0.00 R0.00
Jul R0.00 R18 000.00 R43 200.00 R0.00 R621.00 R0.00 R0.00
Aug R9 000.00 R27 000.00 R54 000.00 R0.00 R621.00 R90.00 R8 910.00
Sep R9 000.00 R36 000.00 R61 714.29 R0.00 R621.00 R90.00 R8 910.00
Oct R9 000.00 R45 000.00 R67 500.00 R0.00 R621.00 R90.00 R8 910.00
Nov R9 000.00 R54 000.00 R72 000.00 R0.00 R621.00 R90.00 R8 910.00
Dec R9 000.00 R63 000.00 R75 600.00 R0.00 R621.00 R90.00 R8 910.00
Jan R9 000.00 R72 000.00 R78 545.45 R0.00 R621.00 R90.00 R8 910.00
Feb R9 000.00 R81 000.00 R81 000.00 R0.00 R621.00 R90.00 R8 910.00
TOTALS R81 000.00 R81 000.00 R621.00 R621.00 R810.00
CODES 3601 3699 4102 4102 4142

In order to calculate the tax for May, you would follow the following steps:
1. Year to date remuneration = 18000 ÷ 3 x 12 = 72000 (annual equivalent)
2. Tax according to the statutory tables on 72000 = 0
3. The tax on the annual equivalent must be gross down by ÷ 12 x 3. Then the YTD tax must be deducted from this gross-down result. (NOTE: PAYE can never result in a minus figure due to the fact that the employer is NOT allowed in terms of Tax law to refund an employer).
Due to the fact that the tax deducted to date is R621.00 and is more than the tax required to be deducted, no tax will be deducted for May.

You may not refund any PAYE deducted to date due to the fact that the provisions of the Fourth Schedule do not make provision for an employer to refund PAYE.

Directors

In terms of the definition of employee and employer in the Fourth Schedule to the Income Tax Act, if any director (executive or non-executive) provides services to an employer as an employee, they must be taxed in exactly the same way as any other employee.

However, in their capacity as the holder of an office, one has to determine whether or not the individuals are offering these services as an independent contractor.

Executive directors are employees by the nature of being an executive, therefore generally all amounts paid to them by the company are remuneration, and subject to PAYE, SDL, UIF etc.

Non-executive directors are seen to be independent contractors and their fees are not remuneration. In this regard, refer to the SARS Binding General rulings numbers 40 and 41 for non-executive directors.
Both of these BGR’s deal with non-executive directors (NED’s), number 40 for PIT, and number 41 for VAT.

While it is an enlightening exercise to read these two BGR’s, they are not directly relevant to executive directors.

An executive director provides services to the company and is an employee of the company if he or she is paid remuneration as defined by the Fourth Schedule of the Income Tax Act in return for those services.

Besides amounts paid such as salary, wage, bonus, overtime, commissions etc, ‘fees’ are defined to be remuneration and are therefore administered in the same way as, for example, salary as far as PAYE, SDL, UIF etc is concerned.
The starting point is therefore that the director is an employee, and in terms of the tax result, there is no difference between a ‘salary’ and a ‘fee’.

However, if it is determined by the two statutory tests provided in the definition of remuneration that the director is paid fees in respect of services rendered as an ‘independent trade’, then the director is no longer an employee.
A discussion of the two statutory tests is very lengthy and I am afraid is outside of the scope of this reply – independent contractors are a very difficult area.

Consult the SARS Interpretation Note 17 (EMPLOYEES’ TAX: INDEPENDENT CONTRACTORS), in particular section 3.1. for more information.

Employer cease trading/stop trading/close business

In terms of paragraph 13(2)(c) of the Fourth Schedule to the Income Tax Act, an employer who ceased to be an employer, must submit the EMP501 reconciliation together with all associated IRP5 tax certificates to SARS within 14 days of the date on which the employer has so ceased.

This means that the employer may submit the reconciliation documents immediately and do not need to wait for the filing season to open. It must also be noted that all certificates must be marked as final certificates, in other words the period in the certificate number must be 202102 and the indicator in easyfile must be set as final certificate.

Independent contractor

In order to determine if a worker/service provider will be an independent contractor, etc, you need to classify such person.

• Is the contract for services for a company/trust or an individual.

If it is for a company/trust, then the possibility exist that the company/trust might be a personal services provider (provided that it complies with the provisions of the Fourth Schedule, namely:

A personal service provider (PSP) is a company or trust, where the services rendered to a client is rendered personally by a person who is a CONNECTED person to such company or trust, and
• Such person would be regarded as an employee of the client if the services were rendered directly to the client; or
• The duties are mainly performed at the premises of the client and is subject to the control and supervision of the client as to the manner in which the duties are preformed; or
• More than 80% of the income of the company/trust from services rendered consists of amounts received from one client.

However, there is an exception to the above, namely, where the company/trust employs 3 or more employees who are full-time engaged in the business of the company/trust of rendering services (other than a connected person). If the company/trust complies with the exception, then it is not a PSP.

If the contract for services is with the individual, then the employer must determine whether or not the individual is an independent contractor.

The statutory tests as prescribed in Interpretation Note 17 must be performed in order to determine if the person is an independent contractor.

These statutory tests are the following:
• Are the services performed mainly (more than 50% of the time on average) at the premises of the client, and
• Control and supervision of manner in which duties are performed or as to the hours of work

If any one or both of the two statutory tests are satisfied, then the person providing the services is independent.

Please note that IN 17 also provides a flow chart on the scenarios to be tested in order to determine the status.

Tools are provided by SARS to guide employers to classify the employee correctly (please refer to Interpretation Note 17 for details).

The facts provided in the query is not adequate for me to apply all the test prescribed in the Interpretation Note, and an opinion on whether or not the individual is a true independent contractor cannot be provided.

