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.
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Says Tanya Tosen, Tax and Remuneration Specialist at Tax Consulting South Africa: “We often come across the following top five payroll errors that organisations need to question and correct to mitigate any risks associated with them.”

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 that employee then becomes disabled, their payout now becomes tax free in their hands.

“We continue to discover companies 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 an employee’s 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 SARS’ Voluntary Disclosure Programme (VDP), but they must act swiftly to avoid further complications which may have detrimental financial repercussions,” she says.


MEDIA CONTACT: Rosa-Mari Le Roux, 060 995 6277, rosa-mari@thatpoint.co.za, www.atthatpoint.co.za

ABOUT Tax Consulting SA:
Tax Consulting SA offers a streamlined service in the calculation and filing of individual income tax returns, provisional income tax returns or any other more complex individual tax relate matters. Our highly qualified team of Tax practitioners are registered with SARS under controlling body of the South African Institute of Tax Practitioners (SAIT). As tax specialists, we remove the burden from clients to keep their tax affairs in good order, achieving optimal tax savings while ensuring full compliance.
​
For more information on Tax Consulting please visit:
Website:  http://www.taxconsulting.co.za/
LinkedIn: Tax Consulting South Africa
Facebook:Tax Consulting South Africa

“There’s only one remuneration model employers should be considering during COVID-19,” says Tanya Tosen, Tax and Remuneration Specialist at Tax Consulting South Africa.

What a company is prepared to pay its workers has always been a juggling act between three main considerations. These are: attracting, retaining and motivating talented employees; being fair; and keeping total remuneration costs from spiralling.

According to Tosen, there is, in fact, a structure that offers a critical balance between all these needs.

The contenders
There are two main remuneration models that employers use throughout South Africa with a third being a hybrid of the second model.

The first is Basic Plus which, as the name suggests, starts with the basic salary and adds benefit contributions to determine the total cost of the employee.

The second is Cost to Company. This begins with the total cost the employer is willing to pay and reduces that amount by benefit contributions to arrive at the employee’s net income.

The third is Cost to Company with Flexible Benefits. This model is similar to Cost to Company in that the total cost is fixed. However, it allows employees to adjust their contributions to individual benefits, with any remainder flowing back into their basic salary.

Pros and cons
Although Basic Plus is still used, it has a major flaw in that an employee’s total remuneration cost is not capped and therefore unpredictably variable.

Consequently, this makes it difficult to pin down what the company’s overall staff expenditure is at any point in time. For example, if benefit rates unexpectedly increase, the total cost of all employees increases too, with the employer bearing the brunt. Similarly, projecting future staffing costs is uncertain at best.

On the other side of the coin is Cost to Company. Because the total cost of every employee is capped, it becomes easy to report on remuneration costs and project staffing budgets.

However, in this model, benefits are generally rigid and an unexpected increase in rates negatively impacts the worker’s take home pay. This calls into question its motivational efficacy and fairness to staff.

The Cost to Company with Flexible Benefits model offers the best of both worlds and, in a COVID-19 stricken economy, is just what the doctor ordered.

The employer still retains the certainty of a fixed total cost to company, and can just as easily report on and project its company wide staffing costs.

At the same time, employees can manage their own contributions. This means they are not paying for benefits they don’t need in their current phase of life and can take advantage of those they do. Any remainder becomes part of their take home pay.

“This is especially important to those who are facing salary cuts right now and wish to free up cash to meet their financial obligations,” says Tosen.

Its balance between motivation, fairness and control clearly makes Cost to Company with Flexible Benefits the winning model during and after the pandemic.

Switching
Tosen says that, in the COVID-19 era, more companies are moving to a Cost to Company with Flexible Benefits remuneration model.

She strongly advises employers to consider switching and to seek the assistance of a reputable remuneration consultant to ensure a smooth transition.

“Those who adopt it will enjoy the same benefits as the legacy Cost to Company structure while offering the flexibility and assurance employees need at this time to remain productive,” she concludes.

ENDS

MEDIA CONTACT: Rosa-Mari Le Roux, 060 995 6277,  rosa-mari@atthatpoint.co.za, www.atthatpoint.co.za

ABOUT Tax Consulting SA:
Tax Consulting SA offers a streamlined service in the calculation and filing of individual income tax returns, provisional income tax returns or any other more complex individual tax relate matters. Our highly qualified team of Tax practitioners are registered with SARS under controlling body of the South African Institute of Tax Practitioners (SAIT). As tax specialists, we remove the burden from clients to keep their tax affairs in good order, achieving optimal tax savings while ensuring full compliance.

For more information on Tax Consulting please visit:
Website:  http://www.taxconsulting.co.za/
LinkedIn: Tax Consulting South Africa
Facebook:Tax Consulting South Africa