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2016 Employees Tax SeminarGareth Hardy

May 2016

Disclaimer• This is an informative presentation based our experience in dealing with SARS; • nothing in this presentation should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case; and• even though great care has been taken to ensure the accuracy of the material, the presenter do not accept any responsibility for consequences of decisions taken based on the material. It remains your own responsibility to consult with a tax practitioner

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General• A bit about me. I have studied at Wits, obtaining a BComm, CMA, and an H Dip Tax and I am registered as a master tax practitioner. I have been involved with tax for some 20 years now. My professional career includes first-hand experience working in senior tax roles at listed blue chip listed companies and also as a consultant. I have also been contracted into SARS on high level matters;• I have included as much material as possible but it is not practicable to include all the guides;• Today’s objective is to give you a resource centre to refer back to when you deal with your day-to-day PAYE, SDL and UIF issues;• there is a significant amount of material to cover; and• questions will be answered and discussed at the end of the session

Topics• 2016/2017 tax tables;• Basic Legislative framework: A road Map to PAYE, SDL, UIF and ETI;• PAYE reconciliation process;• audits and disputes;• retirement reform;• income protection;• medical tax credits;• fringe benefits; and• case law and rulings

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Tax Tables - 2017

Individuals - Rates of tax 2017 Taxable income (R) Rates of tax (R)0 – 188 000 18% of taxable income188 001 – 293 600 33 840 + 26% of taxable income

above 188 000293 601 – 406 400 61 296 + 31% of taxable income

above 293 600406 401 – 550 100 96 264 + 36% of taxable income

above 406 400550 101 – 701 300 147 996 + 39% of taxable

income above 550 100701 301 and above 206 964 + 41% of taxable

income above 701 300

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Individuals - Rates of Tax 2016 Taxable income (R) Rates of tax (R) 0 - 181 900 18% of each R1 181 901 - 284 100 32 742 + 26% of the amount above 181 900 284 101 - 393 200 59 314 + 31% of the amount above 284 100 393 201 - 550 100 93 135 + 36% of the amount above 393 200 550 101 - 701 300 149 619 + 39% of the amount above 550 100 701 301 and above 208 587 + 41% of the amount above 701 300

Individuals - 2016 and 2017 Tax RebatesRebate 2017 2016 Primary 13 500 13 257 Secondary (65 and older) 7 407 7 407 Tertiary (75 and older) 2 466 2 466

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Individuals - Tax Thresholds 2016 and 2017Person 2017 2016

Under 65 R75 000 R73 650 65 an older R116 150 R114 800 75 and older R129 850 R128 500

Tax Comparison 2012 – 2017(New inserted slide)

Income 1,000,000 198,000 75,000 Year Tax Tax Tax2017 315,929 22,940 -2016 317,795 23,671 243 2015 313,244 24,555 774 2014 317,683 25,828 1,420 2013 320,698 26,860 2,060 2012 325,493 28,245 2,745 Decrease over 6 years

9,564 5,305 2,745

% Decrease 2.9% 18.8% 100%

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Tax benefit comparison2016 vs 2017 – low income earnersLow End of the Income Scale (Rands)Under 65 2016 2017Income per annum 198,000 198,000 Less Tax 23,671 22,940

Nett Pay 174,329 175,060 Nett Saving R 731

Tax benefit comparison2016 vs 2017 – high income earnersHigh End of the Income Scale (Rands)Under 65 2016 2017Income per annum 1,000,000 1,000,000 Less Tax 317,797 315,931 Nett Pay 682,203 684,069 Nett Saving R 1 866

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Do these reductions in tax mean anything in real terms?• Inflation will unfortunately erode much of the benefit;• for a low income earner (R731 Benefit), it could, at today’s prices for one year, mean:

– 72 loaves of bread extra in a year or extra 88kg of maize meal; and/or– extra 56 litres of petrol; and

• for a high income earner (R1 866 Benefit), it could, at today’s prices for one year, mean:– more shopping at “Woolies”; and/or– extra 143 litres of petrol extra

Retirement Lump Sum -Withdrawal Benefit Taxable income (R) Rate of tax (R)2017 (unchanged from 2016) Taxable income (R) Rate of tax (R)0 – 25 000 0%25 001 - 660 000 18% of taxable income above 25 000660 001 - 990 000 114 300 + 27% of taxable income above 660 000990 001 and above 203 400 + 36% of taxable income above 990 000

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Retirement and Death Benefits or Severance benefitsTaxable income (R) Rate of tax (R)2017 (Remains unchanged from 2016)0 – 500 000 0% of taxable income500 001 - 700 000 18% of taxable income above 500 000700 001 – 1 050 000 36 000 + 27% of taxable income above 700 0001 050 001 and above 130 500 + 36% of taxable income above 1 050 000

Medical Tax CreditsPer month (R) 2017 2016 For the taxpayer who paid the medical scheme contributions 286 270 For the first dependant 286 270 For each additional dependant(s) 192 181Taxpayers younger than 65 – converted to the Medical Tax Credit from 1 March 2012Taxpayers 65 and older – converted to the Medical Tax Credit from 1 March 2014

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Travel Allowance 2017 – Rates

Value of the vehicle (R) Fixed cost (R p.a) Fuel cost (c/km) Maintenance cost (c/km)

0 - 80 000 26 675 82.4 30.880 001 - 160 000 47 644 92 38.6160 001 - 240 000 68 684 100 42.5240 001 - 320 000 87 223 107.5 46.4 320 001 - 400 000 105 822 115 54.5400 001 - 480 000 125 303 132 64480 001 - 560 000 144 784 136.5 79.5more than 560 000 144 784 136.5 79.5