Zero tax agreement between employer and employee
Any employer that is liable to pay remuneration to an employee, is liable to withhold and pay over the relevant employee taxes to the South African Revenue Service (SARS) on a monthly basis. This is governed by the Income Tax Act No 58 of 1962.
The term “Remuneration” is defined in paragraph 1 of the Fourth Schedule of the Income Tax Act. An extract of this definition is shown below:
“any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered….”
Paragraph 7 of the Fourth Schedule states the following:
“Any agreement between an employer and an employee whereby the employer undertakes not to deduct or withhold employees’ tax shall be void.”
It is our opinion, on review of the legislation and the facts at hand, that no grounds exist to not withhold employee’s tax. We further would like to caution the employer, that should employee’s tax not be levied on the amount, and SARS should take the opinion that the amount is considered “Remuneration” as defined, the employees will be liable for the outstanding tax on this amount when the employee’s submit their personal income tax returns, and in turn could hold the employer responsible.
An alternative consideration to resolve the issue at hand, would be for the employer to apply for individual tax directives for each affected employee. The Income Tax Act does allow for consideration by the Commissioner on special circumstances and thereby rule on a reduced or exclusion of PAYE on a specified amount.
Finally, consideration could be given to the option of the employer to cover the tax liability of the employee on this amount. A transaction such as this will in itself needs to be taxed as a benefit (Payment of Employee Debt). The principle would be that the employer adds an allowance to the employee’s income that would cover that tax due on the amount. This transaction will invariably increase the cost to the employer. There is a calculation in tax law that caters for this. In this instance the employee would get the full benefit of the tax liability paid on his/her behalf by the employer and SARS would get the full tax due on the amount paid. The effect of doing the transaction would be an increase in employer expenses.
PAYE under-deducted
In terms of the Fourth Schedule to the Income Tax Act 58 of 1962 (“the Act”), there is an obligation on employers to withhold employees’ tax from remuneration paid to employees. This mechanism of collection of employees’ tax provides the South African Revenue Service (“SARS”) with an efficient way in which to obtain the employees’ tax due to the fiscus. Instead of having to deal with each employee separately, SARS only has to concentrate on the relevant employer’s withholding obligation.
The provisions of the Fourth Schedule do not absolve the employer from its obligation in terms of the Act where the employer has not issued payslips and/or account for the salary related taxes to SARS. Although in terms of Labour Law payslips should be available for salaries paid to employees.
In addition, the Seventh Schedule to the Act places a responsibility on an employer to calculate the cash equivalent of fringe benefits granted to employees and include this amount in the determination of the employees’ remuneration from which the employees’ tax is calculated.
If an employer fails to deduct or withhold the full amount of employees’ tax due, paragraph 5(1) of the Fourth Schedule to the Act stipulates that such employer shall be personally liable for payment to the Commissioner of the amount of employees’ tax which he fails to deduct or withhold. In addition, the employer will be liable to a penalty of 10% of such amount in terms of paragraph 6(1) of the Fourth Schedule to the Act, as well as interest in terms of section 89bis(2) of the Act.
Furthermore, if an employer fails to pay an amount of employees’ tax with the intent to evade his obligations under the Act, paragraph 6(2A) of the Fourth Schedule to the Act imposes a penalty of up to 200% of the outstanding employees’ tax.
Therefore, there is a heavy burden on employers to ensure that they withhold the correct amount of employees’ tax due to SARS, or else they could make a costly error.
Recovery of PAYE from employee: The Fourth Schedule provisions allows the employer to recover PAYE under-deducted from the employee. However, where an employer is unable to deduct PAYE under-deducted from an employee due to the fact that the employee is no longer in the employment of the employer, such under-deducted PAYE must be paid by the employer to SARS and will be deemed to be a penalty in terms of paragraph 5(5) of the Fourth Schedule to the Income Tax Act.
Due to the fact that the employer cannot recover this amount from the employee in question, such PAYE cannot be included in a tax certificate issued to the employee. In fact, the PAYE amount must be reflected in the “Tax Paid on Behalf of Employee” on the EMP501 reconciliation in order to rectify the liability of the employer.
The liability of the employer is calculated by –
• adding all the values of code 4102 on all tax certificates PLUS any amounts declared on the “TAX PAID ON BEHALF OF EMPLOYEE” and “AUDIT RESULT NOT IN CERTIFICATES”; compared to
• all liabilities completed in the relevant months in the PAYE columns.
Due to the fact that there is no space on the EMP501 for SDL and UIF amounts as “PAID ON BEHALF OF EMPLOYEE”, the additional SDL and UIF (not recovered from the employee) needs to be completed in the “AUDIT RESULT” fields under the SDL and UIF columns.
The following is found on Page 30 of the SARS Reconciliation Guide.

When the individual’s tax assessment is done, such individual will then have to pay the shortfall on assessment as the PAYE paid on behalf of the employer will be deemed a penalty, and was not recovered from the individual. This is the main reason why the under-deducted amounts must not be included in the tax certificate if it is not recovered from the individual by the employer.
PAYE refunds by employers
In terms of paragraph 2 of the Fourth Schedule to the Income Tax Act, the employer has an obligation to deduct PAYE from the remuneration paid to the employee as and when the remuneration is paid and pay such amount deducted over to SARS via the monthly EMP201 return.

This means that when you are paying monthly, you use the monthly deduction tables, for example:
• Salary paid in March R15000 – PAYE according to monthly deduction tables
• Salary paid in April is R0 – no PAYE according to the monthly deduction tables

Due to fluctuating of remuneration or unpaid pay period, it might happen that the final calculation of PAYE done at the end of the employee’s tax period, indicate that there is an over-deduction of PAYE. This calculation is normally done when the total remuneration paid until the end of the employees’ tax period is annualized and the annual tax rates are used to determine the total PAYE on the total remuneration paid during the tax period.

