Employees’ tax (part 1): Personal service providers

For there to be an obligation for PAYE to be withheld is typically dependent on three elements being present. These elements are all defined in the Fourth Schedule to the Income Tax Act[1] and include the presence of an employer, an employee and the payment of remuneration. No employees’ tax can be charged if one of these elements is absent.

As a result of certain avoidance structures being implemented to avoid employees’ tax, specific tax provisions were introduced dealing with “personal service providers” (or “PSPs”) to combat such possible instances of tax avoidance and to limit the available deductions from income in the determination of taxable income for these entities.[2] What individual taxpayers would do to limit their effective tax rate (and to ensure that PAYE is not withheld from remuneration paid to them) otherwise would be to earn their salaries in entities controlled by them. In other words, an employee would arrange with his/her employer that a company owned by the employee would rather be rendering the same services as an employee to the employer. This company would then earn remuneration, even though it would be performing exactly the same services as the employee otherwise would have and had that individual not rendered those services through that company.

It was therefore necessary to include a PSP in the definition of “employee” for tax purposes. A PSP can be a company, close corporation or trust, where any service rendered on behalf of the entity to its client (the would-be employer) is rendered personally by any person who stands in a connected person relationship to such entity. One of three additional requirements must be met for an entity to be a PSP:

  • The client would have regarded the person as an employee if the service was not rendered through the entity.
  • Alternatively, the person must render the service mainly at the premise of the client and he/she is subject to control and supervision of that client as to the manner in which the duties are performed.
  • More than 80% of the income derived from services rendered by the company is received from one client.[3]

A PSP is deemed to be an “employee”[4] and any remuneration[5] received by the PSP is subject to the withholding of employees’ tax in the form of PAYE too. Income tax deductions for PSPs are themselves also severely limited, typically akin to what would have been the case for individual employees themselves. It is recommended that clients of potential PSPs should have policies and systems in place to correctly identify and withhold tax from these entities.

[1] No. 58 of 1962.

[2] Also see SARS Interpretation Note 35 (Issue 4) dated 28 March 2018.

[3] Also includes any associated person in relation to the client.

[4] See the definition of “employee” in paragraph 1 of the Fourth Schedule to the Income Tax Act.

[5] See the definition in paragraph 1 of the Fourth Schedule to the Income Tax Act.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Nwanda Internal News
(March 2018)

DAYS

Awesome Rewards: 

  • Rafeeah Razak for a job well done on his first big audit (Consolidated Safety Equipment)
  • Carla Teixeira for Excellent client service
  • Daniel Adlam for Going above and beyond to meet a deadline
  • Jennifer Neill on working hard and meeting the deadline on all the sections allocated to her on Optron
  • Talita Roux for her hard work on Metalsa
  • Shene Miller for obtaining 3 distinctions
  • Talita Roux for obtaining 3 distinctions
  • Lebohang Lemaoana for her hard work on Metalsa
  • Dean Elson for passing CTA 2 exams

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Congratulations: 

To Esmeralda Lottering for passing APC SAICA Board exam

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New staff members:

A warm welcome to –

  • Anika Pretorius (tax compliance officer)
  • Mohammed Limbada (audit supervisor in Bob’s group)

Sports & Social Club threw a party for Esmeralda and Dean on Friday 9 March.

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Employer Interim Reconciliation

In the past SARS required the Employer Reconciliation to be done every twelve months. A few years ago SARS introduced the Employer Interim Reconciliation in addition to the annual Employer Reconciliation.

The Employer Interim Reconciliation have the same requirements as the Employer Reconciliation, with two exceptions:
1. The Interim Reconciliation is completed for six months only, and
2. The tax certificates generated during the Interim Reconciliation are only submitted to SARS and not distributed among employees, except in certain circumstances as set out in the table below.

The major benefit of performing the Employer Interim Reconciliation is that it decreases the pressure on employers with their Employer Reconciliation at the end of the tax year, as only six months have to be reconciled for each reconciliation.
The table below shows the major differences between the Employer Interim Reconciliation and the Employer Reconciliation for the tax year commencing 1 March 2016, followed by some tips on how you can prepare for the next Employer Interim Reconciliation.
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Tip 1: Start preparing now
Get a jumpstart on the reconciliation process by starting to confirm employees’ personal details. Draw up a confirmation form of personal details needed to complete employees’ IRP5/IT3(a) tax certificates. These forms should be completed and signed by each employee and kept in the Employer Interim Reconciliation file as part of the working papers. The details that must be confirmed with employees are the following:

1. First two names and surname
2. Date of birth
3. South African ID number or Passport number and name of country which issued the passport
4. Income Tax reference number
5. Contact details:
• Postal address
• Residential address (including postal code)
• Cellphone number
• Home telephone number
• Work telephone number
• Fax number
• E-mail address
6. Banking details:
• Bank account number
• Bank account name
• Type of account e.g. savings or cheque
• Branch name
• Branch number
• Indication of whether it is their own bank account, a joint bank account or a third party bank account

Tip 2: Use the latest version of easyFile
Make sure that you use the latest version of easyFile when doing the Employer Interim Reconciliation as well as the Employer Reconciliation, as reconciliations and tax certificates done on previous versions of easyFile software will be rejected by SARS. Check the SARS website for updates and the most current version of easyFile software.

