Human Capital
Vairable remuneration By Gabrie Combrinck
The draft Taxation Laws Amendment Bill, of 2012 was released on 29 June 2012 for comment. This draft Bill proposes an amendment to the Income Tax Act No.58, of 1962, (the Act), by the insertion of section 7B(1), which will change the time of accrual of ‘variable remuneration’. Variable remuneration is defined in the proposed amendment as:
- Overtime pay, bonus or commission;
- An allowance or advance paid in respect of transport expenses;
- Any amount which an employer has become liable to pay to an employee, in a particular year of assessment, in consequence of the employee having become entitled to any leave, in that year of assessment, which has not been taken during that year.
1. Executive Summary
Should the legislation be enacted in its current form, employers will have to change their payroll systems so that variable remuneration is only reported in the month in which it is paid to the employees. This will eliminate any debate around when the amount actually accrued for tax purposes.
Employers will no longer be faced with unnecessary penalties and interest charges in their PAYE accounts, due to the mismatch between the accrual of the income, on the one hand, and the payment of employees’ tax on the other.
Employers will only be able to claim a corporate tax deduction, to the extent that the payment of the variable remuneration had been made. This could place them at a cash flow disadvantage, and give rise to deferred tax adjustments
2. Background
Variable remuneration
For a long time many employers in South Africa, have in relation to variable remuneration, experienced a mismatch between the employees’ tax reported on the employees’ tax certificates issued, and the employees’ tax declared in the monthly EMP201 returns.
Employers have an obligation to report all the remuneration paid or payable to their employees, at the earliest of the date that the amount is paid or has accrued to the employee. Certain categories of remuneration, especially in the case of overtime, bonus or commission, may have accrued in an earlier month, but may only be paid in the following month.
Many payroll systems have been developed in line with the legislation and therefore include the remuneration in the month that it accrues rather than when it is actually paid. When EMP501 reconciliations are submitted by employers to SARS, the mismatch in the remuneration reported to the employees’ tax deducted is identified and the SARS employees’ tax system automatically raises penalties and interest on the employees’ tax account in cases where an under-payment is identified.
As an illustration:
An employee would render services for the entire month of February 2013 and qualify for an overtime payment which is only paid on 15 March 2013, in terms of the employment terms and conditions agreed between the employer and the employee. The employer withholds the relevant employees’ tax on the 15 March 2013 payroll run, and pays over the employees’ tax by 7 April 2013.
As the 2013 IRP5 tax certificate issued includes the remuneration in respect of the February overtime received in March 2013, while employees’ tax was only paid on 7 April 2013, the employer’s bi-annual reconciliations would reflect differences and automatic reconciliation assessments are raised by the SARS employees’ tax system on these differences, including employees’ tax, UIF and SDL.
In the case of any under-payments, the system automatically raises penalties and interest on the under-paid employees’ tax, UIF, and SDL due to SARS.
Effective 1 March 2013 the remuneration earned by the employee in respect of overtime for the month of February, which is paid in March , will only be reported in March as under proposed legislation it will be deemed to accrue to the employee at that date. The employees’ tax would then be due and be paid by the deadline date of the 7 April of that tax year.
Employers have spent considerable amounts of time and effort in addressing this issue with SARS. It seems that eventually someone at Treasury has realised that something had to be done to accommodate the standard practice applied by a major portion of South Africa’s working group.
Timing of corporate tax deductions
Employers under the existing legislation are only allowed a deduction of the employee income, to the extent that the amount is actually paid or is incurred by the employer.
The proposed amendments will align the deduction of the variable employee income, with the actual payment of such income. Variable remuneration often accrues prior to the payment being made, profit share bonuses, which accrue to employees at financial year end, but are only paid once the financial records have been audited, frequently fall into this category. The employer, under the proposed draft legislation will now only be able to claim the deduction for this expense after the financial year end.
In our illustration above, although the overtime paid to the employees in March relates to the services rendered in February, the corporate tax deduction will only be allowable in March.
A deferred tax implication will arise due to a timing difference between the accounting treatment and the tax treatment of the expense. In addition, there may be a cash flow problem for the employer in that the tax payable for the year of incurral (of the expense) will now be higher.
3. Conclusion and next steps
Should the proposed amendments to the legislations be promulgated, effective 1 March 2013, employers who remunerate their employees on this basis, should establish the impact of matching the employee-income and employer-deductions, for employment related income.
We expect the draft legislation to be promulgated in November 2012 and we will provide our readers with confirmation on whether this amendment is then included in the Act.
