Author: Arlene Leggat, Director at the South African Payroll Association (SAPA) The Minister of Labour announced an amendment to the “scale of benefits” described in the Unemployment Insurance Act, 2001 (Act No. 63 of 2001) on March 17th this year, to be implemented from April 1st. The statement has caused much confusion across the payroll function, affecting employers, payroll departments, payroll consultants and payroll software vendors. The question on everyone’s lips is: if the benefits have changed, should the contributions payable by employees increase in step with the new targets? In this article, I’ll deal with the problem, its cause and the solution. The problem Firstly, the wording is misleading. The announcement uses the term: “scale of benefits”. However, the figures mentioned are actually the limits of benefits to which UIF applicants are entitled, i.e. they can’t claim amounts above this ceiling. The scale of benefits refers to brackets of income previously earned by a beneficiary and the corresponding percentage of that income they may claim at each level. These brackets might not even be affected, and the articulation of the change could have been clearer. Secondly, UIF benefits are perceived to be closely associated with UIF contributions. So, payroll practitioners assume that changes to the first will have a direct impact on the latter. To compound the confusion, changes to both have historically been implemented together on 1st April, and the updating of payroll systems is a given. Therefore, many practitioners were led to believe that contributions must be included when, in fact, payroll is not affected at all. Contributions fall within the ambit of the National Treasury and are governed by the Unemployment Insurance Contributions Act of 2002. Benefits, however, are distributed by the Department of Labour and are regulated by the Unemployment Insurance Act of 2001. While each law sets brackets against which contributions must be deducted or benefits paid, these tables need not correlate. This can be seen in a 2015 draft bill raised by then Finance Minister, Nhlanhla Nene, which proposed a reduction in UIF contributions. Government Notice 187 of March 2015 assures the reader that “The proposed contributions reduction would not reduce the unemployment insurance benefits payable to beneficiaries.” Although the bill never passed, the notice highlights that contributions ceilings need not match benefits ceilings. Thirdly, since each function is managed by a different Minister, an amendment by one Minister does not constitute an amendment by the other. By law, each Minister must announce any changes separately by way of government gazette. Still, amendments by the Minister of Finance regarding UIF contributions must be made in consultation with the Minister of Labour and the UIF Commissioner, and vice versa. This suggests a high level of collaboration and correspondence between the two offices. Surely, at such close quarters, consideration should be given to communicating the status of each law in regards to the other. In other words, the confusion should have been anticipated and addressed as part of the legislative roll-out. The source of confusion It’s the payroll practitioner’s duty to understand the laws governing their function. However, by the number of queries received by SAPA from parties across the industry, it’s obvious that the change was not communicated effectively enough to clarify its scope and implications. SAPA representatives contacted the UIF in an attempt to offer our members an official response. Surprisingly, the UIF representatives with whom we corresponded assured us that the amendment was applicable to both contributions and benefits. But when pressed to provide a gazetted announcement by the Minister of Finance, they were unable to do so. Currently, the matter is under investigation with the UIF and we’ve received no further information. It seems obvious that the source of confusion is a lack of coordination between the relevant lawmakers and their departments, and poor communication to the public in general. What should you do? First, don’t jump to any conclusions. Last year it was reported that the UIF had amassed a R99-billion surplus. Therefore, they might be in no hurry to increase contributions until they have to. SARS seems to confirm our thinking, with the existing limits still displayed on their UIF web page at the time of writing. Next, obey the law. Until the Minister of Finance gazettes any changes to the UIF contribution structure in accordance with the Act, it should be business as usual. Do not update your payroll software’s tables or deduct higher contributions from employees because, without official notification, this could prove illegal. SAPA will continue to pursue this matter and keep its members abreast of developments. Photo caption: Arlene Leggat, Director at SAPA ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.sapayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Association
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Author: Lavine Haripersad, Director of the South African Payroll Association (SAPA)
