PAYE AND DIRECTORS’ (AND MEMBERS’) REMUNERATION FROM 1 MARCH 2017

A1bMany would have noted reports in the national media that the Taxation Laws Amendment Act, 16 of 2016, was signed into law by President Zuma on 11 January 2017. One of the many changes that the Act brings into effect is the repeal of paragraph 11C of the Fourth Schedule to the Income Tax Act, 58 of 1962. The provision is repealed effective 28 February 2017, which means that a new regime is introduced for deducting PAYE from directors’ remuneration effective for the 2018 tax year commencing on 1 March 2017.

The repeal introduces a new dispensation for the calculation of employers’ liability to pay over PAYE on a monthly basis as relates to directors’ remuneration paid. (It bears reminding at this stage that members of close corporations are deemed to be directors for PAYE purposes too, so the same would apply to members’ remuneration paid from 1 March 2017.) Ironically, the “new” dispensation that now applies to directors’ remuneration is the same regime that has throughout applied to “regular” employees, and these regimes can now be said to be aligned.

The purpose of paragraph 11C was to provide for the unique circumstances presented in directors’ remuneration, whereby actual remuneration for directors would often be inconsistent and amount to ad hoc payments decided and approved from time to time.[1] Policy was therefore to have PAYE calculated on a notional amount calculated generally with reference to the actual directors’ remuneration paid out in the previous year of assessment.

However, with the introduction of section 7B (dealing with “variable remuneration”[2]) in the Income Tax Act itself in 2013, policy in this regard appears to have changed with National Treasury. If “regular” employees need to account for PAYE on an ongoing basis on variable remuneration (also inconsistent) received, the need to differentiate between employees and directors would fall away and no policy consideration would exist whereby there should be differentiated between the PAYE treatment of variable remuneration received by employees vis-à-vis directors’ remuneration.

The reference to section 7B is only relevant to explain the policy change. It is important to appreciate though that directors’ remuneration will likely not form part of “variable remuneration” as defined in section 7B, and therefore PAYE cannot be accounted for merely on an actual payment basis. PAYE should be calculated and paid over as and when remuneration accrues to an employee (with the exception of variable remuneration), and likewise to directors now too. This would be as and when the employee or director becomes entitled to the remuneration, and not only when the amounts are actually received subsequently (as would be the case for variable remuneration covered by section 7B).

[1] See the now archived SARS Interpretation Note 5 (Issue 2)

[2] A term defined in section 7B of 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)

DIRE PROVISIONAL TAX PENALTIES ON UNDERESTIMATION OF INCOME

a3bProvisional taxpayers are generally those taxpayers who earn income from sources other than a salary. In other words, PAYE is not deducted from these other sources of income on a monthly basis and paid over to SARS. As is the case with PAYE, provisional tax presents a cash flow mechanism to National Treasury through which to gather prepayments of an ultimate tax liability throughout a tax year on income which is not subject to the PAYE regime and which would otherwise only have been paid some time later when an annual income tax return is ultimately submitted. This can be as much as a year later.

To this end, provisional taxpayers are required to submit an estimate of their annual taxable income on a six-monthly basis. In the case of natural persons, provisional tax estimates are required to be submitted to SARS by way of a provisional tax return at the end of August each year, and again by the end of February. Legal persons similarly are required to submit estimates of taxable income at the end of the first 6 months of their financial years and again on the final day of the financial year.

For the first sixth-month estimate to be submitted an estimate is required to be made by the taxpayer of the estimated amount of taxable income that will be earned for the full year of assessment: half the amount of tax due on that estimated amount is required to be paid over to SARS at that date already, albeit after taking into account any amounts of PAYE also already deducted, where salary income is also earned. For the second provisional tax return, an estimate should again be submitted, and the tax on such estimate again be paid over (after taking into account any amounts of PAYE already deducted during the year as well as the first provisional tax payment already made).