Travel Allowance 2016 - Rates

Value of the vehicle (R) Fixed cost (R p.a) Fuel cost (c/km) Maintenance cost (c/km)

0 - 80 000 26 105 78.7 29.3 80 001 - 160 000 46 505 87.9 36.7 160 001 - 240 000 66 976 95.5 40.4 240 001 - 320 000 84 945 102.7 44.1 320 001 - 400 000 102 974 109.9 51.8 400 001 - 480 000 121 886 126.1 60.8 480 001 - 560 000 140 797 130.4 75.6 more than 560 000 140 797 130.4 75.6

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Travel Allowance comparisons 2016 vs 2017Vehicle details 2017 2016Vehicle value 600 000 600 000Business Km 18000 18000Total km's 32000 32000Purchase Date 01/03/2016 01/03/2015Fixed Costs 144 784 140 797Fuel Cost 136.5 130.4Maintenance Costs 79.5 75.6Period used for 1 year 1 yearDeduction 120 321 116 062Increase in deduction R4 259

Basic Legislative framework: a road map to PAYE, SDL, UIF and ETI

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PAYE - Legislative Framework• Primary legislation – Income Tax Act No 58 of 1962;• provisions relating to PAYE are primarily contained in:

– Second Schedule to the Income Tax Act – Gross Income, Lump Sums;– Fourth Schedule to the Income Tax Act – Provisional tax and PAYE amount to be withheld; – Seventh Schedule Benefits derived by office holders;

• the most important definition therein is: “remuneration”

PAYE - SARS application of the law. Rulings and Interpretation• SARS have issued guides, various returns, practice notes, binding class rulings etc., to provide clarity;• there are approximately 60 such documents, equating to hundreds of pages;• why are there so many SARS external documents excluded from the Fourth Schedule?;• to provide clarity and understanding regarding the legislation;• these rulings and interpretations are SARS’ view on the matter. You may adopt a different position; and • if we turn to the document marked Annexure 1, you will see I have summarised these for you. They are available at www.sars.gov.za

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SARS - Application of the law• The most relevant section of the Fourth Schedule for these purposes are:

– Part 1: relevant definitions, and– Part 2: sets out how, what, when and the amount of tax to be withheld;

• the above provisions are little more than 14 pages long

Skills Development Levy -Legislative Framework• Primary legislation:

– Skills Development Levies Act No 9 of 1999, and – Skills development Act No 97 of 1998;

• SARS only administer certain sections of these Acts;• The purpose of the Act is to develop skills in South Africa;• SDL is calculated using the following formula:

– determine remuneration;– less SDL exclusions;– less allowable deductions;– equals (=) levi-able amount x 1% from 1 April 2001 to date– Equals (=) amount of SDL payable; and– (computation set out in detail in SDL Guide)

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SDL and Compliance• Most important exemptions from having to pay SDL are:

– employers who expect to pay less than R500 000 remuneration during the following 12 months, and– Public Benefit organisations;

• SDL is leviable on all employees including those who earn under the tax threshold;• SDL compliance is subject to the punitive measures contained in the Tax Administration Act:

– interest and penalties are payable on late payment,– default penalties,– estimated assessments, and – criminal offences

SDL – Government expenditure and you• In our current budget speech, R17,64 billion was budgeted for SDL;• this expenditure is budgeted to increase to R22 billion for the 2018/2019 year;• this is a 25% increase – we will have to wait and see how this implemented;• focus of this spending, will be to train artisans; and• I would recommend evaluating your current SDL strategy and training polices so that you maximise your own benefits

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Unemployment Insurance Fund-Legislative Framework• Primary legislation:

– Unemployment Insurance Act No 63 of 2001– Unemployment Insurance Contributions Act No 4 of 2002 (UIC);

• SARS only administers sections of the UIF; and• the purpose of the ACT is to provide temporary:

– Unemployment benefits,– Illness benefits,– Maternity benefits,– Adoption benefits, and– Dependant benefits

UIF calculations (Slide Amended)

• UIF applies to all employers and employees except:– an employee who is employed for less than 24 hours,– learners or public servants,– foreigners working on contract who will return home once finished,– those earning commission only, and– certain officers of state, municipal councils and traditional leaders, including the President;

• the company pays 1% and 1% is deducted from employee, a total of 2% based on remuneration; and• deduction cap: a maximum of R148.72 may be deducted from an employee. So if you earn more than R14 872 pm, your contribution will be capped• UIF benefits paid out are not taxable.

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UIF and Compliance• All employers are required to be registered for UIF;• if you are registered for PAYE and SDL purposes, your UIF is paid using your monthly EMP201 return;• all other employers must be registered with the UI Commissioner’s Office and pay accordingly by www.ufiling.co.za; and• UIF compliance is subject to the punitive measures contained in the Tax Administration Act:

– interest and penalties are payable on late payment,– default penalties,– estimated assessments, and– criminal offences

Employment Tax Incentive Act 26 of 2013• ETI is a cost sharing arrangement with government and the employer in order create jobs for our youth;• it started 1 January 2014 and ends 31 December 2016 (There is no clarity as to whether it will be extended as yet);• Section 1 of the ETI Act contains all ETI definitions:

– “monthly remuneration” is defined in the ETI Act, – “month” and “remuneration’” is defined in the 4th

Schedule to the Income Tax Act, and – the definitions are different and only apply to the respective Acts;

• an amount is calculated in accordance with a formula so as to determine a PAYE credit per “qualifying employee” per month

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ETI – Must haves – Quick Summary• Qualifying Employer:

– registered for PAYE, and– commercial companies (government bodies usually excluded) qualifying employer; and