The Fourth Schedule do not make provision for the employer to refund any over-deduction of PAYE to the employee. The employee is supposed to complete his income tax return in order to claim this over-deduction.

Therefore, a payroll calculation should work as follows:
Month Remuneration YTD remuneration Annual equivalent PAYE YTD PAYE UIF 1% Nett pay
Mar R9 000.00 R9 000.00 R108 000.00 R310.50 R310.50 R90.00 R8 599.50
Apr R9 000.00 R18 000.00 R108 000.00 R310.50 R621.00 R90.00 R8 599.50
May R0.00 R18 000.00 R72 000.00 R0.00 R621.00 R0.00 R0.00
Jun R0.00 R18 000.00 R54 000.00 R0.00 R621.00 R0.00 R0.00
Jul R0.00 R18 000.00 R43 200.00 R0.00 R621.00 R0.00 R0.00
Aug R9 000.00 R27 000.00 R54 000.00 R0.00 R621.00 R90.00 R8 910.00
Sep R9 000.00 R36 000.00 R61 714.29 R0.00 R621.00 R90.00 R8 910.00
Oct R9 000.00 R45 000.00 R67 500.00 R0.00 R621.00 R90.00 R8 910.00
Nov R9 000.00 R54 000.00 R72 000.00 R0.00 R621.00 R90.00 R8 910.00
Dec R9 000.00 R63 000.00 R75 600.00 R0.00 R621.00 R90.00 R8 910.00
Jan R9 000.00 R72 000.00 R78 545.45 R0.00 R621.00 R90.00 R8 910.00
Feb R9 000.00 R81 000.00 R81 000.00 R0.00 R621.00 R90.00 R8 910.00
TOTALS R81 000.00 R81 000.00 R621.00 R621.00 R810.00
CODES 3601 3699 4102 4102 4142

PAYE can never go into a credit in any month.

Paragraph 11B was repealed by s. 11 (1) of Act No. 16 of 2016 with effect from 1 March, 2017 and applicable in respect of years of assessment commencing on or after that date. In this paragraph the provisions to allow an employer to refund SITE only employees when the final tax determination is made could be found. This is no longer applicable as the SITE is no longer applicable.
Prior to the deletion of the SITE provisions in the Fourth Schedule, the employer had the authority in terms of the said Schedule to refund any over-deduction in the case of a SITE ONLY employee. Due to the deletion of the SITE provisions and that fact that SITE is no longer applicable, these provisions have ceased to exist.

SARS may indicate a tax certificate as an over-deduction of PAYE during their “Tax validation” and the report provided by SARS may indicate that the PAYE on the tax certificate is excessive to the total remuneration for the complete tax period. However, this is only a warning message to employers in order for employers to ensure that their determination of PAYE is correctly done.

As mentioned above, employers may not refund PAYE to employees. Should the employer find that the PAYE was deducted correctly during each pay period (eg. Month, etc.), this warning message should be ignored and the tax certificate should be deemed as final.

Furthermore, should a recalculation proof that an over-deduction of PAYE is in fact applicable, the warning message should also be ignored as the employer do not have the authority in terms of tax law to refund this to the employee.

Only in cases of under-deduction, should the employer correct the situation and the tax certificate as it is clear in terms of paragraph 5 of the Fourth Schedule that the employer is ultimately responsible for any under-deductions.

Refund by employee to employer for access remuneration paid

SARS has published an Interpretation Note (IN no. 88) with regards to amounts to be refunded to employers.

A deduction of this amount so refunded to the employer by the employee must be treated as a Section 11(nA) deduction in the tax year when the amount is refunded to the employer and not in the year when it was paid by the employer to the employee (e.g. when the expense incur).

In order to claim the refunded amount, the employer must provide the employee with a letter on its letterhead stating the amount so refunded to the employer and when the amount was paid and the reasons for the obligation to refund to the employer (e.g. non-compliance to a certain criteria, etc.).

The amount should then be completed on the individual’s income tax return (other deductions). Please refer to the IT12 Comprehensive Guide, for details on where the amount should be completed.

Register employees for tax

In terms of the Tax Administration Act, any person receiving remuneration is required to register for income tax, irrespective if such an employee has a PAYE liability.

Due to this, the SARS easyFile software has a function to register new employees for tax purposes (see bottom of VIEW/EDIT EMPLOYEE: (ITREG)

Furthermore, SARS has issued the following notification on their website during August 2019:

The following notice from SARS is important in that it outlines the channels that SARS have put into place in order to smooth the process of registering an individual for income tax once that person has been appointed as an employee.

NOTICE STARTS
Dear Employer,

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

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

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

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

Resident

The SARS guide with regards to taxation in RSA explain this specifically in paragraph 2.3 or the non-resident paragraph.

The RSA tax system is based on the fact that residents are taxed on their world-wide income (subject to certain exclusions), irrespective of where their income was earned.

However, a non-resident is taxed in RSA on the income earned in RSA, depending on the provisions of the Double Taxation Agreement with the relevant country of which the individual is a resident.
Salary income earned in South Africa by a non-resident will be subject to normal tax in South Africa, unless DTA entered into between South Africa and the foreign country in which he or she resides, stipulates otherwise.

The starting point for a non-resident who renders services in South Africa is that the employment income is subject to normal tax in South Africa. If however a DTA is in existence and all three of the following requirements are met the income will not be subject to normal tax in South Africa:
• He or she is present in South Africa for a period or periods in aggregate not exceeding 183 days in any 12-month period (not necessarily a year of assessment).
• His or her remuneration is paid by, or on behalf of an employer who is not a resident of South Africa.
• His or her remuneration is not borne by a “permanent establishment” that the foreign employer has in South Africa. A “permanent establishment” is a complex concept, especially determining the establishment of one but in essence means a fixed place of business through which the business of the employer is wholly or partly conducted.

The foreign codes prescribed in the PAYE BRS is only used for residents to whom the section 10(1)(o) exemption may be applicable.