Employer reconciliations don’t necessarily need to be a nightmare. Some timely preparation will go far to make the reconciliation process smoother and less stressful.

If the above article raised any questions in your mind please do not hesitate to contact our office. We look forward to the opportunity to assist you.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Reference List:
• www.sars.gov.za

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Nwanda Internal News (April 2016)

Awesome Rewards awarded to:

Nicole Pretorius for obtaining a Bcompt Accounting degree

Brett Beetge for passing Board I exam

Proffessor Mafela for passing Board I exam

Farewell to staff member:

We bid farewell to Danielle Fynn

Congratulations to Samantha Goodrich on the birth of her baby girl on 19 April.

Congratulations to Carmen and Paul Maroun, they were married on 9 April.

Carmen wedding photo

Best of luck to all those studying for the May/June exams.

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Nwanda Internal News (March 2016)

Farewell to Raeesah Shaik, Nikki Padarath and Caroline Koto. 

Awesome Rewards awarded to:

Nhlanhla Ngwasha and Aasimah Khan for going the extra mile
Ncamiso Simelane for providing excellent training to 1st year trainees

Aasimah Khan for going the extra mile

Farewell to three staff members:

We bid farewell to Raeesah Shaik, Nikki Padarath and Caroline Koto.
We wish them success in their new careers.

Congratulations to Saafiyah Ahmed Bashir on her engagement to Raeez Majam on Saturday 27 February 2016.

Saafiyah&Raeez_028

The partners and the staff of Nwanda congratulate our successful current and prior staff members on their passing of the Board Exam. Well done Brett Beetge, Proffessor Mafela, Jean-Pierre Oosthuizen and Deloshnie Govender.

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Nwanda internal news (October)

1Awesome Rewards:

Renier Smit and Nishani Bhagwager – Submitting of good work to their managers.

2. Office closure:

We wish to notify our clients that our offices will be closed from 21 December 2015 and will reopen on 4 January 2016.

3. Annual team building:

Our offices will be closed on the 20th of November 2015 for our annual team building event.

4. Engagement

Congratulations to Carmen Risk and Paul Maroun who got engaged on the 11th of October 2015.

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 5. Examinations –Undergraduates:

Best of luck to all our staff writing examinations during the month of October and November 2015.

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6. CTA Students:

Welcome back from study leave to all our CTA students, you were missed.

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Nwanda internal news (Aug/Sep)

 1. Long service awards:

Congratulations to Liza Hlatswayo who has been employed by Nwanda for 20 years and Denise Behenna for 15 years.  We trust you enjoyed your tax free gift and tasty lunch at Werner’s Bistro

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2Awesome Rewards:

Francis Venter – Going the extra mile

Sadiya Mansoor and Andre Strydom – For consistently good work

Divan Dixon – Delivery of quality work

Sharlott Modibedi – Always assisting with a smile

Nicole Pretorius – Stepping up while her manager was on leave

3. New Employees:

We are proud to introduce a new Employee:

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Kirsten Campbell – 6 month accounting contract

 

 

 

 

 

 

 

 

 

4. Office closure:

We wish to notify our clients that our offices will be closed from 21 December 2015 and will reopen on 4 January 2016.

5. Examinations – CTA and Undergraduates:

To all our staff writing their examinations, you will be missed. As always, make us proud.

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6Love is in the air:

Congratulations to Anastasia Pillay and Lenzel Naidoo, who were married on 10 August 2015.

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Congratulations to Carmen Risk and Paul Maroun, the couple were engaged on 29 August 2015.

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Nwanda internal news (July)

  1. Awesome rewards:

Congratulations to the following staff:

• Successfully obtained their BCom(Acc) Degree:
Daniel Adlam, Rukudzo Chikonye and Jamie-Lee Pietens

• Passed with Distinctions:

Hennie de Beer, Neliswe Mahlangu and Saafiyah Bashir

 • Passed SAIPA Professional Examination:

Faheemah Seedat

• Staff that went out of their way to assist:

Hennie de Beer – MIS Audit

Venice Jordaan – General office assistance

Fatima Wadia – Konica Minolta

  1. New Employees:

We are proud to introduce new Employees:

  1. Employees on the move:

Roxy Lorincz, Tanya de Bruyn, Odette Oosthuizen and Kedibone Maloba – we wish them the best in their future endeavors.

  1. Nelson Mandela – 18 July 2015:

This year the firm chose a charity close to our hearts to assist, not in time spent but in opening each individuals wallet.  The Partners pledged to match donations made by staff and a delivery was made to St Francis Care Centre on the 17th of July 2015.

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Employment Equity

ee
The Department of Labour does random inspections to check on EE compliance.  They turn up at your gate requesting proof of EE compliance within a 21 day period – you have to provide evidence in a file and even deliver at their offices.  Their letter is standard – they want you to provide proof of:

  1. appointment of an Employment Equity Manager.
  2. an employment equity committee, with minutes, agenda and signed attendance registers covering twelve months;
  3. an analysis of any barriers to employment equity;
  4. a copy of your employment equity plan;
  5. a copy of your past three employment equity reports;
  6. reasonable accommodation for people with disabilities in the workplace;
  7. HIV and AIDs policy.