• ETI – Tax compliant

• Qualifying Employees:– SA Citizen, Green ID book, and– aged 18 to 29 (excludes SEZ’s);

• earns between R2 000 to R6 000 pm;• meets minimum wage requirements• employed on or after 1 October 2013; and• not a domestic worker or connected person

ETI ComputationEmployment Tax Incentive per month during the first 12 months of employment of the qualifying employee

Employment Tax Incentive per month during the next 12 months of employment of the qualifying employee 50% of Monthly Remuneration 25% of Monthly Remuneration R1 000 R500Formula: Formula:R1 000 – (0.5 x (Monthly Remuneration – R4 000)) R500 – (0.25 x (Monthly Remuneration – R4 000))

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ETI Computation contd.Monthly Remuneration Employment Tax Incentive per month during the first 12 months of employment of the qualifying employee

Employment Tax Incentive per month during the next 12 months of employment of the qualifying employee R 4 001 - R6 000 Step 1: Take the monthly remuneration and subtract R4 000

Step 1: Take the monthly remuneration and subtract R4 000Step 2: Take the result in step 1 and halve the number

Step 2: Take the result in step 1 and take a quarter of the number

ETI Computation contd.Monthly Remuneration

Employment Tax Incentive per month during the first 12 months of employment of the qualifying employee

Employment Tax Incentive per month during the next 12 months of employment of the qualifying employee R 4 001 - R6 000 Step 3: Take R1 000 and subtract the amount calculated in steps 2

Step 3: Take R500 and subtract the amount calculated in steps 2.

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Basic ETI computation exampleEmployee Start Dates First 12 months Second 12 monthsFirst 10 employees - 1 Jan 2014 120,000 60,000 Next 10 employees 1 Jan 2015 120,000 20,000 Next 10 employees 1 Jan 2016 40,000 (30 Employees Earn R2 000p.m.) 280,000 80,000 Gross ETI Calculated Year to Date (April 2016) 360,000

ETI – How it works (Amended slide)

• Calculate normal monthly PAYE liability; • calculate your ETI credit;• PAYE - credit = Amount payable to SARS;• complete the above on your EMP 201 and submit to SARS;• if your ETI credit is greater than your PAYE, then you must receive a reimbursement for the difference every six months; and• you can claim historical ETI• ETI is for the benefit of the employer. The credit is offset against your monthly Pay as You Earn Tax Bill.

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ETI Reimbursements(New Inserted Slide)

• Only tax Act which sets out when you must receive your refund.• Month in after which you are compliant.• Section 10 of the ETI Act - REIMBURSEMENT. THE GOVERNMENT IS REIMBURSING YOU FOR WHAT IS already YOURS.• It’s up to you to claim it.

ETI Compliance• A tax clearance certificate is not ETI compliance (annual event);• compliance is measured in the month of submission;• an employer will not be eligible to claim the ETI in a month if the employer has –

– any outstanding tax returns or– a tax debt; and

• detailed knowledge of the Tax Administration Act is required in regard to these aspects

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ETI SARS audit (New Slide)

• Information requested in .csv format or excel.• Audit period = All ETI claims submitted• Audit information requested• All calculations• Contracts of employment

ETI Penalties• Two kinds of penalties

– Understatement penaltiesYou offset the incorrect ETI value against your PAYE, 10% of the amount short paid – This is a standard penalty and not specific to the ETI Act. It is contained in the Tax Administration Act and you are subject to these provisions irrespective of whether you claim ETI or not.

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ETI Penalties (cont)– Displacement Penalty

This is a penalty only applicable to those claiming ETI. Should you displace a employee i.e. terminate a existing non-qualifying employee for the express purpose of hiring a new employee who does qualify, you would be subject to a R30 000 penalty for each employee displaced. You may also be prohibited from using the ETI

PAYE reconciliation process

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PAYE, SDL and UIF submissions• There are 14 critical PAYE/SDL/UIF events each year;• every month an EMP 201 must be submitted and every six months a EMP 501 reconciliation must be submitted;• monthly returns are required by the seventh of each month;• EMP 501 returns are due 60 days after period closed;• the 2016 EMP 501 deadline is 31 May 2016;• this is a self assessment system and• the EMP 201 and 501 submissions do not require you to disclose the gross remuneration, upon which you calculated your liability, to SARS

Monthly Returns – EMP 201s• The purpose of the return is to declare your PAYE, SDL and UIF liability and to pay accordingly via efiling by the seventh of each month;• the return contains information relating to the entities:

– Name,– company registration number,– registration numbers (PAYE, SDL, UIF),– contact details,– tax period,– tax practitioners details, and– ETI Y/N indicator (only select Y if you are claiming);

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EMP 201s (cont)• financial information:

– PAYE liability;– SDL liability;– ETI brought forward (Unutilised balance from prior month);– ETI calculated (your current theoretical balance for the current month);– ETI utilised (i.e. amount you offset against your PAYE. You are limited to the PAYE value in any one month. The rest you will receive via re-imbursement every six months); and– ETI carried forward (equals (=) the balance b/fwd from the prior month plus (+) current month calculated less utilised);

EMP 201s (cont)– important, if you complete the ETI balance c/fwd or b/fwd incorrectly or leave it out, it will reflect incorrectly on the SARS system. The SARS system uses what you input in those blocks and is not “auto system calculated”;– VDP Voluntary Disclosure Indicator – N (VDP’s are rare. You would know if you were applying for one); and– penalty and interest (only to be completed, if you have incurred a penalty);

• unique PRN number (Payment Reference Number); and• important – this is a SARS official return: all the relevant legislation in relation thereto applies. SARS will hold a natural person accountable for the submission