If a non-resident is not taxed in RSA due to the Double taxation agreement provisions, the IRP5 must be issued with a code 3602 and not 3652 (3652 is only used for residents relating to 10(1)(o).

SARS has issued an Interpretation Note (IN) No. 16 for explanation on the Exemption from Foreign Employment Income in terms of section 10(1)(o) which is effective from 1 March 2020.

The Interpretation Note states that once the employer is satisfied that the exemption applies, the total amount of each remuneration type must be split into exempt – no PAYE) and non-exempt (with PAYE) portions, for example:
• 3601 salary earned in RSA, subject to normal tax
• 3651 salary earned outside of RSA that is less than R1,25 million and exempt with no PAYE
• 3651 salary earned outside of RSA that exceeds R1,25 million with PAYE

In order to qualify for the exemption, the individual must be outside RSA for at least 183 full days during any 12 month period. These fill days do not have to be continuous. Calendar days must be taken into consideration for this determination and not working days. A 60 days period must be continuous.

The 183-days test does not work on tax year but on any 12-month period. On page 6 of this IN it is clearly stated that the period of 12 months is not necessarily a year of assessment, a financial year or a calendar year. It is ANY period of 12 consecutive months.

Therefore, if the employer uses the period for example as, May 2019 to April 2020, in order to test the 183 and 60 day periods, it might result in the exemption to be applied for March and April 2020.

Tax prescription period

Tax debt is defined in the Tax Administration Act, 2011. Before this Act came into effect, section 11(a)(iii) of the Prescription Act, 1969 applied to tax debt which indicate that tax debt prescribed after 30 years.

However, since the Tax Administration Act came into effect, section 171 of this Act indicate that SARS may not proceed with the recovery of tax debt after the expiration of 15 years from certain events, namely:
• Date the assessment becomes final; or
• Decision relating to objection and appeal becomes final.

Variable remuneration
Commission

The Commission that will be paid in the year after the employee resigned, will be treated as “variable remuneration” as provided in section 7B of the Income Tax Act.

In terms of this provisions, it is deemed to accrued to the employee on the date on which it is paid to the employee.

Due to the fact that the employee does not work for the employer on this payment date, the amount so paid will be taxed at the 25% flat rate which is applicable to non-standard employment.

An IRP5 for the year relating to the payment date (2021) should be issued to this employee for this payment made in 2021.

Voluntary tax deduction / Additional tax

The provisions of the Fourth Schedule of the Income Tax Act, allows for the “voluntary PAYE deduction” provided that the employee request this in writing from the employer.

In order to ensure that the tax certificate passes the tax validation process, the employer must set the indicator on the certificate as Y (Voluntary over deduction indicator).

If the reconciliation was already submitted to SARS, correct the applicable certificate by adding the indicator as Y, and re-submit the reconciliation with the certificates.

The IRP5 code used for PAYE (Pay-As-You-Earn) is 4102 as issued by the Business Requirement Specification document by SARS.

TAX DIRECTIVES
Lump sum codes: validations

The PAYE BRS states the following:

Directive number (code 3230):
o Directive number (code 3230) If code 3608/3658, 3614/3664, 3707/3757, 3718/3768, 3901/3951, 3902/3952, 3903/3953, 3904/3954, 3905/3955, 3909, 3915, 3920, 3921, 3922, 3923 and/or 3924 are completed with values, then Directive Number is mandatory and MUST NOT BE zeros;
o If YoA is greater or equal to 2021 and codes 3907/3957, 3908 are completed, then Directive Number is mandatory and MUST NOT BE zeros;
o If year of assessment is 2018 and codes 3719/3769 and/or 3720/3770, 3721/3771 and/or 3723/3773 are completed with a value, then Directive number is mandatory and MAY BE zeros;
o From 2019 year of assessment, if codes 3719/3769 and/or 3720/3770, 3721/3771 and/or 3723/3773 are completed with a value, then Directive number is mandatory and MUST NOT be zeros;
All the above codes listed year, is repeated in code 3232 validation (except for 3902-3905 which is not applicable since 2008/2010).

Directive income source code (code 3232):
o If Directive Type Indicator = “L”, then Directive Income Source Code is mandatory;
o If Directive Type Indicator = “F”, then Directive Income Source Code must not be completed;
• The Directive Income Source code can only be one of the following source codes:
o 3608/3658, 3614/3664,
o 3707/3757, 3718/3768, 3719/3769, 3720/3770, 3721/3771, 3723/3773
o 3901/3951, 3902/3952, 3903/3953, 3904/3954, 3905/3955, 3907/3957, 3908, 3909, 3915, 3920, 3921, 3922, 3923, 3924

Therefore, the directive type indicator can only be L with the following codes:
3608: Arbitration award
3614: Other retirement lump sums
3707: Share options exercised
3718: Vesting of equity instruments
3719: Dividends not exempt ito par(dd) – s10(1)(k)(i)
3720: Dividends not exempt ito par(ii) – s10(1)(k)(i)
3721: Dividends not exempt ito par(jj) – s10(1)(k)(i)
3723: Dividends not exempt ito par(kk) – s10(1)(k)(i)
3901: Gratuities/severance benefits
3902: not applicable from 2010
3903: not applicable from 2008
3904: not applicable from 2010
3905: not applicable from 2008
3907: Other lump sum payments
3908: Exempt policy proceeds
3909: Unclaimed benefits
3915: Retirement/termination of employment lump sum benefits
3920: Lump sum withdrawal benefits
3921: Living annuity and surplus apportionments
3922: Death during employment compensation
3923: Transfer of unclaimed benefits
3924:Transfer on retirement

Simplifying the validation rules
The directive codes are as follow:
• 3230 Directive number
• 3234 Directive type
• 3231 Directive date
• 3232 Directive source code
• 3233 Directive amount