Wage overpayments can have a significant impact on the corporate bottom line, employee and business taxation, and also employee relations. It is a complex issue which requires that payroll management and HR work together to ensure that systems and controls are put in place to prevent this type of error from happening. There are numerous reasons why overpayments occur. These include errors in administration and capturing, late terminations, non-adherence to policies and procedures, ineffective time recording administration and duplicate records. Each of these issues can be addressed through systems process, individual accountability, operating in a highly-controlled environment and regular payroll audits. Addressing the challenges Robust internal controls within the payroll department must be implemented and documented to mitigate employee record duplications and payroll errors from occurring. These should include regular payroll audits, run monthly, which pick up any new or residual issues throughout the year. Not only will this dramatically reduce or remove duplication issues, but it will also put payroll ahead of the tax year end process. Time recording is potentially one of the most challenging of the issues impacting on wage overpayments, especially if the organisation has numerous employees paid by the hour. Without accurate time recording, overpayment and subsequent recovery of funds become a problem. Often, the individuals responsible for reviewing the time records are not doing it timeously, which results in incorrect data capture and payments. This can also be addressed through more stringent system controls and exacting processes and procedures, and by reviewing time records regularly. This ties into overtime overpayments – if people are working overtime without authorisation, or if their hours are not monitored correctly, it can cost the business a pretty penny. Often, when these errors are found, it is too late to recover the funds. To address both of these concerns the organisation should implement clearly defined rules and a system that prevents manual intervention. It is also important to ensure that there is a segregation between the person administering the time and attendance records, and the person who is authorising them. In other words, these tasks should not be undertaken by the same person. Of course, as with any rule-based system, there must be exceptions. The business needs effective tools which allow for exceptions to be addressed in the system to prevent incorrect payments and tax issues at year end, while operations which conform to the rules can be automated. Reports all the way as Preventative Control It is by running monthly tax validation reports that the business can find and address issues in the system, as well as preventing year end issues around tax and income corrections. Best practice calls for reports to be run monthly to avoid tax year end corrections. . It is also important to have a set of payroll reports which examine elements such as variances on net pay. This will ensure that when there is excessive net pay, it is instantly picked up, investigated and corrected. Termination policies are also vital in mitigating overpayments. If a late termination comes through, an employee can receive a full salary for a month they didn’t work and there are complexities in recovering that amount. Not only is the money almost impossible to recover, but medical aid and other similar schemes will be affected as they need a month’s notice to withdraw. This particular challenge indicates a disconnect between HR and payroll, or between line management and payroll. It is critical that line managers understand the impact on the business of late notification of terminations. Departments need to work closely together to ensure payroll is notified as soon as an employee is terminated. It will prevent them from being overpaid in periods they have not worked and ensure the final payment is accurate.. Communication is key Communication is essential in reducing many of the challenges around wage overpayments. A lean internal communication process between departments, HR and payroll can minimise these significantly. In addition, payroll must ensure that there are processes, procedures and controls in place, do regular checks and correct errors on time. Avoidance is always better than correction as the latter can become a logistical nightmare. While it is common for staff to bring underpayments to management / payroll attention, it is rare for them to notify these departments when they are overpaid! With these boxes ticked and reports run, both payroll and business will be ready when the times comes to roll over into the next pay period, and tax period. Nothing is missing, everything is correct, and payroll is in the perfect place for the tax year end process. ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.sapayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Association Author: Arlene Leggat, a director at the South African Payroll Association (SAPA) South Africa has a higher than average rate of overtime fraud owing to limited prevention and detection systems, and a workforce which has become dependent on the financial advantage it offers them. Every year another story revealing extensive overtime fraud hits the media, exposing how easy it is for employees to defraud companies. In February 2017, 283 employees were implicated in the Merafong municipality for committing fraud estimated to be valued at millions of Rands. Overtime fraud is a lot more prevalent than we want to believe. The challenge is that most companies tend to not take the case further than a rap over the knuckles - dismissing the person and making them another company’s problem. The right thing to do is charge them and ensure they get a criminal record. Alongside a clearly defined policy around overtime fraud, or theft of any kind, the threat of criminal action will go a long way towards making anyone think twice before they lie about the hours they’ve worked. It isn’t, however, the only step that must be taken towards effective prevention. Measures of prevention Employees need to realise that overtime fraud can be as little as claiming one or two extra hours a month, not just 200. A lot of people don’t see those little hours here and there as fraud. It is. And it should net them a criminal record. Organisations must educate employees on overtime hours, what constitutes fraud, and what will happen should they be caught committing it. Then, they need to invest in systems which can mitigate fraud overall. One such solution would be to implement an automated clocking-in system. It isn’t infallible, but it does allow for improved control over hours spent working versus hours put down on billing. Another option is to implement controls within