Employees earning remuneration are generally prohibited from claiming tax deductions for any expenditure other than those items listed in section 23(m) of the Income Tax Act (58 of 1962). This is in contrast to persons carrying on a trade independently of an employer.

 

One of the few deductions still available to employees is for premiums paid on income protection insurance policies. Currently, such premiums are deductible if (a) the policy covers the person against loss of income as a result of illness, injury, disability or unemployment, and (b) the amounts payable in terms of the policy constitute or will constitute income. The general principle has been that the premiums will be deductible if the proceeds are taxable – for example, if the policy pays a salary replacement annuity to the policyholder in the event that he/she is no longer able to earn a living. The deduction available for these premiums is, however, an exception to the general rule that personal expenditure is non-deductible, on the basis that these premiums incurred may, in fact, produce taxable income (and therefore passes the section 11(a) general deduction test).

Differences in wording between the recently enacted section 19 of the Income Tax Act (‘the Act’) and paragraph 12A of the Eighth Schedule to the Act and the previous plethora of provisions that dealt with debt reduction, will result in a choice having to be made by taxpayers that are looking to write off or reduce debts as to whether they will do so in terms of the recently enacted provisions or the previous provisions. The new provisions come into effect in respect of years of assessment commencing on or after 1 January 2013. Therefore a taxpayer with a tax year end of 31 July, for instance, can either write off the debt in its current tax year ending 31 July 2013 or during the following tax year ending 31 July 2014.

 

There are a number of interesting differences between in wording of the new and old provisions.

 

 For example, while the new provisions explicitly apply to debt that has financed tax deductions or allowances whether directly or indirectly, the wording of section 8(4)(m) and paragraph 20(3) of the Eighth Schedule imply that only debts that directly financed deductions or allowances were affected by these old provisions. 

 

Further, the capital gains tax provision (section 12A) under the new rules does not trigger a taxable capital gain, unlike the equivalent provision under the old rules (paragraph 12(5) of the Eighth Schedule). The write off of tax debt is also not taxed in terms of the new rules, unlike the old. There are also however a number of instances where the wording of the new provisions is unclear.

 

If your company has a tax year that is yet to end in calendar 2013 and you are contemplating writing off debt, you are urged to contact one of the BDO Tax Directors below to discuss the issues involved in more detail.

As part of its 2013 Budget wish-list, the South African Institute of Chartered Accountants (SAICA) is calling on the National Treasury to simplify the complex tax structure surrounding scholarships and study loans in order to encourage companies to provide bursaries to employees and their relatives.

 

Currently, section 10(1)(q) of the Income Tax Act, No 58 of 1962 provides for the exemption of scholarships or bursaries, but this exemption only applies in certain circumstances when the scholarship or bursary was provided to employees and relatives of employees.

 

If the scholarship or bursary is granted to assist an employee, the exemption will only be available if it is a requirement that the employee reimburses the scholarship or bursary if the employee fails to complete his or her studies, (unless this is due to death, ill health or injury). With respect to a scholarship or bursary granted to a relative of an employee, the exemption will only be available if the remuneration derived by the employee does not exceed R100 000 during the year of assessment and only the first R10 000 of the scholarship or bursary will then be exempt.

 

Piet Nel, SAICA’s Project Director: Tax explains that it is not disputed that South Africa is still experiencing a skills shortage. Many employers provide bursaries and study loans to up-skill and develop employees as well as to assist relatives of employees to study and become skilled.

 

“Employers are often committed to the continuous development of their employees and associated relatives. This contributes to the continued increase in education levels across the nation and should be encouraged by Government in order to reduce the burden on the already over-extended education departments and tertiary institutions.”

 

According to Nel, there are nonetheless a number of challenges that employers face in this area.

1. Monetary amounts

The monetary amounts used in section 10(1)(q) have seen little adjustment for inflation since its introduction in 1992. These amounts do not take the considerable increase in the cost of education over the past eleven years in South Africa into account. The low remuneration value is limiting the availability of the benefit to very few individuals. The employers would provide bursaries but the result for employees will be that they will be taxed on a fringe benefit and therefore they cannot afford this benefit.

 

SAICA proposes that the monetary amounts in section 10(1)(q) should be revised in line with inflationary changes. “One option is to link the remuneration level to the annually changing Basic Conditions of Employment earnings threshold, currently R183 008. Another option would be to link it to the lowest tax bracket currently R160 000. We also call for the National Treasury to consider removing the R10 000 limit in its entirety”, says Nel.