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EMP 201s (cont)

EMP 501 reconciliation – every six months• The Income Tax Act No. 58 of 1962, states inter alia that employers are required to:

– deduct the correct amount of tax from employees;– pay this amount to SARS monthly;– reconcile these deductions and payments during the annual and the interim reconciliation; and – issue tax certificates to employees;

• February-run, final certificates issued with the final recon as at 28 February (12 months); and• the interim recon as at 31 August only contains six months worth of data and no certificates are physically issued;

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EMP 501 (cont)• You will consolidate all your monthly EMP201 submissions onto the EMP 501 (consolidation of all the months), where you will compare it to the actual amounts paid over to SARS. These monthly amounts paid over to SARS must equal the total of all tax deducted from employees for the entire period; • should there be differences, these need to be resolved before submission and reasons supplied where applicable;• an EMP 501 can be submitted via E-filing, if you have less than 20 employee certificates to be issued; and• if you have more than 20 certificates, the reconciliation must be done via Easyfile;

EMP 501 (cont)• Easyfile is a stand-alone software package you download from SARS and it is physically stored on a PC. As such the only backups and data there is are the ones you have. SARS will not be able to assist you with backups or data in any way. (you will file two returns a year with Easyfile);• Each user has a login with passwords. Do not loose these. You will not be able to login into the system without them. SARS cannot reset these passwords - they have no access to them;• Please note: E-filing is for your tax overall tax responsibilities, i.e. VAT, Income Tax, PAYE etc. It is SARS’ core tax management system. Efiling is not loaded on local PC hard drives. You login and work over the internet;

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EMP 501 (cont)• information required on the EMP 501:

– this is very much in line with the EMP201. I have included a specimen EMP 501 in the following slides. (The form is 3 pages long if you “selected” that you make use of ETI.);• in order to physically submit your reconciled EMP 501 you would need to do the following:

– most payroll systems have the EMP 501 functionality built in. As such you would run year end procedures to close of the fiscal year. Your Payroll package will generate a data file (.txt); and– you will need to login to easyfile (On one of your PC’s) and upload the file your payroll system generated into the easyfile system;

EMP 501 (cont)• Easyfile will run its own validation tests on the data to ensure that it is in an acceptable format for SARS;• if there are any problems with the Payroll data (e.g. missing data) it will generate an error report;• your file can only be submitted electronically to SARS once your data upload is error free;• once your reconciliation is successfully submitted you can generate all your IRP 5 and IT 3(a) certificates and distribute to your employees accordingly;• by uploading the data in the format that you have allows SARS to link tax data to your electronic efiling profile without you even having to load it. This process is critical for sound management of our tax system;

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EMP 501 (cont)• if you have claimed ETI, the values you claimed are not reflected on any tax certificates generated;• the certificates will be generated electronically in .pdf format and must be distributed to employees;• ensure that you use the backup facility in easyfile to backup your data and store these safely together with the user logons and ID’s;• a word to the wise: start early, there is nothing easy about Easyfile; and • there will be many revisions of the software you submit your reconciliation

EMP 501 (cont)

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EMP 501 (cont)

Please note, the specimen illustrated only has six months reflecting. In an annual reconciliation it will show the full 12 month period.

EMP 501 Contd.

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Easyfile/Efiling Technical Queries• SAIT members they can log the queries for Anton Krynauw’s attention on the SAIT website under TaxTechnical and they will get forwarded.

Audits and Disputes

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SARS - Audit Requests• SARS are in terms of the TAA allowed to conduct inspection/verifications and audits. Such audits are an acceptable integral part of prudent fiscal management;• almost everyone has received a SARS request for information generated by a computer asking for all relevant material;• alternatively it is a letter written by a SARS official, which may be slightly more specific; and• For the most part people who receive these in good faith spend much time preparing “Audit files” with detailed computations and source documents.

Taxpayer – Responses• The information that the taxpayer compiled, with what they thought SARS would want in response to their letter, most likely makes perfect logical sense and it would be prudent to get the information together in any event;• the taxpayer then awaits and outcome, which he may never get or alternatively a nasty assessment instead;• even if you had no adverse assessment raised, you cannot really be sure what it was about the submission or lack thereof that satisfied SARS, and • in fact, you can’t really be sure that the matter has really been dealt with

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SARS standard audit/verification letter (New inserted slide)

Audit – What are your rights?• The same TAA that confers powers upon a SARS official to conduct such audits/verifications also includes the taxpayers’ rights and SARS’ obligations towards the taxpayer (Chapter 5 of the TAA);• firstly I cannot begin to assume what risks SARS identified before sending me the letter nor will I know what it is exactly they require from me; and• you have a right to ask that the “relevant material” requested from you, be done so with “reasonable specificity”

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Audits – Taxpayer responds correctly• You must still respond to SARS, however, I think it far too early to be assimilating documentation and putting in significant effort, unless you know what us required from you; and• right from the time you receive the letter requesting “relevant material”, you should view it as a request only

Audits – What must you find out, before you respond further• This is singularly the most important action to do at the commencement of any SARS verification/inspection;• You need to consult with SARS (Section 42 of the TAA) in order to understand the risks they have identified and

– establish who your auditors are,– exactly what is being audited,– what periods are under review, – what risks were identified,– what provisions of the Act they are looking to ensure there was compliance with– how far the scope of this audit will extend, and– exactly what it is that would satisfy SARS that you have met your obligations

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Audits – “Relevant material”• The TAA was amended the beginning of this year. It now includes:• “relevant material” meaning any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3;• SARS have in effect awarded themselves absolute discretion “that in the opinion of SARS”, “is foreseeably relevant” as to what constitutes relevant material?; and• by defining the audit scope going in you will save yourself a lot of time, energy, stress and money

