Compensation, the term used to define the cost of employment of employees, can be a major headache for decision makers in business, particularly if it is not managed properly and issues like compliance are not taken seriously.

 

One of the main reasons why this responsibility can turn the world of an employer upside down is because it encompasses far more than just salary. Although employees tend to associate compensation exclusively with salary, it is actually far broader than that – in fact, it includes benefits, rewards, incentives and other costs.

 

So, in practice, compensation covers everything that an employee earns for bringing value to the employer.

 

In the South African context, the issue is of extreme importance because of the country’s strong trade union background and the ongoing problem of skills shortages.

The Minister of Finance will present this year’s budget on 26 February, and as we move closer to this date the burning question that every employee would like to know the answer to is whether personal tax rates will go up or down.  Of course, the people who know what’s in the budget aren’t talking, so we have to make an educated guess at what we can expect. 

 

The only way to do that is to pick up trends by looking back at last year’s budget.  The 2013 budget proposed a number of changes to some important areas of employment, of which the following are the bigger projects.

 

Retirement Reforms

South Africa does not have a statutory requirement for pension provision, or death and disability insurance. Government is examining ways in which every working South African can be guaranteed access to these components of social security. As in many other countries, a key element of this reform would be the provision of subsidised contributions for low-income workers.

 

In the absence of a statutory requirement for retirement provision, a large number of employers provide retirement and insurance funds as a condition of employment.

 

Pension, Provident and Retirement Annuity funds (Retirement funds) have their own unique tax and administration rules.  This causes unnecessary complications, mistakes and inefficiencies for everybody concerned. 

 

Proposals were made in the 2013 budget to ‘harmonise’ the tax rules into one standard set of administration and taxing rules for all retirement funds.  These proposals were promulgated late in 2013 and are included in the Income Tax Act but with an effective date of March 2015.

 

This is both a complex and a sensitive area of employment, and I have no doubt that changes will be made as we move forward to correct any unintended consequences that might arise, and to refine the provisions even further.

 

National Health Insurance

Late in 2012, Minister of Finance Pravin Gordhan stated at a press briefing that a discussion document on financing options for the NHI was at an advanced stage, but declined to give details or a date when National Treasury would make the document available.

 

This discussion document, which has still not yet been issued, will presumably address what we want to know –

1. How is the NHI going to be funded?
2. Will employees have to contribute?
3. Will it be administered through the payroll?

 

There was also no mention of the funding mechanism for NHI in the 2013 budget proposals, so all we have is what was proposed in previous budgets -

1. A special tax on high income earners, or
2. A mandatory contribution by all employees (administered through the payroll), or
3. An increase to VAT.

 

While the NHI has moved out of the spotlight in recent times, one expects this year’s budget to take matters forward, otherwise the proposed 14 year project might just become a 20 year project.

 

Youth Wage Subsidy (Employment Tax Incentive Act)

After the State of Nation address in 2013, when questioned in Parliament on the Youth Wage Subsidy, the President said that:

 

“The matter would be left to the National Economic Development and Labour Council to bridge consensus on youth employment interventions”.

 

This was followed in the budget with a reference to an administratively simple incentive that will create a graduated (sliding scale) tax incentive at the entry-level wage, falling to zero when reaching the personal income tax threshold.

 

After years of wrangling, the Youth Wage Subsidy was suddenly back in favour.

 

It was specifically mentioned (as a response to the objections to this scheme over the years), that protection will be provided by existing labour legislation combined with oversight by SARS and the Department of Labour to prevent displacement of older workers by younger subsidised workers.

 

All of this has of course come to pass. 

 

On the 20September 2013, the draft Employment Tax Incentive Bill was issued for a very short period of public comment, and was then moved at an incredible pace through the Parliamentary process, culminating in the State President signing it into law only three months later on 20 December 2013.

 

The Employment Tax Incentive Act is effective from January 2014, and encourages employers to employ youngsters between the ages of 18 and 29 by reducing the PAYE that the employer has withheld and which is payable to SARS, thereby reducing the cost of employment.  The young person will benefit from having a job, and the country will benefit by slowly reversing the negative cycle of social instability resulting from large numbers of unemployed young people.

 

The legislation envisages a three period which could be extended if necessary.  There will no doubt be changes proposed in the budget to improve the effectiveness of the provisions, which considering the very short space of time, was a commendable effort made by the legislators.

