NON-EXECS, PAYE AND VAT: SARS PROVIDES CLARITY

Historically, it was unclear whether amounts paid to a non-executive director were subject to the deduction of employees’ tax and whether the prohibition against certain deductions by salaried employees applied to them. This being as a result of a non-executive directors arguably not earning remuneration as defined in the 4th Schedule to the Income Tax Act. No. 58 of 1962 (“the Act”)

This uncertainty further extended into the application of proviso (iii) to the definition of an “enterprise” as contained in Section 1(1) of the VAT Act, 89 of 1991 (“the VAT Act”), as this proviso excludes from the ambit of VAT the activities of an employee but nevertheless applies to the activities of an independent contractor.

During the 2016 budget speech, it was announced that an investigation into these uncertainties will be launched and clarity provided.  This resulted in the issuance by SARS of two welcomed binding rulings. These are, Binding General Ruling 40 (“BGR40”) which deals with employees’ tax implications for a non-executive director and Binding General Ruling 41 (“BGR41”), which deals with the VAT implications.

In terms of BGR40, SARS ruled that non-executive directors do not earn remuneration and therefore amounts paid to them are not subject to employees’ tax. In addition, BGR40 puts it beyond doubt that the prohibition against deductions as contained in section 23(m) of the Act does not apply to non-executive directors.

In terms of BGR41, SARS ruled that non-executive directors may be required to register for and charge VAT in respect of fees earned provided all requirements are satisfied.

While the rulings only apply from 1 June 2017, it is arguable that the rulings merely give effect to what has always been the position under South African tax law.

RELOCATION ALLOWANCE – COMPLEX TAX LAW CHANGE

Relocation Allowance – Complex Tax Law Change

The very old and tested dispensation of paying an employee 1 month tax free relocation allowance on moving residency for employment, has been repealed by SARS. The new rule applies effective 01 March 2016 onwards and unfortunately the new rule comes with significant uncertainty in application.

Where an employer bears expenses associated with relocating an employee, the employer is providing the employee with a taxable benefit that is subject to tax. That is, unless reliance is placed on the exemption in section 10(1)(nB) of the Income Tax Act, No.58 of 1962 for qualifying expenditure.

The qualifying expenditure may broadly be broken down into three categories:

  • Travel expenses;
  • Cost of selling an employee’s previous home and cost of settling into the employee’s new home (“settling in costs”); and
  • Costs associated with certain temporary accommodation (“temporary accommodation cost”).

Travel expenses:

The travel expenditure that qualify for the exemption are those expenses incurred by the employer in transporting the employee, the members of his household and his or her household goods from his or her previous place of residence to the new place of residence. According to SARS’ guide for employer’s Typical examples of qualifying expenditure include:

Settling in cost:

Prior to 1 March 2016, SARS’ practice was to allow employers to pay an employee the equivalent of 1 month’s basic salary tax free to cover settling in costs. From 1 March 2016, this is no longer the case. Employees will now have to proof that the expenses were incurred to cover qualifying settling costs before reliance may be placed on the exemption. That begs the question – which costs qualify:

Expenses that qualify are those expenses directly related to the sale by the employee of is previous home and settling into new accommodation. There is no bright line test that may be applied to determine whether an expense qualifies or not. Each expense will have to be considered on its own facts. SARS, however, in their Guide for Employers in Respect of Employees Tax (2017), (“the SARS guide”), lists the following expenses as qualifying expenses:

  • Bond registration and legal fees;
  • Transfer duty;
  • Bond cancellation fees;
  • Agents commission;
  • Settling in fees;
  • replacement of curtains;
  • Vehicle registration fees;
  • School uniforms;
  • Water, electricity and telephone connections;
  • Internet connections;
  • Necessary housing refurbishments;
  • Affiliation registration costs; and/or
  • Levies.

In our view, the list of expenses above are not exhaustive.

Temporary accommodation cost:

These are costs incurred of hiring residential accommodation in an hotel or elsewhere for the employee or members of his household during the period ending 183 days after the employee’s transfer took effect or after he took up his appointment, as the case may be, if such residential accommodation was occupied temporarily pending the obtaining of permanent residential accommodation.