payroll, making it the last line of defence. The business must put its overtime policy into play from the start and it must ensure that it is strictly adhered to. It also needs to comply with overtime legislation as outlined in the Employment Act. Two sides to the story The Basic Conditions of Employment Act states that employees are not allowed to work more than three to four hours of overtime per day. The number of hours is dependent on the length of the standard work day, and the role of the employee. Collectively, within a seven-day period, you are not allowed to work more than 10 hours of overtime – it is legislated and companies cannot change this at will. Unfortunately, this is largely ignored by most companies in South Africa due to several factors, including a lack of skilled staff. So, if overtime policy isn’t being adhered to and the company isn’t enforcing it, then it opens the door for employees to commit fraud. Consequences count There must be someone monitoring overtime, checking it against systems and legislative parameters and enforcing its adherence rigorously. Not only will this limit the employee’s ability to commit fraud, but it will ensure that an eye is always on the overtime ball. If employees believe that there are no consequences and that they can push boundaries, they do. This then leads to a weakened moral culture within the business, and that can have far reaching effects on morale, productivity and, of course, fraud. To limit the potential for overtime fraud and to ensure that employees are also protected against working more hours than they should, the organisation must actively develop policy to monitor it. Payroll has a pivotal role to play in balancing overtime requested against internal policy and legislation, ensuring that hours are kept within legal limits from the outset. ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.sapayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Association Author: Cathie Webb, Director, South African Payroll Association We encourage all employers, employees and payroll departments to prepare themselves for an income tax increase that will likely be announced during Finance Minister Pravin Gordhan's upcoming National Budget Speech. Too much tax South Africans already contribute multiple taxes. Therefore, the government is faced with a difficult decision - how to bring in much-needed revenues to run the country effectively without overburdening the man or woman in the street. In tax theory, there’s a level at which taxation can become so high that the average person stops aspiring to a better lifestyle and becomes less economically active. At this point, working any harder seems fruitless. In light of this, the government strives to meet its budgetary requirements without crossing that threshold. However, if people are still left with less disposable income, this can lead to a lower aggregate demand for goods, which puts deflationary pressure on the economy. The result is loss of business profits, lower output and therefore fewer jobs. Limited options However, government’s options are limited. In his 2016 budget speech, Minister Gordhan clearly indicated that R28 billion would have to be raised over the next two years, consisting of R13 billion in 2017 and R15 billion in 2018. There are only three main paths to acquiring the funds, namely by increasing value-added tax (VAT), company tax and/or personal income tax. Because a VAT increase would place a uniform burden on all members of the population, the greatest impact would be felt by the poor. Therefore, it’s less desirable to increase VAT, as opposed to company or personal tax. Despite this, it should be noted that South Africans enjoy the lowest VAT rate in the world, so an increase would not be unwarranted and some even expect it. However, taking into account all taxes levied on South Africans, it’s quite possible the country has one of the highest taxations globally with fewer benefits than nations paying more VAT. It would appear then that an increase in personal and company tax is highly likely, with a lower probability of an increase in VAT. Commentators point to several other taxes the government may levy, including proposed increases on consumption goods, such as alcohol, tobacco, soft drinks, fuel, as well as the much publicised sugar tax. However, these will not be enough to cover the deficit. Bracket creep Certain income ranges may also be exposed to bracket creep. This happens when workers receive their annual pay increase to offset inflation. They haven’t gained extra purchasing power but, from a tax perspective, they appear to be earning more and in some cases, may enter a higher tax bracket. The effect could be that the higher taxation reduces their take-home pay below previous earnings. Historically, tax brackets have been adjusted to match inflation-based pay increases. In the years ending February 2016 and February 2017, the top 2 tax tiers remained essentially unchanged. But the marginal rate in these brackets increased from 40% to 41%. This year, government might leave selected tax brackets as is, or raise them at a lower rate than inflation-adjusted increases. If this happens, it will have an added effect to higher income tax and employees should be prepared to adapt their lifestyles accordingly. Payroll preparation If an income tax increase proves true, payroll departments should move as swiftly as possible to update their tax tables, and to ensure that the staff in the organisation are aware of the changes, and how it will impact them. It’s not unusual for larger organisations to take longer because of their complexity and size. But delaying implementation until April or May could mean that employees will pay more tax due to accumulated PAYE from March. Seeing a lower take-home figure on one’s payslip is never appreciated. Looking to the future Although South Africans have no reason to celebrate, it’s important to realise that our current economy is more the result of the global financial crisis than our own doing. We’re a great nation with the highest gross per capita income (GDP) in Africa and we have a lot going for us. We can regain our momentum by rolling up our sleeves, pulling together and working hard together to improve our nation. ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.sapayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Associatio What it means to be a third-party agent for SARS