 

For the benefit of the country as a whole, it is hoped that employers will embrace the incentive, and where possible, hire beyond what they might otherwise have done.  Under certain circumstances, two youngsters can be hired for the same cost of hiring one.

 

Personal Tax

As far as increasing tax rates is concerned, the general expectation is that tax rates will be lowered, but only enough to cater for inflation increases to remuneration, or ‘bracket creep’ as it is called. 

 

In 2013, the personal income tax relief for individuals amounted to R7 billion.  In our current times of financial stress, one wonders whether this can be repeated in 2014.

 

Every now and then an opportunity comes along that looks very hard to resist. If you’re a seasoned entrepreneur, this might come in the form of a company that, although in such distress that the shareholders want out, still has genuinely valuable assets or a viable business model.

The new tax season has begun. It is time to get your tax inputs in order.

 

If you are an individual, or if you run an SME, there are two basic ways to get your tax done. The first is to log on to the SARS e-filing website and submit your tax returns yourself. The second is to find a registered tax consultant or tax service to help you submit your returns.

 

SARS e-filing is a free, online process for the submission of tax returns and other related services in a secure online environment. Once you are registered for e-filing you can visit SARS online for the submission of returns, declarations and payments in respect of taxes, duties, levies and contributions. e-Filing also allows you to submit a variety of tax returns including VAT, PAYE, SDL, UIF, Income Tax, STC and Provisional Tax through the e-filing website.

 

“While e-filing makes it very easy to submit your tax returns on your own”, explains Somaya Khaki, SAICA’s Project Director at Tax Suite, “it is always a good idea to use a professional tax consultant to submit your returns for you if you are uncertain about anything. Making sure that you are compliant will reduce the likelihood of being audited by SARS and may increase your chances of receiving a refund if deductions are available that you were unaware of ”.

 

Here are some general tips to keep in mind:

 

• General tax rates on the profits of small business corporations are as follows:
  • R0 – R67 111 (0 %)
  • R67 112 - R365 000 (7%)
  • R365 001 – R550 000 (21%)
  • R550 001 + (28%)

• If you supply any of your employees with a subsistence allowance for their business travels, these allowances are tax-free if your employee is obliged to spend at least one night away from his/her usual place of residence and if they do not exceed the following amounts:
  • R319 per day for meals and incidental costs for travel within the Republic
  • R98 per day for incidental costs only within the Republic

• Severance benefits which you might have paid out to your employees in respect of the relinquishment or termination of their employment (for either attaining the age of 55 years, due to incapacity through sickness or other ailment, or retrenchment) are taxable in accordance with the following table:
  • R0 to R315 000 (0%)
  • R315 000 to R630 000 (R0 + 18%)
  • R630 000 to R945 000 (R56 700 + 27%)
  • R945 000+ (R141 750 + 36%)

• If you have acquired any intellectual property, the costs incurred (i.e. other than developing or creating) can lead to tax rebates from 5% (for inventions, patents or copyrights) to 10% (for designs). Intellectual property costs not exceeding R5 000 may be deducted in full although no deductions are available in respect of trademarks.

 

“These are just a few examples of details that you might miss out on when submitting your tax return and there are many more”, reports Khaki. “If you are unsure about your tax status or compliance, or if you think there may be deductions you are missing out on, you should contact a professional tax consultant or tax service you can find registered tax practitioners at”. This is a professional tax information database powered by SAICA (The South African Institute of Chartered Accountants). It’s the definitive source for anyone who needs to find a professional tax advisor.

South Africa's unsuspecting accountants could fall foul of the taxman if they don't get up to speed with new legislation.

 

Nicolaas van Wyk, CEO of the Southern African Institute for Business Accountants (SAIBA), this week warned accountants that the recently introduced Tax Administration Act (TAA) had far-reaching implications for them, including criminal sanction if they didn't pay due attention to the part they play in the affairs of their taxpayer clients.

 

"Simply put, the act makes accountants very vulnerable if they don’t take immediate steps to ensure they review their engagement and relationship with their clients," said van Wyk.

 

Stiaan Klue, CEO of the South African Institute for Tax Practitioners (SAIT) said that “thus far only the tax accountant has received accountability sanctions for their advice to the public as a registered tax practitioner”.

 

The new legislation requires that any person providing advice on the application of a tax act, or who completes or assists with completing a tax return, should register with SARS and a controlling body - failure to register is a criminal offence.