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King IV and the Prickly Issue of Exec Salaries

The recently released King IV Report on Corporate Governance recognises that executive remuneration, both in terms of its quantum and the disparity between top and bottom wage-earners, has become a key governance issue, with real implications for long-term corporate sustainability.

“In line with King IV’s qualitative approach, it focuses on what outcomes boards and remuneration committees should be aiming to achieve,” explains Ansie Ramalho, who was King IV project lead for the Institute of Directors in Southern Africa.

Fair, responsible and transparent remuneration

Principle 14 relates to executive pay, and says: “The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.”

The report recommends certain practices for governing bodies to consider in order to achieve the outcomes expressed in the principle. One important development is enhanced accountability through more definitive disclosure recommendations.

Remuneration should be disclosed in three parts:

  • a background statement which explains the context for remuneration considerations and decisions;
  • an overview of the remuneration policy which is forward-looking; and
  • an implementation report which is looking back at the details of remuneration awarded to each director and member of executive management.

Stakeholder input

Perhaps the biggest innovation is the provision for greater involvement of shareholders on this important topic. King IV proposes two separate, non-binding advisory votes by shareholders at each AGM, one on the remuneration policy itself, and one on the implementation report. It also specifies that in the event that either is voted against by 25% or more of the votes cast, the board should engage with dissenting shareholders to understand their concerns and objections.

“In all other jurisdictions that we had researched, the threshold below which a vote against would require a formal response from the board is higher, at 50%. This will mean that South African companies will have to become much more responsive to the concerns of their shareholders, who could also take on the role of proxies for the broader stakeholder group,” explains Ramalho.

The JSE is making the passing of the two non-binding advisory votes and the responses as stipulated in King IV mandatory through its proposed amendments to the listings rules. The draft amendments to the rules are currently out for public comment before finalisation.

In relation to the highly inflammable issue of the wage disparity within organisations, the report recommends that arrangements be provided for in the policy that ensures that the remuneration of executive management is fair and responsible in the context of overall employee remuneration. An explanation of how this matter is addressed should also be disclosed in the remuneration report.

Charting a defensible course

Furthermore, King IV suggests that boards look beyond financial indicators when identifying performance. While financial performance is obviously important, account should also be taken of the effect (both positive and negative) the organisation has on the different types of capital it uses or affects, and the triple context of the economy, society and the environment.

“Governing remuneration could be one of the board’s most important tasks in the current climate and, of course, there is no such thing as a perfect system for remuneration governance that will satisfy everybody,” Ramalho concludes. “But we hope that by focusing on what is fair, responsible and transparent in promoting the strategic objectives and positive outcomes of companies, boards will be able to chart a defensible course.”

 

Source: www.bizcommunity.com

 

 

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Africorp Solutions Presents at IPM – 2016 – King IV and Human Resources

The IPM Convention, is a 3-day convention which delivers the latest thinking and solutions in the management and development of people. Hosted at Emperors Palace, Johannesburg, all Human Resources Professionals, business leaders, suppliers and key influencers come together from private and public sectors to explore topical issues and to seek solutions to business challenges.

As part of this wonderful event, Africorp Solutions and Advisory in its second year in participating at the convention, presented on a brief update on King IV, its underpinning philosophies and distinguishing principles from King III and interesting points on recent trends which Human Resources should consider for future, delivered by Jerry Botha, Director of Africorp Solutions and Advisory.

You may contact Jerry Botha (0828896118) should you have questions around the presentation content.

We would like to thank all the delegates whom attended our presentation and hope that it was of notable value to you.

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Department for Public Service and Administration – Conditions of Appointment

The Department for Public service and Administration has issued the Conditions of Appointment (including remuneration and other conditions of service) applicable to the members of the public service commission, as determined by the President.

For access to the entire Conditions of Appointment, please click here.

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Minimum Wage Goes Up!

Those working in the domestic worker sector can look forward to increased minimum wages.

According to Timeslive, the new minimum rates come into effect from 1 December.

The Department made the announcement today.

Jobs in the domestic worker sector include cleaners, gardeners, nannies and domestic drivers.