The rules relating to all the above codes are:
• If code 3230 is completed
o Then code 3234, must be completed
• If code 3234 = L
o Then code 3231, 3232 and 3233 must be completed
• If code 3234 = F
o The code 3231, 3232 and 3233 must NOT be completed

Other rules that must be build before the above 3 rules for directives are-
o If code 3608, 3614, 3707, 3718, 3719, 3720, 3721, 3723, 3901, 3902, 3903, 3904, 3905, 3907, 3908, 3909, 3915, 3920, 3921, 3922, 3923, 3924; and
o If code 3658, 3664, 3757, 3768, 3769, 3770, 3771, 3773, 3951, 3952, 3953, 3954, 3955, 3957, is completed,
o Then code 3230 MUST be completed
o and the code 3234 must be L
o and the code forcing this rule must be completed under code 3232
o and code 3231 must be completed
o and code 3233 must be completed

If the code 3230 is completed with code 3234 as a value = F, then no other directive source codes must be completed for that specific transaction relating to the directive completed in code 3230.
It must be noted that an employee may have a F directive as well as a L directive – in this case, there will be 2 code 3230 transactions and the rules will be applied as follows:
o Code 3230 completed with directive number relating to F directive
o Code 3234 completed with value F
o Code 3230 completed with directive number relating to lump sum source code
o Code 3234 completed with value L
o Code 3231 completed with the date of the lump sum directive
o Code 3232 completed with the source code of the lump sum directive
o Code 3233 completed with the amount of the lump sum directive

Severance benefits

In terms of paragraph 9(3) of the Fourth Schedule to the Income Tax Act, the employer has an obligation to ascertain the amount of tax to be deducted against a lump sum due to retirement/retrenchment/death, etc.

Where an employer has not applied for a directive from SARS on this severance amount, in order to correct the situation, the employer should now apply for a directive.

The amount indicated on the directive as PAYE deductible from the severance amount, should then be recovered from the employee, before an IRP5 may be issued to the employee which reflect this amount of PAYE. Should the amount not be recoverable from the employee, it will be deemed to be a penalty in terms of paragraph 5(5) of the Fourth Schedule and should not be included on the IRP5, but should be included in the EMP501 under the field “deemed penalty”.

The amount should then be paid by the employer to SARS to cover the PAYE indicated on the directive.

A severance benefit is defined in section 1 of the Income Tax Act as any amount (other than a lump sum benefit or an amount contemplated in paragraph (d)(ii) or (iii) of the definition of ‘gross income’) received by or accrued to a person by way of a lump sum from or by arrangement with the person’s employer in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s office or employment or of the person’s appointment to any office or employment, if such person has attained the age of 55 years.
If the retirement package complies with the severance benefit definition above, the employer should apply for a tax directive at SARS to ensure that the retirement lump sum package is correctly taxed.
Due to the fact that the employee will not comply with the no-value provisions of paragraph 12A(5) of the Seventh Schedule, the contribution that the employer pay towards to the retirement fund will be fully taxable in terms of the provisions in paragraph 12A of the said Schedule and need to be recorded on the IRP5 under the relevant code for this taxable benefit.
12A (5) No value shall be placed in terms of this paragraph on the taxable benefit derived from an employer by—
(a) a person who by reason of superannuation, ill-health or other infirmity retired from the employ of such employer

In terms of the definition of “normal retirement age” in section 1 of the Income Tax Act, “normal retirement age” means –
(a) in the case of a member of a pension fund or provident fund, the date on which the member becomes entitled to retire from employment for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body;
(b) in the case of a member of a retirement annuity fund, a pension preservation fund or a provident preservation fund, the date on which the member attains 55 years of age; or
(c) in the case of a member of any fund contemplated in this definition, the date on which that member becomes permanently incapable of carrying on his or her occupation due to sickness, accident, injury or incapacity through infirmity of mind or body

Fixed percentage directive

SARS is issuing a fixed percentage tax directive indicating that the directive percentage must be applied on the “Gross remuneration/commission/income” amount paid to the employee.

This wording is specifically indicated in order to prevent employers from applying the percentage on the “balance of remuneration” (after the deduction of allowance deductions, such as, pension fund contributions, RAF, etc.).

The reasoning behind this wording is the calculation method applied in the SARS Tax directive system to determine the applicable percentage.

On the second page of the IRP3b tax directive application form, the employee should complete the following information:
• Gross Income (according to definition in section 1 of the IT Act)
• Estimated admissible expenditure (all deduction that will be allowed when the income tax assessment is processed/finalised)
• Estimated taxable income
• Tax payable (on the estimated taxable income)
• Tax payable as a percentage of gross income (sect 1 definition)

In order to make a connection between Gross income and Remuneration (called gross remuneration in the wording of the directive), the following example is illustrated:

Example
The disabled employee only received employment income from one employer during a tax year. The employer does not pay any other benefits (e.g. medical contributions, allowances, etc.).
Description Gross income per month Gross income per annum
Salary 24000.00 288000.00
Average commission 30000.00 360000.00
Annual bonus 2000.00 24000.00
TOTAL GROSS INCOME 56000.00 672000.00

The payroll deductions are as follows:
Description Deduction
per month Deduction
per annum
Pension fund contributions (27.5% of 24000) 6600.00 79200.00

Due to the fact that more than 50% of the monthly income is commission income, the employee will be allowed to claim his expenses (for the production of income). His expenses that will be allowed is R67000.

The employee also has a son which is disabled and uses a wheelchair on a permanent basis. His total calculated medical contributions and expenses which will be allowed with the processing of the income tax assessment is R58000.