 

According to van Wyk, “The Tax Administration Act does more than just regulate the conduct of tax practitioners. A careful reading of the TAA will reveal that SARS is empowered to monitor and control the complete financial reporting supply chain. Criminal liability is allocated to a wide range of areas, and is not limited to only the information reflected on a tax return and submitted by a tax practitioner”.

 

The bookkeeper, accountant, accounting officer, independent reviewer and auditor are all involved in the financial reporting supply chain of any business.

 

"If they are found to assist a business to unduly avoid, postpone or evade taxes, they may be held criminally liable. It is therefore not only tax practitioners who are affected by the Tax Administration Act. The fact is that generally, tax practitioners rely on the work performed by the bookkeeper, accountant, and auditor to determine a business’s tax liability."

 

Klue explained, by way of example, that a senior SARS official is empowered to lay a complaint against a tax practitioner with the tax practitioner's professional body. However, this power is extended to include the conduct of the accountant who merely assists the business in preparing financial statements. A complaint can be laid against the accountant if he intentionally or by way of negligence assists a business to avoid paying tax or unduly postpones the payment of a tax. Late filing of financial statements or applying an incorrect accounting method may see the accountant fall foul of this requirement.

 

According to van Wyk,  SARS can also demand a new “statement of account” from the accountant who prepared the financial statements for a business or taxpayer. In this statement the accountant will have to explain how the financial statements were prepared and whether the financial statements disclose the true nature of any transaction, receipt, accrual, payment or debit. "If a false or misleading statement is made, the accountant and not the tax practitioner, will be criminally liable.”

 

Van Wyk therefore cautions that accountants must apply the correct accounting framework when preparing financial statements for clients and that the reports that they issue on the financial statements are prepared within acceptable standards. Failure to comply will result in criminal sanctions.

 

He warned that accountants can no longer use a “don’t ask, don’t tell” approach when preparing financial statements.  If they know or have reason to believe that the financial information presented to them by their clients is prepared recklessly, incorrectly, incompletely, inconsistently or prepared without the required diligence, they have a statutory duty to rectify the non-compliance or resign as the client’s accountant.

 

Van Wyk advises that all accountants should therefore ensure that they

• inform their clients of the accountants’ new Tax Administration Act imposed duties,
• implement engagement procedures to mitigate the potential risks, and
• update their knowledge of accounting standards.

 

“The TAA has changed the relationship between the accountant and his client.  In order to protect themselves accountants will be forced to remove any emotional attachment to their clients and adopt a much more formalistic and legalistic approach,” says van Wyk.

Paying tax is nobody's favourite pastime but paying your tax promptly and correctly is a far better option than having to deal with the penalties that you will have to pay should you fail to do so.

Taxpayers breathed a collective sigh of relief on Wednesday, as Finance Minister, Pravin Gordhan, took to the podium in parliament to allay fears of a tax hike. The government’s proposed R7 billion personal income tax relief initiative was one of the few surprises of a relatively conservative Budget Speech, which addressed a number of broader issues such as government spending and infrastructure development.

 

Yet whilst the adjustment of income tax brackets will see some consumers pocketing marginally more come month-end, increased fuel levies and rises in sin taxes look set to make 2013 a costly year for many South Africans.

 

According to Carel Steenkamp, Director of C2M Chartered Accountants, taxpayers should exercise caution when budgeting for the upcoming financial year.

 

“While many consumers will end up paying a smaller percentage of their monthly salaries to the tax man, there are a number of other factors that are likely to put an even greater strain on disposable income levels,” explains Steenkamp. “For instance, while individuals earning R200,000 per annum will owe R1,032 less in taxes over the course of the year, they’ll need to take into consideration the impact of a significant increase in fuel levies and a raise in so-called ‘sin taxes’ of between 5.5 and 10%.”

 

The general fuel levy will rise by 15% on 03 April to R2.13/l. This, combined with an 8c/l Road Accident Fund levy, rising oil costs and a weakening Rand, could end up having an enormous impact on consumers’ expenses.

 

“The rapidly increasing price of fuel is likely to hit consumers’ pockets hard, and will severely diminish the impact of any proposed income tax relief,” says Steenkamp. “Additional taxation on alcohol and cigarettes, as well as rising electricity costs, will further contract these income tax gains, meaning that consumers are in fact likely to experience greater financial strain over the course of the upcoming financial year.”