There are two new minimum rates:

– Rates for those working in major metro municipalities and cities. This is called “Area A”. The new hourly rate for those working in Area A, and who work for more than 27 hours a week, is R12,42. This is up from R11,44 per hour.

The new weekly rate for those working in Area A is of R559,09 (up from R514,82) and the monthly rate is R2422,54 (up from R2230.70).

– “Area B” is the term for more rural areas. For those working in Area B for more than 27 hours a week, the hourly rate is R11.31‚ a weekly rate of R508.93 and a monthly rate of R2205.17.

Source: Daily Sun

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Guidelines for Dealing with Cross-Border Payroll

South African companies, as well as many global multinationals, are increasingly seeing the rest of the continent as an attractive growth target. No matter what particular business model they adopt in the target country, they are likely to find themselves seconding specialist staff to their in-country operations. In general, these expatriates would remain on the payroll of the South African or parent company.

Making salary payments to an employee working in another country raises a whole set of inter-related issues that payroll professionals need to consider carefully. While not exhaustive, the following are some of the key areas to think about:

Draft a cross-border remuneration policy

Chances are there will be more than one employee affected, so it is critical that the company has a policy in place that sets out the principles relating to how the company deals with employees working across borders. The policy should protect the interests both of the company and its employees. Many of the subsequent points would be integrated in the policy, as well as in the individual employee contracts. A payroll professional would be best suited to advise business owners on what this policy should look like.

Ensure that the employee is not disadvantaged by his or her secondment

One important principle is that the employee should not be financially or otherwise disadvantaged by the requirement to work in a foreign country. At a practical level, this means considering carefully what the tax rules in the host country are — tax rates might be higher or tax compliance more complex — as well as the terms of the double taxation agreement between South Africa and the host country (if there is one).

An added consideration here would be to consider how much time is expected to be spent outside of the Republic, and the impact this would have on tax. For example, it might be that the package is structured based on the fact that the employee is expected to be exempt from paying tax in South Africa because he or she is out of the country for more than 183 days in aggregate, 60 of which are continuous, in a 12 month period. Thought needs to be given to the impact of the employee forfeiting this tax exemption by having to make an unplanned trip home, either for business or personal reasons. If deemed a South African resident by SARS, an individual would be liable for normal taxes, including PAYE, and this could be hugely negative if the exemption condition is not met. How to handle such unexpected events should be covered in the policy.

These kinds of complexities, and the fact that the unexpected could happen, means that many companies actually opt for simply paying a home nett salary and taking care of the employee’s tax themselves on behalf of the employee. Although this approach has the virtue of simplicity, it must also be recognised that SARS will treat this payment of employee PAYE as a payment of the employee’s debt. This is seen as a taxable benefit in the hands of the employee and thus increases the employer’s the cost of the employee.

Structure the reward package carefully for tax compliance

While ensuring that the employee is not disadvantaged, it is equally important that his or her cross-border package complies with the tax regimes in both countries. In practice, employees on secondment are usually paid a premium in the form of a hardship allowance or similar subsistence allowance, and this should be structured in a way that is beneficial to the employee while remaining tax-compliant in both countries. Both employee and employer need to fulfill their tax obligations to the host and home countries, and tax evasion should be avoided as it is a criminal offense.

Give thought to medical aid and evacuation

While an individual is on secondment in a foreign country, he or she would need to continue paying South African medical aid in order to avoid late joiner penalties. Late Joiner Penalties may be imposed on members over the age of 35 if they have not belonged to a medical aid before, or if they have had a break of more than 90 days from a medical aid. Depending on the number of years that they have not belonged to a medical aid, a late joiner penalty will be added to the member’s monthly contribution and worked out as a percentage of the contribution based on the total number of years a member has not been on a medical aid since the age of 35 years. But he or she would also need medical cover in the foreign country. Who pays for this, and what are the arrangements if urgent repatriation for medical or other reasons is indicated?

Does the employee’s death benefit cover cross border deaths?

Death is normally not a topic that forms part of general discussions, but an employer needs to make sure that the policy in place to cover death covers cross border eventualities. An employer might find themselves in trouble if such an event occurs and the employee was not covered outside the borders of South Africa. Ensure that proper precautions are in place as this can also result in an increase to the cost to the company.

