- Sanchia Temkin - Business Day
A first of its kind publication by the South African Revenue Service (SARS) and the treasury is intended to provide tax practitioners, economists, taxpayers and other stakeholders with an in-depth analysis of tax revenue data
Treasury tax policy chief director Cecil Morden said yesterday that the government wanted to make the information available to as many parties as possible.
Parties would be able to use the data for structured analysis purposes rather than a time series analysis, Morden said. This was because in some instances an overview for all tax periods had not been provided.
The research provides an overview of tax revenues for the financial periods 2002- 03, and 2005- 06 and, in some instances, aggregate revenues for earlier and later periods .
The data is based on tax revenue collections and customs duties with the focus on three main taxes: personal income tax, corporate tax, and VAT.
Beric Croome, a tax executive at corporate law advisers Edward Nathan Sonnenbergs, said the initiative was a welcome publication for tax practitioners. There had long been a call for such information.
“It seemed at various stages to have been available to practitioners, such as in the budget review, and then suddenly it was no longer at hand,” Croome said. “The statistics will also give the government a better feel of where the revenue is coming from. It will help the government with their projections and budgeting, particularly in difficult economic times such as these, ” he said.
Morden said the treasury had used the data internally and it helped the government in instances with its budgeting.
Although the figures for registered companies and individuals were likely to be accurate, it was difficult to get an accurate figure for the registration of trusts, Croome said.
The masters of the high courts did not provide SARS with information such as the registration of a trust. Improvement in the quality of data and availability would also enhance the tax policy process, he said.
The number of registered individual taxpayers on the SARS database had increased from 3,4-million in the 2002-03 financial year, to 5,2-million last year.
Thursday, December 18, 2008
Thursday, December 11, 2008
Bill reverses change to company tax law
- Sanchia Temkin - Business Day
A SURPRISE and almost-invisible clause in the Revenue Laws Amendment Bill reverses one of the key amendments made last year to secondary tax on companies (STC) charged on dividends declared in the course of the liquidation of a company.
Jackie Arendse, Wits University tax associate professor, said at the weekend that the STC exemption for distributions of capital profits prior to October 1 2001, and the exemption for revenue profits prior to March 1 1993 in the course of a company’s liquidation, were removed in the Revenue Laws Amendment Act of 2007. “This removal is effective from January 1 next year,” Arendse said.
The amendment to the income tax laws was widely publicised and drove many companies to declare liquidation dividends before the end of this year, she said.
However, a further recent amendment to the income tax legislation repeals the 2007 bill, with effect from January 1 next year. “This means that, for the time being, the STC treatment of liquidation dividends goes back to its original form,” Arendse said.
Any portion of a liquidation dividend that consists of profits derived during any year of assessment which ended not later than March 31 1993; capital profits relating to the period prior to October 1 2001; and profits derived before the company became a (South African) resident, would be exempt from STC.
“It is likely that this STC exemption will continue until the new withholding tax on dividends is implemented, which is expected to be mid- to late 2009.”
New changes to the STC regime were announced last month by the government.
Johan Troskie, a director at Deneys Reitz Tax, said that SA’s tax system had moved away from a company tax to an effective tax on shareholders payable on the distribution of dividends by a company. As with STC, the dividend tax would remain at 10%.
Last year, Finance Minister Trevor Manuel announced a two-phased approach to the reform of STC.
The first involved the reduction of the STC rate.
The second phase of the STC reform entailed the replacement of the tax with a new levy on distributions of companies.
Under the new system, dividend tax would be payable on the payment of any dividend declared by a company.
A SURPRISE and almost-invisible clause in the Revenue Laws Amendment Bill reverses one of the key amendments made last year to secondary tax on companies (STC) charged on dividends declared in the course of the liquidation of a company.
Jackie Arendse, Wits University tax associate professor, said at the weekend that the STC exemption for distributions of capital profits prior to October 1 2001, and the exemption for revenue profits prior to March 1 1993 in the course of a company’s liquidation, were removed in the Revenue Laws Amendment Act of 2007. “This removal is effective from January 1 next year,” Arendse said.