 

Another significant development addressed in Minister Gordhan’s speech is a new tax set to be applied to trusts, which could severely curtail the benefits currently enjoyed by trustees and beneficiaries.

 

According to Carel Bester, Director of the C2M Group, it is now even more important for trust owners to ensure that their trust deeds are up to date, and that they follow correct procedural guidelines.

 

“Under the new proposed trust tax initiative, any beneficiary distributions that are claimed as deductible in the trust will be taxed as ordinary revenue in the hands of the beneficiary,” explains Bester. “What this means is that any type of distributed income stream from which beneficiaries previously derived benefit will now fall away, and be subject to current income tax legislation.”

 

“Trusts, which are often used to protect and manage assets, will now find themselves under increased scrutiny, and the onus is on trust owners to ensure that they follow protocol, something that includes holding annual meetings with all trustees present,” continues Bester. “Trust owners and beneficiaries would be well advised to consult with a financial advisor in order to ensure compliance.”

While Finance Minister, Pravin Gordhan’s, 2013/2014 budget speech presentation held no real surprises from a tax perspective, Zweli Mabhoza, Head of Tax Services at SizweNtsalubaGobodo, South Africa’s largest black-owned audit firm, believes it did reveal some interesting developments around how Tax Authorities intend to deal with corruption and tax avoidance transactions. “In addressing these areas of concerns Tax Authorities will be able to increase collections without having to introduce any major changes in the tax legislation,” he says.

 

Mabhoza says that the announcement by the Minister that National Treasury intends announcing the name of a Chief Procurement Officer is informed by the need for the government to increase the value on the money it spends.  “The Minister reported that National Treasury is scrutinising 76 business entities with contracts worth R8,4 billion which are likely to have infringed the procurement rules. 

 

“The South African Revenue Services (SARS) is also performing an audit of over 300 entities and scrutinising additional 700 entities.  SARS has managed to raise tax of R480 million on 216 cases concluded.  If one takes a simplistic view and extrapolates this R480 million to 1 000 potential cases, it seems SARS can collect approximately R2,2 billion by simply working on government’s procurement processes,” he comments. 

 

Also notable for Mabhoza is the announcement that SARS, following several years of work to trace transactions through multiple jurisdictions and entities, is currently pursuing several schemes identified under the revised general anti-avoidance rules. “This announcement interestingly comes within weeks of a local listed company reporting via its SENS document that SARS has raised an assessment of more R1 billion in respect of its funding transaction using general anti-avoidance rules.  It is certainly an interesting development as Tax Authorities have in the past been reluctant to invoke general anti-avoidance rules, instead opting to introduce additional specific provisions in the Income Tax Act, 1962, further complicating tax legislation,” he says. 

 

Mabhoza believes the Minister is of the view that the benefits of some of these schemes accrue to advisors and pre-existing shareholders rather than new shareholders who were introduced as the ostensible beneficiaries of the transactions.  “The point made by the Minister is, to some extent, true in particular where BEE partners are introduced using corporate rules.  These transactions often result in BEE partners carrying a deferred tax liability that may have not been factored in their purchase price,” he explains.

 

Encouraging for Mabhoza is the introduction of the permanent voluntary disclosure programme as from 1 October 2012. “Following the success of the initial voluntary disclosure programme in 2010 which has now been reported to have generated more than R3 billion in undeclared taxes, it makes sense to have introduced a permanent voluntary disclosure programme. The programme included in the Tax Administration Act, 2011, has already generated more than R200 million in taxes to date. Another positive is SARS’ intention to introduce a link between tax clearance certificates issued and tax revenue collected from people who tendered for work from the state. This is certainly long overdue,” he comments.

 

Mabhoza regards the Minister’s proposal in favour of discretionary trusts no longer acting as flow-through vehicles as pertinent. “Instead of discretionary trusts only paying tax on amounts not distributed, the income received by these trusts will be taxed at a trust level with beneficiaries receiving a tax free distribution.  This prevents beneficiaries of these discretionary trusts off-setting income against tax losses while avoiding tax in the hands of the trust,” he explains.

 

Although the Minister announced his intention for the Tax Authorities to work with the Department of Home Affairs and other agencies in registering small and micro businesses (including those operated by foreigners), Mabhoza believes this will be a challenge.  “Although this will also work towards widening the tax net, the challenge here is that some of the small businesses that SARS is targeting operate in remote rural areas. These locations are without SARS offices. This raises the question as to where these taxpayers will go if they need guidance,” he concludes. 