In conclusion, it should be apparent that this a complex area, and the payroll policy needs to be robust in order to cope with different eventualities. My advice would be for business owners to work closely with a registered SAPA payroll practitioner that specialises in cross border remuneration structuring to understand the issues fully, and to structure the company policy and individual employment contracts.

One might find that the cost to the company is much higher than budgeted for as the secondment could result in unanticipated costs if not thought through thoroughly before drafting both the business contract and the employee contract.

Source: www.bizcommunity.com

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KING IV

King IV, which aspires to be the revamped, modern version of its predecessor, comes across as more philosophical in nature with strong ties to sustainability, ethical behaviour and a call on all corporate citizens to ensure that governance extends further than the boardroom. It attempts to instil the ethos of maintaining a symbiotic balance between sustainable value creation and its ripple effect on the socio-economic eco-system in which business operates.

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Compensation for Occupational Injuries and Diseases Act (COIDA) Threshold Increase 2016/2017

The Minister of Labour, NM Oliphant, on the 12 February 2016 announced in a Government Gazette (39683) that she intends to increase the amount of earnings (the remuneration of an employee at the time of the accident or the commencement of the occupational disease) under Section 83 (8) of the Compensation for Occupational Injuries and Diseases Act, 1993 (Act No. 130 of 1993).

With effect from 1 April 2016 the maximum amount of earnings will increase from R355 752 to R377 097 per annum.

Budget Review 2016 – A focus on Remuneration and Collective Bargaining Reforms
Following the 2016 budget speech/review, Finance Minister Pravin Gordhan made mention of a few pointers which might be quite relevant for remuneration professionals to consider in the next round of salary increases or wage agreements. This included the following:

  • Government has reached an agreement on the principle of a notional minimum wage. However, deliberations still continue on an appropriate level and how it will be determined.
  • The National Treasury, the Department of Public Services and Administration (DPSA)and the Department of Planning, Monitoring and Evaluation (DPME)are assessing the 2015 public sector wage negotiation process, where the following issues were identified:
  1. There is excessive focus on short-term cost of living adjustment;
  2. Insufficient focus on longer-term reforms to public sector employment practices and remuneration structures that could improve performance, service delivery and fiscal sustainability;
  3. Weakness in collective bargaining chambers; and
  4. There seems to be an increase in remuneration and wage bills which in most cases it’s not always linked to increase in productivity.
  • The results of the assessment will be used by the National Treasury in partnership with the DPSA and DPME to develop and propose reforms to collective bargaining and remuneration that could further enhance fiscal stability;
  • Government further suggests that remuneration frameworks be reviewed and a framework to measure productivity be developed that will ensure that wage settlement and remuneration growth is contained and linked to efficient performance at an individual and organisational level.

For more in-depth information, please click here to view the article.

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RETIREMENT REFORM: What are the real issues to be considered by employers ahead of the implementation date?

Engaged and happy employees are less likely to look for greener pastures elsewhere. But how do you, as an employer, ensure that your employees are happy and engaged? Is it enough to only pay market related salaries or to provide the bare minimum benefits, like a retirement fund or benefits in the event of death or disability? Or should employers perhaps consider that each of their employees are unique and would therefore also require unique benefits.

Much has been said about the retirement reform over the last two years, and again in the recent days. But how can you as an employer ensure that the changes have a positive impact on your employees. In this article we revisit the changes that are due to be implemented on 1 March 2016, but more importantly consider some of the remuneration items impacted by these changes and for consideration from a human resource perspective.

Background

The 2015 Taxation Laws Amendment Act that was promulgated on 8 January 2016, and the events and debate unfolding thereafter, have been very interesting from an advisory perspective. Statements from specifically Cosatu has sparked a lot of public debate. They certainly have some valid points and their views cannot be simply dismissed as them taking a political position.

A number of the changes we, as employers and employees are facing, were promulgated in the 2013 Taxation Laws Amendment Act already and then amended in the 2014 Taxation Laws Amendment Act to only become effective on 1 March 2016. The new tax rules that will come into effect are designed to harmonise the tax treatment and annuitisation requirements for all types of retirement funds, namely pension, provident and retirement annuity (RA) funds.