Disputes• Disputes generally occur when the taxpayer is aggrieved by an assessment;• based on the risks to the business and amounts involved the advice of specialist tax practitioner should be sought before correspondence is entered into with SARS;• please make sure that you contact your tax practitioner before the 30 allotted days has expired in order to lodge objection; and• a hasty objection filed in good faith will not serve you in good stead. You will not be able to expand upon your grounds of objection and will, all likelihood, lose the dispute

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Disputes – What to do practically• The advice of a tax practitioner should be sought before entering into correspondence with SARS;• by advice, I don’t necessary mean a full blown tax engagement that would cost a significant amount of money;• the first step is to establish what the appropriate course of action should be – this is a short consultation with a tax practitioner to assess the situation and layout possible options. This is neither time consuming or prohibitively expensive; and• you will have more clarity and be able to make informed decisions going forward.

Disputes – Practical actions you can take quickly• Generally speaking, if you are aggrieved by an assessment and believe that the reasons sated for the assessment are inadequate. you may legally request such reasons;• the procedure for this request is detailed on the actual assessment;• once you have requested these reasons from SARS until they furnish you with adequate reasons or inform that the reasons they have already supplied to you are adequate, the 30 day-objection rule is put on hold i.e. the clock on time limit to submit the objection is paused; and • if the assessment is reversed and the matter resolved as a result of a request for adequate reasons and SARS being unable to provide these, then it really has cost you much

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Conclusion - Audits and Disputes • The audit is the seed and the dispute is the fruit;• I would recommend consulting a tax practitioner before engaging with SARS in regard to any audit or information request; • if you can deal with the seed then you have done away with the fruit. This is by far the safest and cheapest option;• irrespective of what stage you are in, the pre-audit/audit assessment phase, failed objection, getting nasty text messages late at night, there is always a cost effective strategy and approach to remedy the problem.• If you do not follow this approach, not only are you going to create a significant amount of additional unnecessary work for yourself, but you are going ?

Retirement Reform

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Retirement Reform - Introduction• Government’s intention is to create “vertical harmonisation”, i.e. which means irrespective of the income bracket you are in, you get treated equally in terms of taxation; • another reason is what they call “horizontal harmonisation”, which means that irrespective of the retirement product you are investing your money in, your contributions and subsequent payouts will be treated in the same way across various products; • the reforms essentially intend to make the playground fair for everyone earning an income and saving for retirement in South Africa

Retirement Products• Retirement Products:

– Pension Funds,– Provident Funds, and– Retirement Annuities.Under the old system, different products had different taxation rules. Retirement reforms ensure that no one product has tax advantages over the other

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Retirement Tax deductions – Pre - 1 March 2016• Pension Fund Contributions

– Current Pension Fund Contributions limited to 7,5% of remuneration from retirement-funding employment or R1 750, whichever is the greater; and – excess contributions are not carried forward to the next year of assessment, but are accumulated for the purpose of determining the tax-free portion of the lump sum and/or annuity upon retirement;

Retirement Deductions – Pre 1 March 2016 (cont)• Arrear Defined Benefit Pension Fund Contributions

– up to a maximum of R1 800 per year. Any excess may be carried forward;• Current Retirement Annuity Fund Contributions

– limited to 15% of taxable income from non-retirement-funding employment, excluding any retirement fund lump sum benefits, or R3 500 less current contributions to a pension fund, or R1 750, whichever is the greater. Any excess may be carried forward; and• Reinstated Retirement Annuity Fund Contributions

– up to a maximum of R1 800 per year. Any excess may be carried forward

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Retirement Tax Deductions – Post 1 March 2016• Pension, Provident and Retirement Annuity Fund Contributions:

– the total contributions to retirement funds are deductible but limited to 27,5% of the greater of remuneration or taxable income (excluding lump sums), capped at an annual limit of R350 000; – any excess may be carried forward; and– contributions paid by the employer are taxed as a fringe benefit in the hands of the employee and are deemed to be contributions paid by the employee in order to calculate the allowable deduction;

Retirement Tax Deductions – Post 1 March 2016 (cont)– the employer deduction for contributions made to these funds on the employee’s behalf is not subject to any limitation (2016 : 20% of remuneration)

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Retirement Tax Reform Challenges• The Income Tax Act inadvertently limited the allowable deduction for the fringe benefit of employer contributions to retirement funds to the actual value of the employer contribution;• the fringe benefit value for defined benefit pension funds is determined by a formula provided in paragraph 12D of the Act’s Seventh Schedule and may be larger than the actual value of the employer contribution (because the fringe benefit is dependent on the value of benefits and not the funding position of the defined benefit pension fund);

Retirement Tax Reform Challenges (cont)• this was not the original intention and the legislation will be adjusted to allow a deduction up to the full value of the employer contribution fringe benefit, if valued according to paragraph 12D of the Seventh Schedule; • in essence any mismatch between fringe benefit retirement calculation rules will be aligned to meet the intention of harmonising retirement contributions; and• the 27,5% contribution limit must be linked to remuneration, not pensionable salary

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Withdrawing from A Retirement Annuity• The definition of the word “retirement annuity” was amended to allow for expatriates to withdraw lump sums from their retirement annuity fund if one of the two criteria are met:

– when expatriates cease to be tax resident and leave South Africa, or– when the expatriates leave South Africa at the end of their work visa;