Solution
In normal circumstances where an employee does not have a fixed (hardship) tax directive, the employer will calculate the employees’ tax on the balance of remuneration which is in this case as follows:

Total annual remuneration 672000
Total allowable pension fund contributions 79200
Balance of remuneration 592800

The total employees’ tax (2022 tax rates) on the balance of remuneration will be: R140133.00
The medical tax credit (taxpayer plus 3 beneficiaries) will be (R888pm): R 10656.00
TOTAL EMPLOYEES’ TAX (deducted by employer during the year) R129477.00

This total employees’ tax represents a percentage of 19.26% of the “annual remuneration” (before deductions).

Tax directive percentage determination

Total annual remuneration (Gross income) 672000
Total allowable pension fund contributions 79200
Total allowable medical disability expenses 58000
Total allowable commission expenses 67000
TOTAL TAXABLE INCOME 467800

The total income tax payable with the processing
of the income tax assessment will be: R84477.00

The total income tax represents a percentage of 12.57% of the gross income (before deductions).

Difference

When deducting the percentage (indicated on the tax directive) on the “balance of remuneration”, the employer will deduct far too less tax to cover the annual tax liability (i.e. R16133.60) for the year of assessment.

However, when deducting the percentage on the gross income (remuneration before deductions), the tax will more or less equal the annual tax liability [i.e. R58807 (including the medical tax rebate)]. IT IS FOR THIS REASON THAT SARS TAX DIRECTIVE INDICATES THE WORDING “GROSS REMUNERATION”. The wording cannot indicate “gross income” as the employer would not know about any other income the employee might receive from another party (e.g. interest, rental, etc.).

Medical tax credit and fixed percentage directives
Payrolls are not allowed to reduce the PAYE calculated in terms of a par 11 fixed-rate directive by the medical tax credits (MTC). Although SARS do not take the MTC into consideration with the calculation of the fixed-rate when issuing the directive, the reasoning is that the employee may have other income or multiple employment and therefore this MTC is only apply upon the income tax assessment of the individual. Individuals with a fixed-rate directive are obliged to submit an income tax return in order to determine their final tax liability for a tax year irrespective of the PAYE deducted by the employer during the tax year.

SDL (SKILLS DEVELOPMENT LEVY)
SETA code changes

1. SDL PURPOSES – Refer to the SETA/SIC code annexure in the SARS Guide in respect of Skills Development Levies.
• The SETA/SIC codes are established (published in GG) by the Minister of Higher Education and Training. Certain SIC codes are classified under specific SETA’s and are chosen by the employer when registering with SARS as an employer for PAYE/SDL/UIF or SDL/UIF purposes.
• SARS accepts the codes chosen by the employer and will only change the SIC code if a SIC code belonging to a different SETA is chosen. The SETA/Sic codes under which an employer is registered, used to be printed on the –
o confirmation of registration (I trust that this is still happening),
o monthly EMP201 (I trust that this is still happening), and
o EMPSA (statement of account).
• Where an incorrect SETA/SIC code was chosen, there is an IST01 form which the employer must complete which can be sourced from the SETA or the Department of Higher Education and Training (DHET) and submit it to the current ‘incorrect’ SETA for approval. Once approved, the ‘incorrect’ SETA will send the approved IST01 to the DHET for verification. The DHET will direct a re4quest to SARS to change the SETA/SIC classification.
• I suggest that the same process is followed to correct the SIC code where the SETA code is correct but the SIC code is incorrect. Although the IST01 might not make provision for the SIC code change, I suggest that the employer complete the relevant SETA/SIC codes on this form as SARS do need some confirmation to confirm the correct SIC classification and who better than the SETA to do this.
http://www.sars.gov.za/AllDocs/OpsDocs/Guides/SDL-GEN-01-G01%20-%20Guide%20for%20Employers%20in%20respect%20of%20Skills%20Development%20Levy%20-%20External%20Guide.pdf

2. ETI PURPOSES – See SARS¬_PAYE_BRS – PAYE RECONCILIATION: codes 2083 Employer SIC7 Code & 3263 Employee SIC7 code.
• 2082 – Employer SIC7 Code – The Employer Standard Industry Classification Code
o Use the 5-digit sub-class
• 3263 – Employee SIC7 Code – The Standard Industry Classification Code in which the employees mainly work.
o Use the 5-digit sub-class
• These SIC codes are chosen by employers when creating the IRP5/IT3(a) cert’s and where incorrect codes were used, the cert’s should amended to correct these codes. As far as I know, these codes are only used for IRP/IT3(a) purposes to validate the ETI values/limitations on the cert’s and are not part of the employer record on the relevant SARS systems.
http://www.sars.gov.za/TaxTypes/PAYE/ETI/Pages/SIC-Codes.aspx

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

The following employers are also exempt from paying the SDL, any:
• Public service employer in the national or provincial sphere of Government.
• Public service employer in the national or provincial sphere of Government.
• National or provincial public entity if 80% or more of its expenditure is paid directly or indirectly from funds voted by Parliament

See eFiling screens below.

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.

LABOUR LAW
Digital employment related documents
The BCEA only specifies that records must be kept for a specified time period. It does not specify that it must be kept in hard copy. If the documents can be stored securely digitally, it should not be an issue when looking at labour law. However, it must just be kept secure in compliance with the POPI Act.

Garnishing orders

SARS IT88 and Court orders: You only comply with garnishees whilst the employee is in your employ, as the order pertains to an amount deducted from a salary. Once there is no salary to deduct from anymore, the employer’s obligation ends and such employer should just inform the person responsible for managing the garnishee order that the employee is no longer employed by him.

End date for monthly garnishing orders: The employer need to do exactly as instructed per the Court Order. Therefore, if there is an end date, the employer only pays until that date. I f there is no end date, the employer continues paying until he is instructed otherwise by a court. It is up to the employee to ensure that he follows up on garnishees if he wishes to challenge the order.

