Elements required before employees' tax, Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF) may be determined
The Fourth Schedule requires the presence of three elements before employees' tax and UIF contributions may be deducted, namely, an employer paying remuneration to an employee.
The employer also must form a dominant impression of the employment relationship to be able to classify the worker efficiently in order to determine the rate which must be applied to deduct employees' tax from the remuneration of the specific employee.
The annual equivalent needs to be used when an employee's tax period is shorter than a full tax year in order to determine the amount of employees' tax deductible.
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Remuneration for employees' tax purposes
Paragraph 1 of the 4th Schedule defines remuneration as any amount of income which is paid or is payable to any person whether in cash or otherwise and whether or not in respect of services rendered.
Examples of remuneration — Remuneration will include salary, fee, bonus, wage, gratuity, pension, leave encashment, emolument, voluntary award, commission, annuity, stipend, remuneration for overtime, superannuation allowance, retirement allowance, lump sum payment, director's remuneration, etc.
The following are specifically included as remuneration:
• restraint of trade payments;
• an amount, including a voluntary award, received or accrued in commutation of amounts due in terms of a contract of employment or service;
• an amount received or accrued in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of an office or employment or of an appointment;
• An allowance or advance paid to an employee in respect of accommodation, meals or other incidental costs while the employee is by reason of the duties of his / her office obliged to spend at least one night away from his / her usual place of residence in the Republic is deemed to become payable to the employee in the following month in respect of services rendered. This deeming provision applies where such an allowance or advance was paid to an employee during any month in respect of a night away from his / her usual place of residence and that employee has not by the last day of the following month either spent the night away from his / her usual place of residence or refunded that allowance or advance to the employer;
• 50% of an allowance paid to a holder of a public office;
• 60% of an allowance or advance in respect of the expense of travelling for business purposes (excluding an allowance paid for actual distance travelled for business purposes, at a rate not exceeding the rate per kilometre fixed by the Minister of Finance in the Government Gazette);
• fringe benefits received in terms of the 7th Schedule;
• a gratuity received by or accrued to a person from his / her employer because such person obtained a university degree or diploma or has been successful in an examination;
• any gain determined in terms of Section 8B, which must be included in that person’s income under that section (broad-based equity share plan); and
• any gain determined in terms of Section 8C which is required to be included in the income of that person.
The following are specifically excluded from remuneration and consequently no employees' tax is deductible:
• Amounts paid to common law independent contractors, but excluding amounts paid to independent contractors who are subject to the control or supervision of any person as to the manner in which their duties are performed or as to the hours of work or if the amounts paid or payable to them are payable at regular daily, weekly, monthly or other intervals;
? This exclusion does not apply to —
? any person who receives any remuneration or to whom any remuneration accrues by reason of any services rendered by such person to or on behalf of a labour broker;
? any labour broker;
? any personal service company;
? any personal service trust; or
? a person who is not ordinarily resident in South Africa.
• Any pension or additional pension under the Social Assistance Act.
• Any disability grant or additional or supplementary allowance under the Social Assistance Act.
• Any grant or contribution under the provisions of Section 89 of the Children’s Act.
• Amounts paid to an employee, wholly in reimbursement of expenditures actually incurred by such employee (i.e. expenses incurred on behalf of the employer on an agency basis), in the course of employment.
• Any allowance or advance in terms of an order of divorce or decree of judicial separation or agreement of separation.
Employees' tax must be calculated on the balance of remuneration (remuneration for employees' tax purposes less any allowable deductions).
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Remuneration for Unemployment Insurance Fund (UIF) contribution purposes
Section 1 of the UIC Act defines remuneration as remuneration for employees' tax purposes, but excludes any amount paid or payable to an employee:
- by way of pension, superannuation allowance or retiring allowance;
- that constitutes an amount contemplated in Paragraphs (a), (cA), (d), (e) or (eA) of the definition of gross income in Section 1 of the Income Tax Act —
- by way of annuity [par (a)];
- as compensation for any restraint of trade [par (cA)];
- any amount, including a voluntary award received or accrued in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of any office or employment or of any appointment [par (d)];
- lump sum benefits from any pension fund, provident fund or retirement annuity fund [par (e)]; or
- lump sum benefits from a pension fund (where the rules provide that on retirement a portion of the benefit has to be taken in the form of an annuity, etc.) [par (eA)]; and
- by way of commission.
The UIF contribution must be calculated on the remuneration for UIF purposes.
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Remuneration for Skills Development Levy (SDL) purposes
Section 3(5) of the SDL Act defines remuneration as remuneration for employees' tax purposes, but excludes the following amounts from remuneration for purposes of determining the leviable amount:
• an amount paid or payable to any labour broker or any person declared by the Minister of Finance by notice in the Government Gazette as an employee to whom a certificate of exemption has been issued by SARS;
• an amount paid or payable to any person by way of pension, superannuation allowance or retiring allowance;
• an amount contemplated in Paragraphs (a), (d), (e) or (eA) of the definition of gross income in Section 1 of the Income Tax Act —
? by way of annuity [par (a)];
? any amount, including a voluntary award received or accrued in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of any office or employment or of any appointment [par (d)];
? lump sum benefits from any pension fund, provident fund or retirement annuity fund [par (e)]; or
? lump sum benefits from a pension fund (where the rules provide that on retirement a portion of the benefit has to be taken in the form of an annuity, etc.) [par (eA)]; and
• an amount payable to a learner in terms of a contract of employment contemplated in Section 18(3) of the Skills Development Act.