The South African Institute of Chartered Accountants (SAICA) hopes that mention will be made on how the uncertainty over transfer pricing should be dealt with in the national budget to be presented by Minister Pravin Gordhan on 27 of this month, as the current circumstances cannot continue without significant challenges for business.

The new Tax Administration Act No 28 of 2011 (“TAA”) was promulgated with the effective date of 1 October 2012 and while expected to have extend taxpayer rights, it also re-affirmed and extended the powers of the South African Revenue Services (”SARS”). 

 

SARS’ objective remains the efficient and effective collection of tax revenue and the TAA is geared to assist it with meeting this objective. Tax evaders and non-compliant taxpayers can expect to face more strict enforcement action, assessment of taxes and the collection thereof. It is therefore imperative for taxpayers to toe the line in administering their taxes and taking correct decisions with regards to potential contentious matters.

 

However, once returns are filed and assessments are raised taxpayers must pay the taxes that arise.  SARS has always believed in the mantra “pay now argue later” with regards to tax collections but in practice it was not always readily enforced across the board. The TAA however re-enforces that principle and SARS is set to follow the process as laid down.

 

Taxpayers who are aggrieved by assessments raised by SARS must therefore not only enter into dispute resolution process with regards to the assessment but must also approach SARS with a formal request to suspend collecting the tax arising from the disputed assessments. Merely arguing with SARS regarding the assessment may therefore lead to the taxpayer still facing serious collection action which SARS has the right to institute despite the taxes being disputed.

 

A two-pronged approach is required in all these circumstances.  However, merely filing a payment postponement request without confirmation that SARS has agreed to it is also not wise. It must be ensured that there is regular follow up on the progress with regards to the collection of the taxes until such time as SARS has issued the confirmation of suspension.

 

When deciding on whether a dispute must be lodged against an assessment, care must also be taken to ensure when the action for collection will start. If it is to start   before the dispute is filed, an application based on the intended dispute must then be filed with SARS first.

 

It is, however, not a given that SARS will postpone or suspend the collection action when a taxpayer wishes to enter into a dispute and makes the request to suspend collection. SARS will consider various factors before suspending collection action. First and foremost it will consider the taxpayer’s compliance history. This is yet another reason why taxpayers must ensure that tax filings and payments are made as and when required.

 

A taxpayer’s compliance history will also be taken into account, i.e. were there regular or serious transgressions in the past, did the taxpayer apply for voluntary disclosure relief or amnesty in the past or has the taxpayer been unsuccessful in various disputes in the past. Being a model taxpayer therefore assists taxpayers’ cases in such situations. This is not to say that taxpayers with a poor record will not be successful but their application may require more meat to the bone.

 

Another factor SARS will consider is the amount of tax in question. There is no guidance as to whether a small or large amount will receive more favourable attention but the amount of taxes may be linked back to the context and situation of the taxpayer. 

 

Another factor to be considered by SARS is whether it believes that there is a real risk of the assets of the taxpayer being reduced during the period of the dispute which may jeopardise the collection of the taxes at a later stage. SARS may require the taxpayer to provide security for the amount in question.

 

SARS would consider whether the amount in question would provide financial hardship to the taxpayer if immediate payment is required as would be the likelihood of the liquidation or sequestration of the taxpayer. Another consideration would be whether the assessment raised by SARS contained elements of fraud or intentional tax evasion on the part of the taxpayer.

 

A request for suspension would only be considered if it is filed with SARS in the prescribed format and if the taxpayer is able to supply all the information called for by SARS at that time. SARS will deny requests for suspension if it believes the dispute action is frivolous and if there is a material change in the taxpayer’s position and factors upon which the application is based. The suspension of tax collection will also automatically lapse if the dispute is not lodged or SARS has ruled against the taxpayer in the relevant dispute.

 

Taxpayers who are issued with assessments must therefore make two decisions:

• Will the assessment be accepted – in which case the taxes must be paid; or
• Will the assessment be disputed - in which case the dispute must be lodged.

 

Where taxpayers decide on the second option they must ensure that they not only adhere to the rules of dispute resolution, but also that the matter of collecting the tax is also addressed to avoid potential action instituted by SARS.