After becoming aware of an increase in payroll deductions in recent years, the South African Reserve Bank (SARB) and National Treasury have engaged in discussions with stakeholders on the creation of a regulatory framework to govern payroll deductions. The proposal was open for public comment until 30 April 2018.
What can be done to remunerate employees better? The simple answer is plenty. Yet many employers do not get the most out of employee package structuring. This is one of those areas where there are “too many experts”, and correctly so, as this spans the professional functionality of remuneration specialists, tax advisors, auditors, financial planners and trustees.
Therefore, depending on which professional you ask, you will get different responses, for example, tax advisors will comment on that there is no tax risk, whilst they have no experience in remuneration methodology and financial planning.
Conversely, trustees will always promote better retirement planning and more risk benefits, which are indeed important, but should this be more important than putting a child through the best possible education. The correct answers only come when you deal with holistic experts that can demonstrate to you an approach of “total reward statements”.
Tough Times Means no More Holy Cows
With economic times being what they are, employers cannot afford large increases. It also becomes difficult to give good increases if you are retrenching staff. The question then is, what can be done to pay employees better.
If you have ever offered an employee a job and needing to “gross-up” the package because the take-home pay is not enough, the reason is most likely not your costing of the job, but rather not having the correct package structure flexibility.
The Supreme Court of Appeal says you can Salary Sacrifice
On November 30th 2015, it was confirmed that the Supreme Court of Appeal has delivered a final judgement on remuneration structuring. The simple message is that it is absolutely legal to structure remuneration and allow a salary sacrifice. A word of caution before you proceed.
The principle has been confirmed. The Supreme Court of Appeal (SCA) made it very clear that a package structuring agreement and correct documentation, which will include policies and often a Package Structuring Tool, is compulsory. With no ambiguity, the SCA said it will simply not believe oral evidence and the actual legitimacy depends on correctly executed documents.
What is the Golden Rule?
An employee should be allowed to structure their remuneration to meet personal financial requirements. Where this is not done, the employer is “paying” for benefits or allowances which employees do not want. This means hard earned employee remuneration is paid towards benefits which the employee does not value. It may make your employee benefit broker happy, but it does not mean anything for your employee. Rather give your employee the choice to utilize flexible benefits to maximize their package.
The most commonly allowed items to a flexible-package are retirement funding, group life, disability, income protection, funeral cover, employee vehicle insurance, travel allowance, company vehicles, medical aid, gap cover, thirteenth cheque etc.
Why do all Companies not do this?
Employers are generally not well informed of what legally can be done. In addition, the functions within the company who should promote this flexibility are usually concerned about additional administration. The administration is actually not that much more, where you are currently administering the employee benefit provider and payroll systems.
What is New?
The budget 2017/18 had plenty of bad news for employers, but there has been serious relief given for employee child bursaries’.
Employee Children Bursaries – Tax Saving Structuring
The ability for employees and business owners to pre-tax structure their children’s school and university fees, remain one of the few available, but seldom used tax planning opportunities. This is the only tax break allowed on private expenses and have been extended in the 2017/18 Budget Speech.
The saving depends on the cost of school fees, tax brackets and number of children. For qualifying employees, the saving ranges between R3,600 to R23,400 per child per annum.
The most common reasons why employers, business owners and their advisors have been reluctant to offer this to employees include –
- Technical uncertainty on how the tax relief must be package structured correctly and concerns that a tax scheme may be operated which may later be challenged by SARS audit.
- Resources to implement, roll out and administer the scheme.
- Capacity to deal with employee questions, tax risk management, proper communication on the saving to employees.
- The cost of top end tax advisors to see through implementation and administration.
We offer an outsourced employee children bursary scheme, with no cost to the employer. The cost of this service is an administration fee, funded from the tax saving –
a) Assessment on whether employees qualify, and the tax saving achieved.
b) Salary structuring agreement.
c) Instruction for payroll.
d) One invoice per month for all participating employees with reconciliation.
e) Tax policy documentation, tax opinion and other supporting documentation to ensure full tax legal compliance and tax risk management.
Our service includes our defence against any SARS employees’ tax audit or employee personal tax audit, at no cost to the employer, including any costs of defence at the Tax Board or Tax Court.