 

2. The concept of “remuneration”

The R100 000 amount in section 10(1)(q) refers to remuneration. The word remuneration is not defined for purposes of the section and must therefore take its normal meaning. It is a very wide definition and will for instance include variable, discretionary and lump-sum payments.

 

Many employers do not have the resources to manage full bursary schemes or to fund payments upfront to institutions or to manage approval processes in time for registration dates to be met. “We suggest that section 10(1)(q) is amended to allow the employer to determine the application of the exemption based on the fact that the employer is satisfied that at the time the award is made, the remuneration of the employee for the year of assessment is not expected to exceed the monetary amount for that year”, Nel explains.

 

SAICA also proposes that remuneration should, for purposes of this exemption, be restricted to the cost, to the employer, and should exclude any lump sum payments, share gains and variable remuneration due to the employee.  

 

3. Method of payment

Section 10(1)(q) does not stipulate the manner in which the scholarship or bursary is to be awarded or funded. The Interpretation note refers to “financial or similar assistance granted to enable a person to study” and then provides some examples of what a bona fide scholarship or bursary would include. It specifically states that “a reward or reimbursement of study expenses ... after completion of studies” will not qualify for the exemption and then deals with study loans.

 

For many employers, the award of scholarships or bursaries is an ad hoc function and the current practice does not provide the employer with flexibility in payment options. “It is proposed that where the true nature of the payment, in whatever form, is for the purpose of enabling an employee or relative of an employee to enable or assist a person to study then the section 10(1)(q) exemption should apply”, says Nel, adding that other mechanisms of funding should therefore be permitted.

 

Nel says National Treasury should be encouraging employers to fund these studies by relaxing the tax laws, as this will ease the burden on the state. “This will assist the National Government to reduce the strain on education needs as well as for future provision of social grants as more individuals will be qualified to earn a living wage.”

In one of the most significant changes to employees' tax requirements in decades, the accrual principle is proposed to be relaxed for variable remuneration items such as commissions, travel payments, overtime and bonuses. This comes as one of the proposed changes to the Income Tax Act issued for public comment in July this year. "While at this early stage much thought still has to be put into the practical implications of this change, there is no doubt that it will significantly simplify payroll administration over the tax year end for employers and for the South African Revenue Service (SARS), and is to be welcomed," says Rob Cooper, a Payroll tax expert at Softline VIP, part of the Sage Group plc.

"One of the pillars that our tax law stands upon is the concept of 'accrual'. Amounts are generally interpreted to have accrued when there is an unconditional entitlement to that amount. This causes problems for payroll systems that have to withhold employees' tax on amounts that accrued in one tax year, but were only quantified and processed in the next tax year. Adjustments to monthly payments to SARS, tax certificates and reconciliations are the inevitable result of adjusting amounts back into a tax year that has already closed," explains Cooper.

Other proposed changes to the Income Tax Act include the extension of the medical tax credit principle. "From March 2012, we saw the introduction of medical tax credits (tax rebates) for employees under 65 years of age who contribute to a medical scheme. Changes were also made to the income tax relief granted on assessment to individuals for their out-of-pocket medical expenses subject to certain conditions. The draft changes now extend to the medical tax credit principle for contributions to include those employees who are 65 years of age or older. The values proposed for their tax credits are the same as those currently used for employees under 65 years of age, and are based on the number of dependents," says Cooper.

The deduction system of income tax relief for out-of-pocket medical expenses has been replaced by a medical tax credit system, with varying degrees of relief for over and under 65 year old employees, and for those who are disabled or with a disabled spouse or child dependent. "What is of concern is that the tax relief granted for medical contributions and out-of-pocket medical expenses has been whittled away by the changes made last year and the proposed changes in the draft legislation, particularly for those taxpayers who earn above the 30% marginal tax rate. Individuals over the age of 65 and those who are pensioners, in particular, have been hit hard in recent years by dividend tax changes and interest tax relief amongst other measures. A further reduction in the assistance from the state for medical contributions and medical expenses is going to hurt these individuals. The same can be said for families with a disabled person," says Cooper.

The proposed changes to the tax law also include some fine tuning made to the provisions which allow employers a deduction from income of R30 000 at the start and the end of a learnership. These changes address the delays in registration of the learnership with a SETA which can reduce the value of the incentive, as well as the disallowance of the incentive will be limited to learnerships that the employee failed while working for the current employer.

There have also been some proposed changes to the taxation of employer-owned insurance policies that will impact on employees.