• the same rules apply to South African residents when emigrating

Annuitisation Rules ControversyPostponement until 2018• Ordinarily provident fund members would be entitled to encash the entire policy and pay tax thereon in accordance with the tables; • when the retirement reforms came into effect on 1 March 2016, provident funds were supposed to be brought into line with the other two products – with only one third withdrawal being permitted upon retirement and the remainder being used to purchase an income annuity; • This specific reform has been met with much opposition from various sectors. The introduction has been delayed until 2018. It is hoped that by this time, the retirement-planning benefits of this reform will be properly understood;

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Annuitisation Controversy (cont)• for pension, pension preservation and retirement annuity fund members, the threshold above which you are required to purchase a pension (known as annuitisation) with two-thirds of your retirement benefit, has increased from R75 000 to R247 500; and• This means that pension fund members with retirement benefits less that R247 500 will now be able to take the whole amount in cash without having to annuitise / buy a pension with any portion of it

Effects of new Retirement rules post 1 March 2016• The new tax laws mean contributions into a fund are tax deductible up to up to 27,5% capped at R350 000 pa. This should encourage people to save more;• This should allow for simpler retirement panning;• people contributing to provident funds will also qualify for a tax deduction. This could result in an increase in take home pay or an increase in retirement contributions;• if your contribution is more than R350 000 your deduction will be capped and as such you will pay more tax. The excess amount will be carried forward;• before this amendment, tax-free transfers from pension funds to provident funds required a tax directive. This requirement will be removed

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Income Protection ContributionsRecap• With effect from 1 March 2015:

– premiums in respect of Group Income Protection policies will continue to attract a fringe benefit tax, but employees will no longer be entitled to a tax deduction;– benefits paid to employees will not be taxed; and– this change will applies to new claims as well as claims that are already in payment;

• potential issues is that arise is that employees are over insured.– Since your insured benefit had to take the tax deduction into account, your insured value may be to high. The payout is tax free and as such should now be discounted for the value of the tax;

Income Protection Contributions (cont)– This would mean you are now paying more tax as the fringe benefit monthly premium is higher than it should be;

• since there are no deductions for income protection there is an immediate cost by way of fringe benefit tax. The plan by its nature is structured for an uncertain future event (Even unlikely). As such, some people are considering “whether it is really worth it”

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Medical Aid Tax Credits

Medical Tax Credit• Medical Aid Contributions• Medical aid contributions may be claimed as a medical scheme fees tax credit against tax payable as follows:

– R286 per month for the primary member and a R192 per month for each additional dependant;• a medical tax credit can only be offset against your current year PAYE liability and cannot be carried over to the following year. This has drawbacks;• E.g. someone under the tax threshold who contributes to a medical aid would be entitled to the credit but would not be entitled to use as they do not pay tax

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Medical Tax Credit (cont)Younger than 65Younger than 65 years• Excess contributions and other qualifying medical expenses may be claimed as an additional medical expense tax credit calculated as follows:• - The amount by which the formula {[medical aid contributions - (medical scheme fees tax credit x 4)] + other qualifying medical expenses} exceeds 7,5% of taxable income, divided by a factor of 4; and• taxpayers younger than 65 – converted to the Medical Tax Credit from 1 March 2012

Medical Tax Credit (cont)65 and older (Amended Slide)

65 years and older, or younger than 65 years if an immediate family member has a disability– Excess contributions and other qualifying medical expenses may be claimed as an additional medical expense tax credit calculated as follows:[Medical aid contributions - (medical scheme fees tax credit x 3)] + other qualifying medical expenses}, divided by a factor of 3;

• taxpayers 65 and older – converted to the Medical Tax Credit from 1 March 2014• Medical Tax Credits and medical expenditure covered in SARS “Guide on the Determination of Medical Scheme Fees Tax Credits and Additional Medical Expenses Tax Credits”

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Fringe Benefits –SARS’ right to re-determine cash equivalent• Paragraph 3(2) of the Seventh Schedule of the Income Tax Act allows the SARS Commissioner under certain circumstances to re-determine the cash equivalent of a fringe benefit and assess either the employer or the employee accordingly; • uncertainty exists regarding under what circumstances this determination will be made; and • to provide clarity, it is proposed that the wording of paragraph 3(2) of the Seventh Schedule be aligned with the wording in paragraph 5(2) of the Fourth Schedule;

SARS’ right to re-determine cash equivalent (cont)• Par 5(2) of the Fourth Schedule to the Income Tax Act:

– where the employer has failed to deduct or withhold employees’ tax and the failure was not due to an intent to postpone payment or evade tax, the Commissioner may, if he or she is satisfied that there is a reasonable prospect of ultimately recovering the tax from the employee, absolve the employer from the employer’s liability. (Proposed amendment: Sub-para. (2) to be substituted by s. 7 (1) of Act No. 23 of 2015 with effect from a date determined by the Minister of Finance by notice in the Gazette – date not determined);

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SARS right to re-determine cash equivalent (cont)• Par 3(2) of the seventh schedule to the Income Tax Act:

– the Commissioner may, if no determination is made, or if such determination appears to him or her to be incorrect, re-determine such cash equivalent—– (a) issue the employer with a notice of assessment in terms of paragraph 12 of the Fourth Schedule for the unpaid amount of employees’ tax that is required to be deducted or withheld from such cash equivalent; or– (b) upon the assessment of the liability for normal tax of the employee to whom such taxable benefit has been granted(No provision included to absolve the employer from the employees tax if there is a reasonable prospect of recovery from the employee)

Travel Allowance• Fixed Travel Allowances as from 1 March 2010

– 80% of the fixed travel allowance is subject to PAYE. As from 1 March 2011, where the employer is satisfied that at least 80% of the use of the vehicle for the year of assessment will be for business purposes, the inclusion rate may be limited to 20%; and– the full allowance is disclosed on the employee’s IRP 5 certificate, irrespective of the percentage of business travel