The potential for manipulation by taxpayers is obvious and a legislated remedy is required to ensure that provisional taxpayers do not simply always submit an estimate of Rnil, thereby delaying the payment of amounts to SARS until the tax return for the applicable year itself is ultimately submitted. To this end, the Fourth Schedule to the Income Tax Act, 58 of 1962, makes provision for penalties to be levied where it appears at ultimate assessment date that a taxpayer has underestimated its taxable income for provisional tax purposes. For taxpayers earning more than R1 million in taxable income, taxpayers are allowed some leeway in that an estimate should at least have been 80% of the actual taxable income ultimately determined. This recognises that taxpayers are unlikely at year end to be able to accurately estimate their actual taxable income for the year already. However, if the estimated taxable income proves to be less than 80% of the actual taxable income, a 20% penalty is levied on the difference between the tax payable on 80% of the actual taxable income and the tax payable on the estimated amount returned by the taxpayer.

Similarly, taxpayers earning less than R1 million taxable income are subject to the same 20% penalty, but within a 90% margin of accuracy instead of 80%. These taxpayers are afforded additional relief though in that they are permitted to submit as an estimate a factor of their last assessed taxable income without running the risk of incurring a penalty, even if this amount ultimately is less than 90% of the actual taxable income determined.

Interestingly, no underestimation penalty exists for first provisional tax estimates, however SARS may query estimates submitted and require taxpayers to submit revised first provisional tax estimates. Where second provisional tax estimates are concerned though, taxpayers should take care in preparing estimated taxable incomes which are to be submitted for provisional tax purposes as failure to do so could lead to a significantly increased tax charge when the tax year is ultimately assessed by SARS.

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)

REGISTERING FOR PROVISIONAL TAX

Many taxpayers file their tax returns on an annual basis unaware thereof that they may be regarded as provisional taxpayers in terms of the Income Tax Act, 58 of 1962, too. In its simplest form, provisional tax exists to provide for regular cash flows to the fiscus throughout the year. In this sense it exists for very much the same purpose as the PAYE system, with provisional tax applying though typically to non-salary type income.

The following persons are considered provisional taxpayers in terms of the Fourth Schedule to the Income Tax Act, and are thus required to file provisional tax returns and make the attendant payments of provisional tax over and above those annual obligations which exist as relates to their annual income tax returns:

  • Every person (other than a company, but including a trust) who generally earns any income other than in the form of “remuneration” as defined;
  • Every company; and
  • Any person who is notified by the Commissioner for SARS that he or she is a provisional taxpayer.

The above however excludes:

  • Any natural person who does not derive any income from carrying on a business, if the taxable income for that person does not exceed:
    • the tax threshold (for 2016: R73,650 for individuals under 65, R114,800 for individuals under 75 and R128,500 for all other individuals); or
    • R30,000 as relates to interest, dividends or rent received from letting immovable property;
  • Deceased estates;
  • Certain approved public benefit organisations;
  • Body corporates; and
  • Small Business Funding entities.

Many taxpayers may be completely unaware thereof that they are required to file returns as provisional taxpayers. This is especially true of typically individuals earning a salary but for example letting a second property which they may own to earn a second income stream. These individuals will, based on the above prerequisites, have to ensure that they file bi-annual provisional tax returns and pay the requisite amount over to SARS in time (due by 31 August and 28/29 February each year). Failure to comply in this fashion will lead to significant penalties being incurred on late payment, or underestimation of the amount of provisional tax due: failure to submit a return when required is considered as the taxpayer having filed a return for Rnil.

As is the case for PAYE though, the provisional tax system does not operate as a tax per se but rather as the prepayment of a yet to be determined income tax liability. Therefore, once the ultimate amount of tax due for any given year of assessment has been determined after filing one’s annual income tax return, the resultant tax liability is reduced by provisional tax payments already made (and PAYE withheld) and the difference is then either due to SARS or to the taxpayer as a refund of the provisional tax paid too much.

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)

SARS: PROCEDURE TO CHANGE BANKING DETAILS FOR PAYE (PAY AS YOU EARN)

A2_bIf the banking details of an employer, as defined for Employees’ Tax (PAYE) purposes, changes, the employer must request SARS to change its banking details, otherwise SARS can impose a fixed penalty in terms of the Tax Administration Act. A fixed penalty is based on the amount of the assessed loss or taxable income of the employer for the preceding tax year.