The amendment to the income tax laws was widely publicised and drove many companies to declare liquidation dividends before the end of this year, she said.
However, a further recent amendment to the income tax legislation repeals the 2007 bill, with effect from January 1 next year. “This means that, for the time being, the STC treatment of liquidation dividends goes back to its original form,” Arendse said.
Any portion of a liquidation dividend that consists of profits derived during any year of assessment which ended not later than March 31 1993; capital profits relating to the period prior to October 1 2001; and profits derived before the company became a (South African) resident, would be exempt from STC.
“It is likely that this STC exemption will continue until the new withholding tax on dividends is implemented, which is expected to be mid- to late 2009.”
New changes to the STC regime were announced last month by the government.
Johan Troskie, a director at Deneys Reitz Tax, said that SA’s tax system had moved away from a company tax to an effective tax on shareholders payable on the distribution of dividends by a company. As with STC, the dividend tax would remain at 10%.
Last year, Finance Minister Trevor Manuel announced a two-phased approach to the reform of STC.
The first involved the reduction of the STC rate.
The second phase of the STC reform entailed the replacement of the tax with a new levy on distributions of companies.
Under the new system, dividend tax would be payable on the payment of any dividend declared by a company.
Tuesday, December 2, 2008
Manuel praises dedicated finance staff
- Anton Ferreira - The Times
Attention has focused in recent months on how much longer finance minister Trevor Manuel will stay in his job — but equally important to South Africa’s economic stability are the public servants who do the nuts-and-bolts work of the Treasury.
Manuel said as much himself this week, calling the men and women in the Department of Finance an invaluable resource that the country should do all it could to preserve.
Briefing parliament’s finance portfolio committee on the global financial crisis, Manuel said: “If you’re looking for policy continuity, forget about the individuals who are elected as political office bearers. The strength of the policy is in the competence of the public servants.”
Manuel lavished praise on his staff, led by director-general Lesetja Kganyago, for the hard work they put in to draw up the national budget, and took a dig at unnamed cabinet colleagues whose departments were less committed.
“When I say to my colleagues that we table the budget in February — the fact that I know the date, I say the date is February 11 — there aren’t that many of my colleagues who have that relationship, either with their professionals or with parliament, to be able to (set a date) so far in advance,” said Manuel.
Some ministers, he said, expressed surprise that he did not have to change his plans “every two months”.
“The reason we don’t is that we have this intensive budget process that goes on for days and weeks... if anyone were to peek at the e-mail exchanges, what time they come through: 2:30am one day, 3:45am the next,” he said.
Manuel also stressed that the people who worked for him were not “yes-men”, who feared losing their jobs if they dared to offer an opposing view.
“We fight and we disagree and each one will have his own PowerPoint projection and so on... and sometimes the temperature is very, very high in the room,” he said.
“But it’s an important facility that we have because I firmly believe that if we don’t get thinking, competent professionals as public servants, who can say: ‘Minister, with respect, I disagree with what you’re asking me to do.’ if you don’t get public servants like that, we can’t work.”
His comments echoed recent criticism by public service watchdog, the Public Service Commission, which said the process of appointing heads of department in some parts of government was too politicised. The commission said that too often heads of department believed their continued tenure depended on keeping on the right side of their minister or MEC.
Manuel said Treasury wonks were not in government service for the money, which was less than what they could get in the private sector.
“We are greatly privileged to have this, because it’s not about what people can get out of it. It’s about putting heads together to produce a product. We know they could go to the private sector and command salaries that would be many times what they’re earning in the public sector.
“They’re here because of a desire to make a contribution and because they have the space to think and to contribute. We should not mess it up.”
Speculation about Manuel’s future has been rife since the ANC’s Polokwane conference a year ago, when the Zuma camp, backed by the Congress of South African Trade Unions and the South African Communist Party, took control.