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Travel Allowance (cont)• Reimbursive Travel Expenses • Where an employee receives a reimbursement based on the actual business kilometres travelled capped at 8 000 kms,

– no other compensation is paid to the employee and– the cost is calculated in accordance with the prescribed rate of 329 cents per kilometre: – no PAYE is deductible, provided the business travel does not exceed 8 000 kms per year

Travel Allowance (cont)• BINDING GENERAL RULING (INCOME TAX) NO 23

– Recipients who are provided with principal-owned petrol or garage cards are regarded as having “borne the full cost of the fuel” if the full amount expended on that card during the year of assessment is included in the recipient’s travel allowance and is taxed as remuneration; and – in these circumstances, a recipient will be entitled to claim the “fuel cost” element as a deduction against the travel allowance. This ruling constitutes a BGR issued under section 89 of the Tax Administration Act No 28 of 2011;

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Travel Allowance (cont)• the concept of private travel has been difficult for employers to apply in practice:

– the difference in the wording of the definition of private travel in section 8 and the Seventh Schedule of the Income Tax Act adds to the difficulties; and – to correct this, it is proposed that the wording of the two provisions be aligned

Fringe Benefits – Cellular Phones• Use of employer cell phone (fringe benefit):

– the facts and circumstances of a particular employee’s case will determine whether the use of an employer-provided cell phone gives rise to a taxable fringe benefit or not; and– it is important to note that a fringe benefit will not arise if the facts and circumstances indicate that the employee uses the cell phone mainly for the purpose of the employer’s business. “Mainly” means that more than 50% of the total use of the cell phone is for business purposes;

• SARS will take into account– the job description of the employee and – a monthly analysis of which calls were private;

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Fringe Benefits – Cellular phones (cont)• Allowance

– an allowance is a fixed amount of money granted by an employer to an employee to incur business related expenditure on behalf of the employer. The employee does not have to provide any documentation regarding business and/or private expenditure. The amount of the allowance is based on the anticipated business related expenditure;• Section 8 of the IT Act

– deals with all allowances and advances paid by an employer to an employee (for example, travel, subsistence, public office, cell phone and housing allowances) and– provides that all such allowances and advances must be included in the recipient’s taxable income to the extent that it was not expended as specified in section 8(1);

• therefore a cell phone allowance will be included in remuneration and tax accordingly;

Fringe Benefits – Cellular phones (cont) • Reimbursement:

– a reimbursement of business related expenditure occurs when an employee has incurred and paid for business related expenses on behalf of an employer without the benefit of an allowance or an advance. The employee is subsequently reimbursed for the exact amount expended by the employee after having proved and accounted for the expenditure to the employer;

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Fringe Benefits – Cellular phones (cont)• Reimbursements:

– reimbursements of expenditure which were incurred on the instruction of the employer and where the employee is required to provide the employer with proof of the expenditure, are excluded from taxable remuneration. It is important to note that:– fixed amounts based on expected business usage are treated as allowances and not as reimbursements;

• Reimbursements are taxable to the extent that they exceed the cost incurred by the employee for business purposes

Fringe BenefitsDetermined Value of Company Cars• Vat Regulation 2835 specifies a method for computing the “determined value” of a company car;• the Seventh Schedule Par 7(2) to the Income Tax Act also includes a “determined value definition;• these definitions” are different and as such it is proposed that the VAT regulation be aligned with the provisions as contained in the seventh schedule

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Bursaries• Bona fide scholarships or bursaries granted to enable any person to study at a recognised educational institution are exempt from tax; • where the benefit is granted to an employee, the exemption will not apply unless the employee agrees to reimburse the employer in the event that the studies are not completed; and • where the beneficiary is a relative of the employee, the exemption will only apply if the annual remuneration of the employee is less than R400 000 and to the extent that the bursary does not exceed R40 000 in respect of higher education and R15 000 for basic education to grade 12

Case Law and Rulings

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Anglo Platinum Management Services v SARS Case No 20725/2014• This appeal involves a salary sacrifice scheme whereby the appellant, Anglo Platinum Management Services (Pty) Ltd (the taxpayer), gave its employees an opportunity to participate in what it believed, and still believes, was a legitimate arrangement; • the scheme involved its employees sacrificing or foregoing a portion of their cash remuneration “packages” in return for their use of company-owned motor vehicles;

Anglo Platinum Case (cont)• the issue in the appeal is, whether, for the years of assessment 2004 to 2008, the use of the motor vehicles ought to be taxed at a reduced scale as a taxable benefit under para (i) of the definition of ‘gross income’ in s 1 of the Income Tax Act 58 of 1962 (the Act) read with the Seventh Schedule, and para (b) of the definition of “remuneration” in par 1 of the Fourth Schedule, as the taxpayer contends it should be, or on the normal scale under para (c) of the definition instead, which is how the Commissioner assessed the taxpayer;

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Anglo Platinum Case (cont)• Results of case• Salary sacrifice arrangements in return for some quid pro or fringe benefit from that employer that reduces their tax liability is perfectly legal;• Burden of proof (onus):

– the court must assess oral and documentary evidence,– the taxpayer bears the burden of proof and it must prove that the Commissioners assessment is wrong,– taxpayers’ oral evidence must in considered in light of the documentary evidence. – Ensure you have sufficient documentation in place to support your oral evidence e.g. company polices, lease agreements etc;

Anglo Platinum Case (cont)• the court looked at more than just the documentation tendered and oral evidence. They considered the actual implementation and how the scheme physically operated;• the manner in which the scheme was implemented met the requirements of the relevant provisions; and• the taxpayer won the case with a cost order