Employer contributions to a pension or provident fund will be included in the employee’s remuneration as a taxable benefit. In turn, any contribution to a registered fund, whether by the employer or the employee, will be allowed as a deduction from income. The deduction will be limited to the lesser of R350 000 or 27.5% of the higher of remuneration or taxable income (excluding retirement lump sum benefits, retirement lump sum withdrawal benefits and severance benefits).

In addition to this tax change, employees in provident funds who are younger than age 55 at 1 March 2016, will no longer be allowed to take their full fund benefit as a lump sum at retirement. Similar to the current rules for pension and RA funds, a provident fund member will only be allowed to take 1/3rd of their benefit accumulated after 1 March 2016 in cash. If the member’s benefit is less than R247,500 at retirement, the full benefit can still be taken as a cash lump sum.

Although there has been a lot of negative publicity and concern from especially the unions regarding these changes, the average employee stand to benefit from the tax changes once implemented.

Firstly, all employees who are currently making an employee contribution to a provident fund, would be better off as their own contribution will now also rank for a tax deduction, where it was previously only the employer’s contribution that was not a taxable benefit.

Secondly, although employees in pension funds could already contribute 27.5% of their salary packages tax free towards their employer-sponsored funds where the funds were correctly structured, members of provident funds and those being self-employed and contributing to RA’s, would now also be able to enjoy the same tax benefit.

The above items are relatively straightforward and have been discussed endlessly over the last two years, but what are the real issues to be considered by the employer and human resources ahead of the implementation date?

Education

National Treasury was instructed by Parliament to launch an extensive education campaign to educate retirement fund members on how the reforms will impact them. Their latest publications can be viewed here and can be used by human resources to facilitate the communication to their employees.

Not only is communication and education to employees essential, but trustee boards and management committees should also be educated and to ensure the fund is aligned to the employer’s human resource strategies, as it is a sub-component of the remuneration policy. It is important that these individuals understand the different remuneration structures, flexible benefits, King III, and how other peer group employers structure their pay. This will encourage better informed decisions for the benefit of employees.

Flexible contribution rates

It is imperative that an employer’s retirement fund arrangement support their remuneration philosophy, and not the other way around. Often, the employer’s retirement fund was set up many years ago, and the initial fund structure and rules were drawn up based on the remuneration structure at the time. Although the rules of the fund have been updated over the years to allow for legislative and other changes, the contribution rates are usually still at the same level from when the fund was first introduced. At the time, the rate was determined under a defined benefit structure or based on what the employer could afford in a defined contribution environment. Now, many years later, the fund may have converted from a defined benefit to defined contribution structure, and even though the employer has shifted the risk of obtaining an adequate benefit at retirement to the employee, the employee is not afforded the opportunity to select his/her own appropriate contribution rate.

Many employers in South Africa have also moved from a basic salary plus benefit structure to a Total Cost to Company remuneration structure. And although the employee receives a fixed package from the employer, very few employers offer flexibility and allow their employees the opportunity to structure their package according to their own personal financial needs.

Although we have advocated flexibility for many years, the introduction of the tax changes and the now maximum deduction of 27.5% applying to all employer and individual funds, makes it almost impossible to ignore this option anymore. Employers should offer flexible contribution rates in order for their employees to take advantage of this increased deduction within the employer’s fund. Where the employer’s fund is well-run and offers sufficient flexibility in terms of contribution rates and investment options, an employee would almost in all cases be better off by saving within the fund rather than in a personal RA. Not only will they benefit from lower administration fees and commission, but the investment management fees negotiated by institutional investors (like pension and provident funds) are also much lower than on individual policies. This does however emphasize the requirement for funds to offer investment choice, because if an individual feels they can obtain better investment performance by selecting their own investment portfolios, they may want to minimize their contribution to their employer fund, and rather invest in an individual fund. And where their contribution to a RA was previously limited to 15% of their non-retirement funding income, there is now a fair playing field and they can get the same tax advantage by investing in an RA, albeit at a potentially higher cost.

