With COVID-19 burdening the economy and SARS seeking to increase its revenues however it can, organisations with misconceptions about how certain payroll elements should be taxed may unknowingly be exposing themselves financially.
Says Tanya Tosen, Tax and Remuneration Specialist at Remuneration Consultants South Africa: “We often come across the following top five errors payrolls that organisations need to question and correct to mitigate any risks associated thereto.”
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,” advises 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,” says Tosen. Again, this error may result in an undesired tax exposure.
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, new legislation required that monthly disability benefit premiums be taxed as a fringe benefit in the hands of the employee. If an employee then becomes disabled, their payout now becomes tax free in their hands.
“We continue to discover payrolls 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,” says 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 your 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,” says 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,” says Tosen, who recommends a Cost-to-Company with Flexible Benefits structure during COVID-19.
Getting payroll right
Tosen encourages organisations to ensure a thorough independent audit of their payroll function is carried out regularly. This will allow them to identify and correct faults like those encountered above.
“Where a company finds they are non-compliant, they can apply for leniency under the SARS’ Voluntary Disclosure Programme (VDP), but they must act swiftly to avoid further complications which may have detrimental financial repercussions.” she says.