We have highlighted some key areas which are relevant to government institutions.
Travel Allowances are given to employees where employees need to travel for business purposes. Travel allowances can be a fixed amount or it can be used to reimburse expenses. To see the travel codes that can be used on your employee’s tax certificate (IRP5), please consult the Guide for Employers in respect of Allowances.
We have noticed that three travel codes above are appearing on some tax certificates (IRP5) which shows that these travel allowances are not being treated correctly by employers. The effect of this is that the employee faces a hardship when filing their tax return. Employers need to make sure that allowances given to employees are being taxed correctly. Find out more in our fringe benefits guide.
Tax treatment of relocation or resettlement expenses
Employees may be obliged to move from one place of residence to a new place of residence, due to that employee transferring from their current location of employment to another. The employees’ costs associated with such relocation are private in nature, and if the employer carries these costs, a benefit or advantage accrues to the employee that is subject to tax. For more information, see the communication to taxpayers.
What constitutes severance pay when applying for a tax directive
SARS would like to clarify the treatment of severance pay when applying for a tax directive. It has been observed that when government institutions apply for a tax directive with regard to a severance payment, there may be amounts included in the severance pay amount that relate to leave pay and bonus.
Inclusion of such amounts has the effect of understating the taxes due by employees and is therefore incorrect.
The term “severance benefit” is defined in section 1(1) of the Income Tax Act,1962 and means any amount that is received by or accrued to a person in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s office of employment or of the person’s appointment to any office or employment, if-
a) Such person has attained the age of 55 years;
b) Such relinquishment, termination, loss, repudiation, cancellation or variation is due to the person becoming permanently incapable of holding the person’s office or employment due to sickness, accident, injury or incapacity through infirmity of mind or body; or
c) such termination or loss is due to-(i) the person’s employer having ceased to carry on or intending to cease carrying on the trade in respect of which the person was employed or appointed; or
(ii) the person having become redundant in consequence of a general reduction in personnel or a reduction in personnel of a particular class by the person’s employer,
unless, where the person’s employer is a company, the person at any time held more than five per cent of the issued shares or members’ interest in the company.The following is to be excluded from the severance benefit on the tax directive application form:
- Any amounts paid / payable in respect of services rendered. For example any amounts including any voluntary award (that is not a severance benefit as defined) in terms of paragraph (c) of the gross income definition
- Per paragraph (f) of the gross income definition, any amounts in commutation of amounts due under any contract of employment or service.
As a result, leave pay, notice pay, bonus/pro rata bonus must not be included as part of the severance benefit as these amounts are not received as a result of the termination of employment.
- Notice pay flows from the commutation of amounts due under the contract of employment and stems from a contractual obligation between the employer and employee to remunerate the employee for services rendered. Such amount constitutes an amount received under paragraph (f) of “gross income”
- Leave pay and bonuses are received in respect of services rendered and fall with paragraph (c) of “gross income.
We have observed that amounts which do not constitute a severance benefit (e.g. leave pay, bonus and pro rata bonus) are included in the tax directive application form.
It is important to note, that at the time that the government institution submits the application for a tax directive, SARS will not be aware of the makeup of the amounts. SARS will act on the basis of the information contained on the tax directive. In the event however, of a PAYE audit on the Government Institution, where additional information is requested and this matter comes to light, it is the Government Institution that will be required to pay in the correct taxes that should have been deducted from the employee.
It is therefore important that representatives of government institutions who are responsible for the requesting of tax directives from SARS have a clear understanding regarding what constitutes a severance benefit.
Additional information in this regard can be found in the “Guide for Employers in respect of Employees (2018 Tax Year)” and “Tax and Retrenchment” webpage. Queries can also be directed to [email protected].
Government Employees and Filing of Returns
Top Tip: You need to submit your personal income tax returns on time, to find out more please visit our page on Tax Season.
SARS has introduced administrative penalties when people fail to submit personal income tax returns. To see how penalties escalate click here.