With the South African Revenue Service (SARS) seeking to increase its revenue base, organisations with misconceptions about how certain payroll elements should be taxed, may unknowingly be exposing themselves financially.
This is the view of Tanya Tosen, tax and remuneration Specialist at Tax Consulting South Africa, who said her firm often comes across the same common payroll errors.
Tosen outlined these common issues in more detail below.
Did you apply the 80/20 rule of travel?
There are two main rules for taxing an employee’s travel allowance. Either 80% of their mileage is for business purposes, and the remaining 20% is subject to tax.
Or, only 20% of their travel is business-related, and the remaining 80% must be taxed.
Although employees prefer the lower inclusion rate, a company that applies the wrong rate may be understating their monthly PAYE liability, thereby exposing the organisation.
“Payroll must insist on an accurate log book and analyse its entries to ensure the correct inclusion percentage for tax purposes is used,” said Tosen.
Are your company cars leased or not?
When an employee uses a company vehicle held under an operating lease, as defined in the Income Tax Act, they are taxed on its monthly lease value plus fuel provided for that vehicle every month.
However, in any other case, the determined value of the vehicle should be used to calculate the fringe benefit value and the result may be substantially different.
“In practice, companies often neglect to differentiate between the use of leased and non-leased vehicles for tax purposes, and apply the wrong rule,” said Tosen. Again, this error may result in undesired tax exposure, she said.
Did you change the tax treatment to your PHI?
In the past, employees were afforded a tax deduction against their disability benefit contributions. If they became disabled, the payout was then taxed when paid out to an employee.
From 1 March 2015, however, legislation required that monthly disability benefit premiums be taxed as a fringe benefit in the hands of the employee. If that employee then becomes disabled, their pay out now becomes tax-free in their hands.
“We continue to discover companies that have still not implemented this significant change on their payroll, and therefore are not withholding the tax they should, and are putting their organisations at risk with SARS,” said Tosen.
Are your retirement and risk benefits Approved or Unapproved?
The Retirement Reform that came into effect on 1 March 2016 now considers all company contributions to an employee’s retirement and risk benefits as a fringe benefit and should be fully taxed on payroll.
However, the main proviso is to differentiate between Approved and Unapproved benefits which will determine whether a corresponding tax deduction can be applied on payroll subject to certain limits.
Whether a retirement benefit is Approved or Unapproved is determined by the way its associated fund is administered as well as the rules of the fund, which will also dictate its tax treatment. Employers can easily obtain this information from their broker.
Unfortunately, many are still unaware of this distinction and have yet to update their payroll systems accordingly. “In that case, a substantial PAYE deficit could already have accumulated against them,” said Tosen.
Are you wary of changing remuneration models?
A big misconception among employers is that changing their company’s remuneration model would also require a major adjustment to calculating their tax obligation. This is not true.
South African organisations generally favour either a Basic Plus or Cost-to-Company structure.
Regardless of which they choose, tax is applied to individual payroll elements. Changes to any element will determine whether an employee pays more tax or less in either model.
“Because the tax treatment ultimately stays the same, companies should not hesitate to move to a remuneration structure more appropriate to their needs,” said Tosen, who recommends a Cost-to-Company with Flexible Benefits structure during Covid-19.