Payslip information
The following information must be present on the payslip in terms of section 33 of the Basic Conditions of Employment Act:
33 Information about remuneration
(1) An employer must give an employee the following information in writing on each day the employee is paid:
(a) The employer’s name and address;
(b) the employee’s name and occupation;
(c) the period for which the payment is made;
(d) the employee’s remuneration in money;
(e) the amount and purpose of any deduction made from the remuneration;
(f) the actual amount paid to the employee; and
(g) if relevant to the calculation of that employee’s remuneration-
(i) the employee’s rate of remuneration and overtime rate;
(ii) the number of ordinary and overtime hours worked by the employee during the period for which the payment is made;
(iii) the number of hours worked by the employee on a Sunday or public holiday during that period; and
(iv) if an agreement to average working time has been concluded in terms of section 12, the total number of ordinary and overtime hours worked by the employee in the period of averaging.
(2) The written information required in terms of subsection (1) must be given to each employee-
(a) at the workplace or at a place agreed to by the employee; and
(b) during the employee’s ordinary working hours or within 15 minutes of the commencement or conclusion of those hours.
The above is the only information prescribed by the Act.
However, there is no reason why additional information (such as: Bank account details, ID number, etc.) may not be present on the payslip as the payslip is only available to the specific individual whos details are present on the payslip. The payslip is not presented to other persons without the relevant individual’s permission.
Rounding of net pay
The Labour legislation applicable in South Africa do not prescribed anything with regards to whether or not salary/wage payments are allowed to be rounded off.
However, should an employer use a method of rounding when paying salary/wages, it is suggested that it should be round-up and NOT down to prevent short payment disputes.

EASYFILE ( also E@syfile or e@syfile)
Corrupt database
Alternatively you can delete the database for the specific employer out of the easyfile database and just REDO that employer that you deleted.

To delete the database of the specific employer, please follow the following steps:
1. Make sure all hidden files can be view.
2. Select C drive
3. Select USERS
4. Select the relevant user
5. Select APPDATA
6. Select ROAMING
7. Select the EASYFILEEMPLOYER.XXXXXXXXX (NUMBERS FOLLOWING) FOLDER
8. Select LOCAL STORE

The database will then be displayed as follows:

Depending on how many companies you have on easyfile, all the companies PAYE reference numbers will be in the LOCAL STORE.
You only select the PAYE reference number which is corrupt and delete that DBZ file.

After you delete that employer, you have to redo all the transactions for that specific employer in easyfile.

Form viewer
Client must please install the Forms Viewer from the Utilities Menu – System Configuration – Install.
Screen shot of path as below.

During the update, the downloaded Forms Viewer installation is saved to desktop. Users can double-click on this icon on the desktop to run the installation manually. Please ensure e@syFile & Forms Viewer is closed for this.

Download and run the full installer from the SARS/eFiling website.

Adjustment to PDF rendering to allow OS default application
Clients with 64 bit should be able to print PDF documents from today without reinstalling 32 bit (7.2.5). Numerous complaints were also received from clients when ‘Updating’ after submission and error 1016 was displayed. Due to this error files were unfortunately not processed. Clients who received this error must please resubmit using the full resubmission functionality on the ‘Utilities’ menu from today with the updated e@syFile version.
PDF rendering was added. It is ticked by default but if not, employers must please ensure it is ticked to activate.

IT88’s

There is no specific limitation in respect of SARS third party appointments (AA88). However, SARS do take into consideration the “affordability” of an employee in respect of AA88 deductions.

Where the employer identifies that the employee will not be able to afford the deduction, the employer can submit an “Affordability Request” outcome for the employee on e@syFile. SARS will calculate the affordability terms based on the employee’s related income information. In cases where this calculation is too onerous in the employee’s view, the employee is required to visit a SARS branch office to make the necessary arrangements and substantiate what is affordable to allow the employee to pay for his/her basic living expenses.

More information on this can be found on the SARS website by using the following link: https://www.sars.gov.za/TaxTypes/PAYE/Pages/Guidelines-for-agent-appointment.aspx

Please refer to the “Employers Guide to the AA88 Third Party Appointment process” as well as the “Third Party Appointment AA88 easyFile Employer User Guide” on the SARS website.

On the e@syFile application, select the outcome as “Request affordability” and SUMBIT to SARS.

PDF error
What has worked for a number of users is to replace the 64-bit version of Adobe Reader with a 32-bit version.
Uninstall Adobe Reader from the Control Panel.
Restart the PC(most important)
To install the 32-bit version from the link below.
https://get.adobe.com/reader/otherversions/
On the left select your OS, Language and then the 32-bit version(top one from dropdown)
Make sure to uncheck the McAfee’s and the Chrome Extension
then click “Download Adobe Reader”, it will download an installer which when you double-click will download and install the 32-bit version.
SARS easyfile consultant
It is suggested that you contact the SARS E@syfile Consultant on [email protected] so that the Consultant can remotely assist you. These consultants are in the best position to assist and investigate in case of a legitimate system error.
ETV directive issue date error
This error was previously reported by PAGSA to SARS.
The reason for the error might be as a result of 2 things, namely:
• The accrual date of the directive income used instead of the issue date of the directive; or
• A final certificate was issued in August for the employee, and with the February submission, the certificate number used in August was again used for a different employee.
In cases where there is no directive applicable, please try the steps indicated below:
• Open the certificate on e@syFile and open the directive detail container for this certificate – it should be empty.
• Check that it is “blank” and doesn’t contain a space and confirm that it is.
• Save the certificate and try submitting again.
In cases where the directive issue date is correctly reported on the tax certificate, it is suggested that you contact the SARS E@syfile Consultant in order for the Consultant to remotely assist you. These consultants are in the best position to assist and investigate in case of a legitimate system error.
ETV Tax validation on tax certificates – incorrect tax deducted
From the 2020 year of assessment, SARS is performing tax calculations on the IRP5/IT3(a) certificates. Where it is found that the incorrect amount of tax was deducted from the employee, a letter will be issued, accompanied by a file containing a list of the certificates that have failed the SARS calculation.
The tilde (~) delimited text file containing the reasons for the failure(s) will also be sent to the submitting channel.
• e@syfile validation calculation file: can be found on the EMP501 Status Dashboard. After clicking “Update” to see the submission status, click the “Download Employment Tax Validation” button located at the top of the screen to download the tilde (~) delimited text file.
• eFiling validation calculation file: can be found on the EMP501 work page next to the EMP501 information. Click on “View” under the View Certificate Errors heading. The file will be downloaded or an option to save will be displayed (depending on browser used).
Note: The purpose of the Payroll Tax Validation letter is to inform the employer of discrepancies on the amount of tax or levies that were deducted for employees. All the certificates submitted were accepted and processed and will be pre-populated on the employee’s income tax return (ITR12).