The Increasing Need for Flexible Benefits
Today’s South African organisation finds itself entrenched in difficult and uncertain market conditions resorting to cost saving solutions such as retrenchment, down-scaling and redundancy. Consequently, this has a notable ripple effect on attraction and retention strategy.
Ensuring the right talent remain with the organisation, in an environment where every Rand counts, has now become increasingly difficult, yet, critical to sustainability. Introducing flexibility to the remuneration package is an effective means of enhancing the employee value proposition and strengthening employee retention, without increasing salary costs.
Payroll professionals, by the nature of their function, have a good sense of what other organisations in the industry are doing in terms of effectively structuring the delivery of remuneration to their employees. Their understanding of competitive package structuring practices in the market ideally positions them to provide guidance to Human Resources in this regard.
The concept of incorporating flexible benefits within the remuneration structure is becoming widely recognised. It is a typical feature of the Cost-to-Company (CTC) structure. CTC structures, with flexible benefits, offer employees an opportunity to structure the benefits portion of their package to suit their current financial and personal needs.
The CTC with flexible benefits approach provides employees with the following advantages –
- It enables employees the opportunity to make informed choices by tailoring parts of the remuneration package to fit with their personal and financial circumstances;
- The employee is not forced to participate in benefits that they may not value or require;
- The employee will not be worse off as their package remains the same and the employee can elect benefits is such a way that they still maintain their desired net take home pay; and
- It aligns with retirement reform rules on where employer contributions to pension and provident funds will become fully taxable and employee will receive a corresponding tax deduction up to 27.5% Or a maximum of R 350 000 per annum, which ever applies first.
The advantages of this approach also extends to the employer as follows –
- There are no hidden costs which allow better budgetary control and management of remuneration costs;
- It enables employers to be better positioned to attract and retain quality personnel through effective delivery of remuneration;
- The structure is tax-compliant, resulting in no unforeseen liabilities in the event of a tax audit; and
- The approach allows for the harmonisation between employee remuneration, ensuring compliance to Section 6(4) of the amended Employment Equity Act (EEA) 55 of 1998.
The key considerations regarding the introduction of flexibility as part of the remuneration package are outlined below.
- Exclusively costed arrangement – An arrangement where the cost of risk benefits and administration fees are separated from the retirement funding portion of the contribution towards the retirement fund and allows the employee to structure the contribution in a manner which ensures that the retirement savings portion is optimised.
- Fund Salary (Pensionable Emolument) – flexibility in fund salary will allow the employee an option to either increase or decrease the base upon which retirement funding and risk benefits contributions are calculated. In this way employees can either maximise retirement and risk benefits or increase their net pay through a lower contribution.
- Multiples of Risk – where flexibility of risk benefits are provided in terms of a range of multiples of fund salary, employees can flex the benefit up or down depending on specific needs and life stage. Again, this will allow for either maximising the benefit or increasing net take home pay by choosing a lower multiple of risk cover.
- Medical Aid – by allowing the flexibility of choosing between a selection of plans on offer within the medical aid scheme, the employee can choose a plan that balances their medical cover needs with contribution rates.
Implementing flexible benefits within the remuneration structure will not only serve to help employees understand the full value of their remuneration package, but promotes fair and equitable pay practices. Where flexible benefits are aligned with the TGP approach, employees can enjoy maximum flexibility. Furthermore, employees can exercise personal choices on how their remuneration package is optimally delivered, thereby contributing to the attraction and retention of employees.
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In the News
- SARS up tax collection through payroll auditsOctober 30, 2018 - 9:00 am
- Proposal for a regulatory framework for payroll deductionsOctober 16, 2018 - 7:29 am
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- SARS’ new rule: Is travel compensation still worth the chase?April 11, 2018 - 12:41 pm
- CHANGE IN UIF CONTRIBUTIONSMarch 23, 2018 - 12:52 pm
- Can we use standard pay scales in the form of a regressed market for remuneration management?June 27, 2016 - 12:07 pm
- What are the key considerations when attempting to comply with “Equal Pay for work of equal value”?June 27, 2016 - 12:06 pm
- How do I optimally structure travel allowances for employees?June 27, 2016 - 12:04 pm
- How does a Total Reward Statement (TRS) enhance my company’s Employee Value Proposition (EVP)?June 27, 2016 - 12:03 pm
- What advantages does CTC with flexible benefits have for my staff and company?June 27, 2016 - 12:02 pm