Channels through which a change in banking details may be requested

Banking details for PAYE can only be changed:

  • In person at a SARS branch or
  • Via eFiling.

SARS will not accept requests for change of banking details by telephone, fax, email, post or SARS dropbox.

Persons allowed to request a change in banking details

Only the following persons may request a change in banking details for PAYE purposes by submitting the relevant documentation, as set out in Table 1 and Table 2 below, to a SARS branch:

  • The employer (if the employer is an individual), or a representative employer who must be a natural person e.g. accounting officer, member of a close corporation, treasurer, partner, etc. This person must already be registered on the SARS system as the official representative of the legal entity he/she represents.
  • Only under certain exceptional circumstances*:
  • A tax practitioner who is registered with a controlling body and SARS, and can present a valid power of attorney.
  • A representative with a once-off mandate e.g. bookkeeper, auditor, director, tax practitioner or an employee of the tax practitioner, attorney, etc. The representative with the once-off mandate must be linked to a tax practitioner on eFiling in order to change the employer’s banking details on eFiling.

*Circumstances accepted by SARS as exceptional and which requires alternative/additional documentation to be submitted:

– Employer passed away

– Employer is incapacitated or terminally ill

– Employer is in prison

– Business is under liquidation

– Employer/business is more than 200km from SARS branch

– Representative employer is temporarily outside RSA

– Representative employer is terminally ill 

Documentation required for change in banking details

Table 1:

The following documents must be submitted to SARS by the employer/representative employer requesting the change of banking details:

DOCUMENT DESCRIPTION DOCUMENT DETAILS
Employer/Representative employer
a) Identification: Valid original ID/temporary ID/passport/driver’s licence/asylum seeker certificate Original plus one certified copy
b) Proof of physical business address (See Table 2 for list of documentation that SARS will accept as proof) One copy
c) Proof of residential address (See Table 2 for list of documentation that SARS will accept as proof) See Table 2
d) Letter of appointment from the employer if the request is received from the representative employer One original
Tax practitioner/Person with a mandate
e) Power of attorney One original
If employer is a company/close corporation
f) Memorandum of Incorporation (MOI) One copy
g) Proof of banking details:Not more than 3 months old and shows account holder’s legal name, account number, account type and branch code
– Bank statement with original bank stamp on it,
or
One original
– ABSA eStamped statement, or One original
– If client opened a new bank account and has
not received a bank statement yet: Letter from
the bank on bank letterhead with original bank
stamp showing date on which bank account
was opened
One original
h) Proof of physical business address of employer (See Table 2 for list of documentation that SARS will accept as proof of physical business address) See Table 2

Table 2:

SARS will accept any of the documents below as proof of residential address or physical business address:

DOCUMENT DESCRIPTION NOT OLDER THAN
1. Municipal account 3 months
2. Student fee account 3 months
3. Co-op statement (farmers only) 3 months
4. Medical aid statement 3 months
5. Bond statement from bond holder 6 months
6. Telephone account 3 months
7. Licence for motor vehicle 1 year
8. Court order 3 months
9. Subpoena 3 months
10. Traffic fine 3 months
11. Documents for payout of pension or UIF 3 months
12. Life insurance policy 1 year
13. Short-term insurance policy 1 year
14. Health insurance policy 1 year
15. Funeral policy 1 year
16. Investment statement for shares or unit trusts 1 year
17. Current and valid lease/franchise contract N/A
18. Form CRA01 (Confirmation of Entity Residential Address): – To be completed if none of the above documents are available – If proof of residence is in the name of a third party: A certified copy of the third party’s original ID/passport/driver’s licence OR temporary ID/passport/driver’s licence must be supplied Not supplied

The above requirements place an additional administrative burden on taxpayers. However, it is clearly to the benefit of both SARS and the taxpayer to ensure that banking details are not changed illegitimately at SARS. If you need more information or professional assistance regarding the above, please contact our offices.

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:

  • SARS Guide PAYE-MTD-28-G01 – Change of banking details for employers