In terms of paragraph 2 of the Fourth Schedule to the Income Tax Act, the employer has an obligation to deduct PAYE from the remuneration paid to the employee as and when the remuneration is paid and pay such amount deducted over to SARS via the monthly EMP201 return.

Due to fluctuating of remuneration or unpaid pay period, it might happen that the final calculation of PAYE done at the end of the employee’s tax period, indicate that there is an over-deduction of PAYE, although it is not an actual over-deduction if the calculation is done at each pay period. This calculation is normally done when the total remuneration paid until the end of the employees’ tax period is annualized and the annual tax rates are used to determine the total PAYE on the total remuneration paid during the tax period. This same method is used by SARS during the Tax Validation process and an ETV report is then provided to the employer with the outcome of this calculation.

The Fourth Schedule do not make provision for the employer to refund any over-deduction of PAYE to the employee. The employee is supposed to complete his income tax return in order to claim this over-deduction.

Should the employer receive the ETV report from SARS on the tax validations and found after a recalculation of the relevant tax certificates that the PAYE amounts are actually correctly deducted at every pay period (e.g. month, etc.), the employer may ignore the SARS provided calculation and does not need to re-submit the tax certificate.

However, should it be found that the tax is under-deducted on the certificate (after the re-calculation is done), such certificate must be corrected with the correct amount of PAYE which should be recovered from the employee (if it is more than the original amount).
Please note refunds of over-deducted PAYE amounts may not be refunded by the employer to the employee due to the fact that the Fourth Schedule does not make provision for this. If an amount is over-deducted, the voluntary indicator must be set accordingly and the certificate must be re-submitted.

At this stage SARS is only issuing the Tax validation report as a guideline/warning to make employers aware of the calculation result obtained by SARS when re-calculate a tax certificate.
Where the employer re-check these figures and find that the PAYE, SDL, and UIF was correctly deducted during the pay periods, these “failed” warnings should be ignored.
As the provisions of the Income Tax Act does not allow an employer to refund PAYE to an employee, the employer cannot during the final determination of his PAYE payable, refund the employee any over-deduction of PAYE.

It should be noted that the tax certificate has NOT failed validation for pre-population into the income tax assessment process of the individual.

Gross employment income column in the ETV report: This result indicated by SARS in the report is the gross-up result of the total remuneration on the tax certificate ÷ pay periods worked x pay periods in tax year.

The following link can be used to obtain more information on the ETV SARS process.
Employment Taxes Validation (ETV) – South African Revenue Service (sars.gov.za)

The “Not Assessed” status will not result in a letter being issued. A letter will be issued when there is a tax calculation failure or if a single IT number was used for more than one person.

Where the employer is notified that the ITR12 return containing the IRP5/IT3(a) certificate has already been assessed, the employer must inform the employee to resubmit his/her ITR12 return to allow the changes made on the IRP5/IT3(a) certificate to be affected on the employee’s assessment

Validation error: PAYE more than income on tax certificate

With the introduction of paragraph 11C in the early 2000’s, SARS has amended the tax certificate rules to allow R1 income where the remuneration is only determined at a later stage. This rule amendment was specifically to accommodate director’s deemed remuneration scenarios.

However, some employers use this rule for sole proprietors, etc. to try and get around the provisional tax obligations. As the tax legislation has changed some time ago with regards to directors’ remuneration, the rule of at least R1 income with a PAYE value was withdrawn from the PAYE BRS as it is no longer applicable (no more deemed remuneration provisions in the tax law relating to director’s remuneration).

A new rule has replaced this rule, which in effect means that PAYE cannot be greater than the income on the tax certificate. As an employer cannot deduct more PAYE from income which is available for such a deduction. For example, if you are only paying the director R10000 you cannot deduct PAYE of R12000 (from what income do you deduct the additional R2000 PAYE?).

Therefore, if the income is not sufficient to cover the PAYE reflected on the IRP5, such IRP5 will not pass the validations.

In terms of tax law, a director, sole proprietors, etc. should be registered as a provisional taxpayer and provision for his tax liability should be done through the provisional tax process. There is no alternative, unless the remuneration paid to the director/sole proprietor, etc. through the company is efficient to cover the PAYE deducted on the tax certificate.

The provisions relating to the voluntary PAYE deduction in the Fourth Schedule to the Income Tax Act, only applies to the remuneration paid to an employee. Therefore, if no remuneration is paid to a director/sole proprietor, PAYE cannot be voluntary deducted or if remuneration is paid which is a lesser amount of the PAYE, the PAYE can only be voluntary deducted up to the amount of the remuneration paid.

EFILING

User rights
Please log into eFiling and go to Organisation (Top) > Rights groups (Left) > Manage groups and untick and tick the company again under manage payers then update.
Manage groups, click open and ensure that System Default is ticked and update.

User (Top) > User (left) > Change Details and update rights, untick and tick the correct rights and the correct group (System default if the company is under that group)
Log out and in again on eFiling

Please use the username used to log onto eFiling together with your current eFiling password. Please also make sure that the password does not have the $,% and & character.

Lastly, go on e@syfile and try again.