Your employment equity plan can be for a period not less than 1 year and not greater than 5 years.  EE reports must be submitted annually – manually by 1st working day of October or electronically by mid-January of the following year.   The Employment Equity Amendment Act effective from 1 August 2014 has defined designated groups as black people, women and people with disability who are citizens by birth or descent or who became citizens by naturalisation before 27 April 1994 or after 26 April 1994 but were precluded by apartheid policies.  The fines for non-compliance have been increased hugely.

See the Department of Labour website for more details – www.labour.gov.za.

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Allowances and fringe benefits: Part II

In the previous newsletter we discussed the difference between a travel allowance and the right of use of a motor vehicle and attempted to illustrate the pros and cons of each.  We then found that each case should be evaluated separately since there are various factors that need to be considered to obtain the best possible tax benefit. In this newsletter we will look at subsistence and other allowances that an employee may receive and also consider the tax benefits and drawbacks applicable to each.

Subsistence allowance

A subsistence allowance is normally paid to an employee when the employee undertakes a business trip and has to incur certain expenses, e.g. for accommodation, transport, meals or other incidentals, and the employer wishes to reimburse the employee.

The question arises whether the employee is taxed on the amounts paid/reimbursed to him/her, even if the expenses were incurred solely in the execution of the employee’s duties.

The short answer, in most cases, is yes. However, the South African Revenue Service (SARS) permits certain deductions and exemptions, which provide relief to the employee.  Therefore it is important that every employee is aware of the deductions and exemptions available to him/her.

Section 8(1)(a)(i) of the Income Tax Act No 58, 1962 determines that all allowances or advances must be included in the taxable income of the receiver, excluding amounts actually spent on accommodation and/or meals and other incidentals when, in the course of executing his/her duties,  the employee is obliged to spend at least one night away from his/her normal place of residence.

Accommodation

Section 8(1)(a)(i) of the Act touches on two scenarios.

Firstly, in a case where the employer provides an allowance per night to the employee, the allowance is taxed on the amount actually paid/granted to the employee minus the actual expense incurred by him/her. For example, if Julius receives an allowance of R4 500 for three nights’ accommodation and spends only R3 000 on the accommodation, only R1 500 (R4 500 – R3 000) is included in his taxable income.

Secondly, it sometimes occurs that an employer pays an advance to an employee and requests the employee to hand in, on return from the trip, proof of expenditure together with the remainder of the advance. The taxable portion of the advance is then the amount of the advance minus the amount actually spent on accommodation minus the amount returned to the employer.

In both instances it is important to provide proof of the expenses incurred. It is also important to note that the allowance should not create losses. Should the costs incurred exceed the allowance, no deduction will be allowed for the amount by which the allowance is exceeded.

Meals and other incidental expenditure

Where the employer pays the employee an allowance or advance in respect of meals and other incidental expenses, the allowance or advance is also included in the employee’s income but the employee is entitled to claim one of the following deductions:

The amount actually spent on meals and/or other incidentals; or

The amount determined by the Commissioner of SARS for each day or part of a day the employee spends away from his/her normal place of residence.[1] (Note that the employee should spend at least one night away from home in order to qualify.)

The employee may choose the most beneficial option, provided the expenses do not exceed the allowance/advance.

In practice SARS permits the subsistence allowance to be included as a non-taxable allowance on the employee’s IRP5. Thus the deduction is allowed in most instances. It should be noted, however, that especially when an allowance is paid for accommodation, the provisions of Section 8(1)(a)(i) as set out above must be complied with.

Other allowances

Where a salaried person receives another allowance (e.g. an entertainment or cell phone allowance) the allowance is included in his/her taxable income and the expenses incurred (even the expenses incurred for business purposes) may not be deducted for tax purposes.

This, of course, creates a problem for some salaried persons who, by nature of their daily duties, have to incur business expenses that are not deductible against the relevant allowance received.

However, a “deduction” for these expenses may well be accomplished since, although SARS does not permit expenses incurred as other allowances to be deducted, the refunding of business expenses incurred by an employee is not included in the definition of other allowances.

Certain conditions apply, though. The expenses must be incurred on instruction of the employer for the purposes of the employer’s business, and proof of such expenditure must be submitted to the employer.

This means that an employee who is required by his/her employer to entertain clients from time to time, can incur this expense and claim it from the employer without any amount being included in the employee’s taxable income.

It is clear, therefore, that there are cases where the expenses incurred by an employee for business purposes, are indeed tax deductible, although it would be taxable if it were in the form of an allowance. Employers should therefore take into account the tax implications before deciding to include the provision of allowances in employee contracts.

[1] For the 2013 tax year the deduction for meals and incidental expenses for travel in the RSA amounted to R303 per day, and for incidental expenses only, R93 per day. Daily expenses for foreign travel are determined per country and are published by SARS in the Government Gazette.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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