SDL leviable amount — As the basis for the calculation of the levy is to a large extent based on the employees' tax calculation, the remuneration on which the levy will be calculated is determined with reference to the balance of remuneration for employees' tax purposes. Although remuneration paid to an employee may be below the tax threshold for employees' tax purposes, the employer is still liable for payment of SDL on such remuneration.
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Allowable deduction to determine the balance of remuneration
Pension Fund Contributions
Paragraph 2(4)(a) of the 4th Schedule prescribes that the employer must deduct current and arrear contributions, within the limits contemplated in Section 11(k), by the employee to an approved pension fund which the employer is entitled or required to deduct from the employee's remuneration.
Section 11(k) limit the allowable deduction to the following:
Current contributions — An annual deduction limited to the greatest of:
R1 750; or
7,5% of the remuneration received during the year from retirement funding employment.
Arrear contributions — An annual deduction limited to R1800.
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Retirement Annuity Fund (RAF) Contributions
Paragraph 2(4)(a) of the 4th Schedule prescribes that the employer must deduct current and arrear contributions, within the limits contemplated in Section 11(n), by the employee to an approved RAF which the employer is entitled or required to deduct from the employee's remuneration.
Paragraph 2(4)(b) of the 4th Schedule prescribes that the employer may at his / her option deduct current and arrear RAF contributions, within the limits contemplated in Section 11(n), which the employee has paid directly to the Fund, provided that proof of payment has been furnished to the employer.
Section 11(n) limit the allowable deduction to the following:
Current contributions — An annual deduction limited to the greatest of:
R1 750;
R3 500 less allowable current pension fund contributions; or
15% of the remuneration received during the year from non- retirement funding employment.
Arrear contributions — An annual deduction limited to R1800.
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Income protection policy premiums
Paragraph 2(4)(c) of the 4th Schedule prescribes that the employer may at his / her option deduct any premium paid by the employee in respect of which proof of payment has been furnished to the employer in terms of an insurance policy —
• to the extent that it covers that employee against the loss of income as a result of illness, injury, disability or unemployment; and
• in respect of which all amounts payable in terms of that policy constitute or will constitute income as defined.
Medical scheme contributions
Employee 65 years or older — Paragraph 2(4)(d) of the 4th Schedule prescribes that the employer may at his / her option deduct any contribution made by the employee to a registered medical scheme as contemplated in Section 18(1)(a) in respect of which proof of payment has been furnished to the employer.
Employee under 65 years — Paragraph 2(4)(e) of the 4th Schedule prescribes that the employer may at his / her option deduct any contribution made by the employee to a registered medical scheme as contemplated in Section 18(1)(a) as does not exceed the amount contemplated in Section 18(2)(c)(i) in respect of which proof of payment has been furnished to the employer.
The allowable amount is determined as follows:
Capped amount:
R530 for each month in the tax year in respect of which those contributions were made solely with respect to the benefits of the employee;
R1 060 for each month in the tax year in respect of which those contributions were made with respect to the benefits of the employee and one dependant; or
where those contributions were made with respect to the employee and more than one dependant, R1 060 in respect of the employee and one dependant plus R320 for every additional dependant for each month in the tax year in respect of which those contributions were made.
Reduced amount — The capped amount must be REDUCED by any amount contributed by the employer which has not been included as a taxable benefit in the remuneration of the employee (see medical contributions paid by the employer under the fringe benefit section).
Section 18(5) deems contributions paid by the employer which have been included in the remuneration of the employee as a fringe benefit to have been paid by the employee.
Where an employer employs a new employee who was in employment with another employer in the same month, it is the responsibility of the second employer to ensure that only one contribution is made to a medical scheme in respect of that specific month.
In order to determine the capped amount which may be used for a specific month, the employer must obtain the information relating to the beneficiaries covered by the medical scheme from the relevant medical scheme.
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Employees' tax deduction
Paragraph 2(1), 2(4) and 2(5)(c) of the 4th Schedule prescribe that employees' tax must be deducted from any amount that is paid by way of remuneration. The deduction is calculated on the balance of remuneration after the deduction of all allowable deductions.
An employer and employee may under no circumstances conclude an agreement whereby the employer undertakes not to deduct or withhold employees' tax or UIF contributions. Such an agreement is void in terms of Paragraph 7 of the 4th Schedule.
Employees' tax MUST be deducted from remuneration paid to an employee even though such person is registered as a provisional taxpayer with SARS. This provision also applies to directors of private companies and members of close corporations.
Voluntary employees' tax deduction
—Paragraph 2(2) of the 4th Schedule prescribes that an employer may deduct a greater amount of employees' tax on receipt of a written request from an employee. For various reasons, employees may find that they have to pay in fairly large amounts upon receipt of their assessments. To reduce the amount payable on assessment or avoid having to pay in an additional amount, such employees may request (in writing) their employers to deduct from their remuneration a greater amount of employees' tax than is required
The employer must remit the amount deducted to SARS with his / her monthly EMP 201 return.
IRP 5 certificate must be completed as follows:
The voluntary over-deduction field must be indicated with a Y for yes.
Any voluntary employees' tax deducted does not represent SITE and must be reflected as PAYE.
Estimated assessment
Paragraph 12 of the 4th Schedule, Section 13 of the SDL Act and Section 14 of the UIC Act prescribes that the Commissioner may estimate the amount of employees' tax, SDL or UIF contributions due by the employer —
where the employer fails to deduct or withhold the correct amount of employees' tax or UIF contributions (excluding SDL as the employer is not allowed to deduct it from the employee); or
where the employer fails to pay over the employees' tax, SDL or UIF contribution due.
Paragraph 13(3) of the 4th Schedule prescribe that any estimate of the amount of employees' tax, SDL or UIF contributions payable by the employer is subject to objection and appeal.