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Post Retirement Medical Aid Benefits (Slide Amended)

• BINDING CLASS RULING: BCR 045this ruling deals with the consequences for employees whose post retirement medical aid benefits will be cancelled and replaced with a once-off contribution to the employees’ pension fund;

Post Retirement Medical Aid Benefits (cont)• the additional compulsory contribution by the Applicant to the Pension Fund

• will not constitute a taxable benefit to be included in the gross income of the Class Members, as contemplated in paragraph (i) of the definition of “gross income”, and • will not constitute an amount received by or accrued to the Class Members, as contemplated in paragraphs (c) and (f) of the definition of “gross income”;

• this binding class ruling is valid for a period of 3 years from 12 March 2015

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Maintenance orders and the “tax on tax” principle• DRAFT INTERPRETATION NOTE:

this draft Interpretation Note provides guidance and clarity on the treatment of maintenance orders and the tax-on-tax principles relating to maintenance orders that retirement funds pay while a member is still a contributing member and has not left the retirement fund

Determined Value – Regulation R.362 (amended slide)

• Regulation signed 26 April 2015 detailing the determined value in respect of the definition of “determined value” in relation to Par 7(1) of the Seventh Schedule for vehicles.• The determined value is used to calculate the employees benfit.• Sets out the determined value for motor vehicles in the following scenarios:

– motor vehicle manufacturers or motor vehicle importers; – Motor vehicle hire companiesCame into effect 1 March 2015.

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Employees Tax – Monthly Pension Benefits in respect of foreign services rendered• BINDING PRIVATE RULING: BPR 196:

This ruling deals with whether or not a pension fund will be liable to deduct employees’ tax from the monthly pension benefits payable to its retired members who are residents of South Africa in respect of services rendered outside South Africa (foreign services)

Ruling: The Applicant will not be liable to deduct or withhold employees’ tax under paragraph 2(1) from the monthly pension benefits which will be received by or accrue to residents in respect of foreign services.

Employment Tax Incentive Act• Draft Guide released for comment – Second Round• Comments due by 16 October 2015.• No revised guide as yet issued.

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SDL - INTERPRETATION NOTE: NO 10 (Issue 2)• Skills Development Levy Exemption: Public Benefit Organisations;• this Note provides guidance on the interpretation and application of section 4(c) of the SDL Act,1 which exempts any PBO2 contemplated in section 10(1)(cN) from the payment of SDL, provided the PBO –

– solely carries on qualifying PBOs; or – solely provides funds to PBOs that solely carry on qualifying PBA;

• conclusion: a PBO may qualify for exemption from the payment of SDL under section 4(c) of the SDL Act, provided certain requirements are met

Taxation on Foreigners – Guide (Amended slide)

• Guide on the Taxation of foreigners Working in South Africa 2014/2015 released 22 October 2015.• The purpose of this guide is to provide guidance on the income tax obligations of individuals who are not South African residents and who received or to whom amounts accrued from a source within South Africa. It deals mainly with employment income. • The guide does not deal with every possible scenario that could arise. Each case is dependent upon the specific facts and circumstances applicable to the individual.

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Medical Tax Credits (Slide Amended)

• Guide on the determination of medical tax credit allowances (Issue 6) released 16 November 2015.• Guide is comprehensive and contains explanations regarding definitions and has numerous examples to work with.• Includes explanations regarding dependants, spouse and children;• Qualifying contributions;• Qualifying medical expendituire• Additional Section 6B rebate;• Meaning of spouse and disability

Learnerships - INTERPRETATION NOTE: NO 20 (Issue 6) (Amended Slide)

• This interpretation note has been issued to clarify certain items relating to learnerships;• The note has examples going back to the inception of learnerships;• This Note provides clarity on the interpretation and application of section 12H which provides deductions for registered learnership agreements; • Conclusion Section 12H provides an annual allowance and a completion allowance to employers that are a party to a qualifying learnerships agreement with an employee;

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Learnerships (cont)• the annual allowance of R30 000 is subject to a pro rata reduction when the number of full months in a year of assessment is less than 12; • the completion allowance is limited to R30 000 when the learnership is for a period of less than 24 full months. For longer agreements the completion allowance is R30 000 multiplied by the number of consecutive 12-month periods covered by the agreement. The allowances are increased to R50 000 for learnerships entered into with employees having a disability – this is R20 000 more than the prior year.

Company Vehicle Fringe Benefit Value (Amended Slide)

• Guide for employers in respect of fringe benefits;• Special Rules for motor vehicle importers, dealers, manufacturers or motor vehicle rental companies are introduced;• Manufacturers or importers i.r.o new or demo motor vehicles;• Manufacturers or importers i.r.o preowned motor vehicle;• Dealers or rental companies i.r.o new or demo motor vehicles;• Dealers or rental companies i.r.o preowned motor vehicle• In any other cases (i.e. excluding motor vehicle manufacturers, importers, dealers or rental companies)

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Foreign Income - DRAFT INTERPRETATION NOTE: NO 16 (Issue 2)• Exemption from Income Tax: Foreign Employment Income;• this Note discusses the interpretation and application of the foreign employment remuneration exemption in section 10(1)(o)(ii);• the potential for an exemption under section 10(1)(o)(ii) does not automatically waive the obligation of an employer to deduct employees’ tax under the Fourth Schedule. An employer that is satisfied that the provisions of section 10(1)(o)(ii) will apply in a particular case may, however, elect not to deduct employees’ tax in a particular case. In the case where the exemption was not applicable, the employer will be liable for the employees’ tax not deducted as well as the concomitant penalties and interest

Thank you for your time.GARETH@BAZINGAWORX.CO.ZA