Flexible pensionable base for calculating contributions

The further change to the base on which the tax deduction will be calculated, from ‘approved remuneration’ or ‘retirement-funding employment’ to the higher of ‘remuneration’ and ‘taxable income’, require employers to revisit the determination of their current pensionable or fund salary. Although the employer is not privy to the taxable income of its employees, as it includes personal additions and deductions, the employer has a clear picture of the employee’s total remuneration. However, the majority of employers calculate pensionable salaries as a percentage of remuneration or Cost to Company, and the market average is between 70% and 75%. Although we are not suggesting that this should uniformly be increased to 100%, employers should allow their employees to elect a pensionable salary equal to 100% of remuneration to provide them an opportunity to take full advantage of the tax changes.

High-income earners

The one area where employees would be worse-off due to the tax changes, is where higher income earners’ deductible contributions will be capped at R350,000 per annum, which will include costs and premiums in respect of insured benefits offered by the fund, eg. group life assurance (GLA). Members who currently pay more than R350,000 (by way of their combined personal and their employer’s contribution) will, from 1 March 2016 pay tax on the contributions above the capped amount and will accordingly see a reduction in their take-home pay. The contributions to a fund that was not allowed as a deduction as a result of the limit, may rank for deduction in the following year of assessment, subject again to the limitations.

Employers may consider implementing the limitation in their fund rules, but we believe it is more important for the affected employees to have the opportunity to reduce their contributions to the fund on a voluntary basis. Some individuals may choose to continue to contribute above the tax-free limit, although without the tax benefit, there is a level playing field for other types of investment. It is critical for these employees to receive financial advice and to understand the impact of their choices.

Understanding the costs of running your fund

It is a well-known fact that the different layers of charges involved in running a retirement fund, are not transparent and therefore not well-understood by employers and fund members. Those who claim that they have this best bedded down, are often the most ignorant. National Treasury first published a paper in July 2013 on Charges in South African Retirement Funds. Further draft regulations were also published in July 2015 that aim to lower the charges and improve market conduct in the retirement fund industry. A copy of this publication is available here.

The only way for employers, fund trustees or management committees to understand the true cost of running their fund, is to conduct a detailed investigation into these items. Charges may include administration fees, policy fees, benefit consulting fees, financial advisor fees, risk charges, asset management fees, manager selection fees, guarantee charges, capital charges, performance fees, platform fees, and other charges levied on events such as switching investments, leaving the plan, or terminating a policy. These changes can be levied as a fixed rand per member, a percentage of salary or a percentage of assets under management.

Ultimately these costs are borne by your employees, and it is therefore important that employers do not lose sight of this important aspect amongst all the debate of the current tax changes. It is quite interesting that the various fund managers and financial management companies are generally in strong support of the retirement reforms. These institutions are very happy to be on the receiving side of the reforms, as compulsory annuitisation of savings at retirement means an automatic increase in their business. Where there has been proper member education and implementation of member education, one can argue that retirement reform would not have been necessary, as the mischief of uneducated withdrawals and spending, would be less prevailing.

Next step for employers

Although the tax changes effective 1 March 2016 require very little change from employers and fund trustees, and employers could potentially get away by making a few relatively small changes to fund rules, you would be doing your employees an injustice if you do not use this opportunity to revisit your fund structure and give them the opportunity to make full use of the maximum tax free savings. Especially employees closer to retirement would appreciate the opportunity to save tax-free and in a cost effective manner.

About the Author

Mentje Larney is an actuary and specialist remuneration, benefit-and tax consultant at Remuneration Consultants and operates in a niche consulting capacity to various employers. Mentje also presented to Parliament’s Standing Committee on Finance in November 2015 on the proposed Retirement Reform changes on behalf of the South African Reward Association (SARA).

National Treasury Retirement Reform Documents

Annexure B Impact of Annuitisation  
Annexure C Data on Members and Net Pay  
Annexure D NT Consultation Responses  
Annexure A Q&A  
Additional Considerations  
Advantages of Reforms  
TLAB A-List  
TLAB B-Bill  
Charges in South African Retirement Funds