Few employers or employees truly understand what it means when you are nominated by The South African Revenue Service (SARS) as a third-party agent, which often results in a matter that could be resolved speedily lingering unnecessarily and impacting both parties. In this instance a Payroll professional is in a prime position to help manage the process. “Your company’s Payroll administrator performs many services that can alleviate a company’s administrative burden,” says Arlene Leggat, a director at the South African Payroll Association (SAPA). How it works If a taxpayer fails to submit their returns, or to pay their income tax, SARS will apply penalties every month until their returns are received and all amounts owed are settled. However, if a penalty is outstanding for over two months, the Tax Administration Act allows SARS to appoint any person, including an employer, to hold money for that taxpayer as SARS’ agent. If nominated as such an agent, that person/organisation will be sent an AA88 Notice showing an amount to be withheld from the employee’s income, which is to be paid to SARS by the due date shown on the form. It’s important to understand that when you, as an employer, receive an AA88 Notice, you become legally accountable for the payments. Penalties against an employee with unpaid tax will stop, but for outstanding returns penalties will be applied until the forms are submitted. Failure to adhere to the AA88 instruction will result in the agent being penalised for late payment. A separate penalty will be incurred for each month that the employee fails to submit their tax return. Every three months SARS will accumulate this debt and issue an AA88 to the Employer (Agent). SARS will also regularly send the agent an AA88 Reconciliation Statement showing any paid, cancelled or outstanding amounts for all employees against which an AA88 has been issued. What Payroll should do Any Payroll department should be familiar with the entire AA88 system, how to process payments and how to resolve issues of all kinds. If you’re unable to make deductions, as will be the case if the taxpayer has left your employment, Payroll should inform SARS of this situation immediately, via the @EasyFile system. On receipt of an AA88, Payroll should inform the employee that deductions will be made, ensure they understand their obligation, and assist them with settling their debt promptly. If the AA88 is for outstanding taxes, Payroll must ensure the employee knows why the deductions are being made to avoid that a sudden cut in pay might be perceived as trickery on the employer’s part and the worker becoming demotivated and unproductive. If the employee hasn’t submitted their return, Payroll should inform them that penalties will accrue until they’ve done so and explain the process to be followed. If possible Payroll may even offer assistance in completing and submitting such returns. They would require one of their Payroll team to be a registered Tax practitioner in order to do so. An employee who earns under R350 000 for the tax year isn’t required to submit a tax return. However, mistakes can creep in and penalties are applied in error. If Payroll receives an AA88 Notice that appears to be penalties for late submission (usually increments of R250), they must encourage the employee to take it up this with SARS to resolve as soon as possible If the deduction will cause the employee financial distress, Payroll should inform the employee that they can reduce the deductions by proving to SARS they cannot afford it. The employee must gather information about their expenses and submit this to SARS. If SARS deems the case valid, it may split the payments into more manageable monthly installments. Payroll should also keep the employee updated on deductions, especially in the case where unsubmitted returns yield new penalties every month. In this way, the employee can see the dynamics and that their employer is not withholding pay unfairly. In addition, if any refunds are due to the employee because of double payments, Payroll can inform them of the process to be followed apply for a refund. And if the employee leaves the company or dies, Payroll should apply for cancellation of further AA88s and refunds for any payments made afterwards. Education It would be greatly beneficial for any company to send Payroll personnel that are not acquainted with processing AA88s to SARS’ free workshops to ensure they have the latest information and requirements at their disposal. Value-added service “Make sure your Payroll department isn’t only processing AA88 claims endlessly, but providing a value-added service that keeps your workers happy, motivated and productive,” says Leggat. “They should always strive to help employees protect their income and reduce the administrative burden on your company.” ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.saPayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Association It’s not uncommon for a payroll to be consistently managed so poorly that workers threaten to strike over incorrectly administered pay. Often, the person administering the payroll is not adequately qualified for the job. Lavine Haripersad, a Director of the South African Payroll Association (SAPA), says such risks are why hiring accredited payroll practitioners is so important. Yet, many employers don’t realise how much skill it takes to run a payroll. “There are literally hundreds of legal requirements and specialised procedures to follow,” she says. “It’s therefore critical that organisations have professional payroll administrators who know, understand and can practically implement them.” So what do the top payroll administrators know (that business managers sometimes don’t)? Correct Procedure Payroll consists of various processes that must be correctly executed. “Qualified payroll administrators know these processes intimately,” says Haripersad. “These processes include record keeping, employee take-on, month-end procedures, year-end procedures, and more.” Calculations There are many complex payroll calculations related to tax, medical aid, pension funds, provident funds, allowances, reimbursements, deductions or bonuses. A payroll administrator knows how to perform them in accordance with the latest legislative requirements. The law Payroll is governed by an extensive set of legal and regulatory requirements. Payroll administrators are trained in the law and ethical governance, and keep themselves updated on new standards as part of their duties. “So they act as advisors to their organisations, guiding them in the right direction to avoid legal problems,” says Haripersad. Information management Payroll information and data must be collected, stored, secured, destroyed and used in accordance with various laws and accepted procedures. “The safeguarding of employee data must adhere to the Protection of Personal Information Act,” warns Haripersad. The proper information must also be submitted to the government at defined intervals. And correctly calculated payroll aggregates must be reported to accounting for recording in the general ledger. “Payroll administrators are well versed in the function of information inside and outside the organisation.” Tax Employee tax is so critical it demands special attention and skills only a professional payroll administrator can provide. This is especially true of larger organisations where the taxable portion of intricate remuneration, allowances, expense claims, deductions, bonuses or perks schemes is difficult to determine. Ethical practices Accredited payroll administrators are specifically disciplined in ethics and bound to the association’s Code of Professional Conduct. Not only do payroll administrators have an authoritative standard to work to; employers also have in SAPA a means to resolve unethical or unprofessional behaviour. The same can’t be said for non-certified administrators. Project management Payroll administrators are also trained to work in dynamic environments like project management where each payroll project might be different from the last. They therefore have project management training and can often act as project administrators. Strategic advisors Overseas companies see payroll for what it is - a key business enabler. International payroll administrators can work towards a Master's Degree in payroll management and provide direction to national and global payroll initiatives. But even a single organisation can derive such value from a well-trained payroll administrator. Payroll administrators offer a wealth of knowledge that an employer can leverage to their benefit. Says Haripersad: “If organisations see payroll administrators as managers rather than workers, they will appreciate the strategic value they stand to gain from their input.” ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.sapayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Association The South African Payroll Association (SAPA) says that the proposed amendments to the Magistrates’ Court Act 32 of 1944, aimed at curbing unconstitutional practices relating to garnishee orders, are to be welcomed. The Association has urged Parliament to press ahead with tabling the bill now that the local government elections are complete. “The new bill is an excellent piece of legislation that corrects some of the glaring faults in the existing law, which have greatly prejudiced large numbers of vulnerable workers,” says Nicolette Nicholson, director at SAPA. “Because the current Magistrates Act sets no cap on garnishee orders, and the Basic Conditions of Employment Act cap personal deductions only, employees can find themselves with no pay to take home, clearly something that is not sustainable either for the individual or the company.” Proposed Amendments In terms of the proposed amendments, says Nicholson, a maximum of 25 percent of a person’s salary will be able to be garnished—it’s not clear yet whether of gross or nett salary. Under the new bill, garnishee orders will have to be filed in the court whose jurisdiction covers the area where the debtor resides. Whereas the present law allows garnishee orders to be issued by any magistrate’s court, making it easy for companies to approach courts anywhere in the country that are known to grant orders easily—or, indeed, where they may have a corrupt relationship with a specific court official. The new bill also tightens up on the issuing process to force magistrates to investigate thoroughly the debtor’s financial position in order to ensure orders are just and equitable. Furthermore, the new bill gives employers the responsibility of ensuring that salary deductions are made timeously (or risk becoming liable for any interest on arrears), and of stopping deductions when the amount stipulated in the judgement is paid in full. “These are all very good moves to protect employees,” says Nicholson. “However, one concern is the extra burden this places on payroll departments. My advice would be for companies with large workforces to engage the services of a reputable third-party service provider to manage the garnishee orders.” The proposed amendments have been approved by Cabinet and are now due to be considered by the Portfolio Committee on Justice and Correctional Services, although the date has not yet been set. In the meantime, says Nicholson, irrespective of the law, employees need to take responsibility for their own actions. Take responsibility However, the onus still falls on consumers to take responsibility for their spending. “Every citizen is responsible for conducting his or her financial affairs responsibly—that’s the bottom line,” says Nicholson. “If one lives above one’s means, then there will be consequences. In particular, employees must avoid relying on their variable income to fund their lifestyles—bonuses, overtime and the like are not part of the salary package and will vary in line with company performance. For example, many people find themselves receiving a garnishee order because they are relying on a bonus to pay for something, and then the bonus doesn’t materialise.” If employees run into trouble, she concludes, they should definitely turn to their employers for help. Although there is no legal obligation to provide financial or debt counselling, many companies do so, or would be prepared to refer an employee to someone who could help. In addition, most of the big retirement funds offer financial well-being services. “Help is definitely available—look for it,” she advises. “A problem with debt compounds quickly, so the earlier one begins with a solution, the better.” ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.sapayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Association When changing jobs or retiring, it is very important to ensure that the correct tax treatment is applied—or both employer and employee could find themselves at risk. Author: Lavine Haripersad, Vice Chairman, South African Payroll Association When employees leave a company, whether to move to another job or to retire, it is important to ensure that the payroll department applies the correct tax treatment. Typically, the reason for the employee leaving determines the way the final payments are treated by the taxman. Failure to apply the correct principles could make the company vulnerable to penalties from SARS, and the employee could find him- or herself having to make arrangements to pay back some money to SARS on assessment Reasons for leaving If one looks at the most common reasons for people leaving their current employer, it becomes easier to understand the type of tax regime that should be applied. Employees should make it their business to understand the broad principles and raise any queries, in order to avoid having to make unexpected repayments later. Reasons for departure include: • Resignation. When an employee resigns, his or her final payment will typically include a pay-out for any untaken leave, pro rata bonuses and notice pay, if applicable. These payments are subject to normal income tax, and the payroll department does not need to obtain a tax directive. • Operational requirements. This covers both retrenchment and redundancy, both of which result from the operating conditions in which the company finds itself. In the case of redundancy and retrenchment, HR has to apply the rules prescribed in the Labour Relations Act, 66 of 1995, which requires the employer to make a severance payment of (a minimum of) one week’s pay for every completed year of service. For tax purposes, this redundancy lump sum payment must be treated as a retirement lump sum payment. A portion of this lump sum is free of tax (although this will be affected by any previous lump sum benefits obtained). In order to obtain this highly desirable benefit, the employer must first obtain a tax directive from SARS. The tax regime in respect of these severance pay-outs is that the first R500 000 is not subject to tax, the next R200 000 is taxed at 18 percent, the subsequent R350 000 at 27 percent, and all amounts above R1 050 000 at 36 percent. As already noted, these figures have to take into account any previous benefits claimed during prior redundancies. Most importantly, it must be remembered that notice pay, leave pay and pro rata bonuses that are also paid at the time of termination are not part of the severance benefit, and are subject to normal tax. • Mutually agreed separation. When the relationship between employer and employee breaks down, the parties might agree to an amicable parting of the ways to avoid legal disputes. In such cases, a gratuity or final settlement payment is usually made. It will usually be determined following the guidelines for retrenchment packages in Section 41 of the Basic Conditions of Employment Act. The critical point to note here is that because this payment is not made on the basis of operational requirements, it does not constitute a severance benefit. Thus, a portion of this payment may not be treated as a tax-free pay-out, as in the case of a severance for operational requirements. This means that the mutual separation gratuity will be treated as part of the employee’s normal remuneration, and will thus be taxed as such. What can you do? In conclusion, let us stress two points. The first is the one already made, namely that the reason for the termination of the employment relationship will determine how the final payment will be taxed. While the onus is on the employer to ensure that the correct tax regime is followed, if the employee has insufficient tax deducted, he or she will still be liable for the unpaid tax to be paid to SARS—even if the discrepancy only comes to light after some time has elapsed. If employees are unsure, they should first discuss the matter with the payroll department and, if necessary, consult an independent tax practitioner. The second point to emphasise is that to prevent mistakes happening, the traditional communications gap between HR and Payroll needs to be closed. Both parties should make active efforts to improve this situation because if HR makes the reasons for the termination absolutely clear, it is easier for Payroll to apply the correct tax regime. In the end, everybody will benefit, including the employees. ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on SAPA please visit: Website: http://www.sapayroll.co.za/ Twitter: @SAPayroll LinkedIn: The South African Payroll Association |
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