Communists and trade unionists have become increasingly vocal in criticising Manuel, particularly over inflation targeting and his belief in budget surpluses.
Finance portfolio committee member Kobus Marais, of the Democratic Alliance, said he backed Manuel’s view of the Treasury staff. “My personal experience has been that the Treasury Department, and the South African Revenue Service and, to a large extent, Stats SA, have been incredibly competent,” he said.
“Manuel is giving them the political backing for what they believe in, and they are giving him the technical know-how, so it’s really a team effort.”
Marais said it was unclear what would happen to the department if Manuel were to be replaced by a minister who shared the views of Cosatu and the SACP. “I do believe that what is happening, in terms of our economic policy, has got a lot to do with the director-general and his staff. There’s no doubt about that.”
Marais said the Treasury was the most important government department, drafting medium-and long-term goals that were fundamental to the country’s economic health.
He added that if the new leadership were to alienate Finance Department officials, “competent people would be grabbed by the private sector”.
They would be replaced by staff chosen for their political loyalties, and the Treasury would sink into the kind of incompetence that paralysed other departments, said Marais.
Attention has focused in recent months on how much longer finance minister Trevor Manuel will stay in his job — but equally important to South Africa’s economic stability are the public servants who do the nuts-and-bolts work of the Treasury.
Manuel said as much himself this week, calling the men and women in the Department of Finance an invaluable resource that the country should do all it could to preserve.
Briefing parliament’s finance portfolio committee on the global financial crisis, Manuel said: “If you’re looking for policy continuity, forget about the individuals who are elected as political office bearers. The strength of the policy is in the competence of the public servants.”
Manuel lavished praise on his staff, led by director-general Lesetja Kganyago, for the hard work they put in to draw up the national budget, and took a dig at unnamed cabinet colleagues whose departments were less committed.
“When I say to my colleagues that we table the budget in February — the fact that I know the date, I say the date is February 11 — there aren’t that many of my colleagues who have that relationship, either with their professionals or with parliament, to be able to (set a date) so far in advance,” said Manuel.
Some ministers, he said, expressed surprise that he did not have to change his plans “every two months”.
“The reason we don’t is that we have this intensive budget process that goes on for days and weeks... if anyone were to peek at the e-mail exchanges, what time they come through: 2:30am one day, 3:45am the next,” he said.
Manuel also stressed that the people who worked for him were not “yes-men”, who feared losing their jobs if they dared to offer an opposing view.
“We fight and we disagree and each one will have his own PowerPoint projection and so on... and sometimes the temperature is very, very high in the room,” he said.
“But it’s an important facility that we have because I firmly believe that if we don’t get thinking, competent professionals as public servants, who can say: ‘Minister, with respect, I disagree with what you’re asking me to do.’ if you don’t get public servants like that, we can’t work.”
His comments echoed recent criticism by public service watchdog, the Public Service Commission, which said the process of appointing heads of department in some parts of government was too politicised. The commission said that too often heads of department believed their continued tenure depended on keeping on the right side of their minister or MEC.
Manuel said Treasury wonks were not in government service for the money, which was less than what they could get in the private sector.
“We are greatly privileged to have this, because it’s not about what people can get out of it. It’s about putting heads together to produce a product. We know they could go to the private sector and command salaries that would be many times what they’re earning in the public sector.
“They’re here because of a desire to make a contribution and because they have the space to think and to contribute. We should not mess it up.”
Speculation about Manuel’s future has been rife since the ANC’s Polokwane conference a year ago, when the Zuma camp, backed by the Congress of South African Trade Unions and the South African Communist Party, took control.
Communists and trade unionists have become increasingly vocal in criticising Manuel, particularly over inflation targeting and his belief in budget surpluses.
Finance portfolio committee member Kobus Marais, of the Democratic Alliance, said he backed Manuel’s view of the Treasury staff. “My personal experience has been that the Treasury Department, and the South African Revenue Service and, to a large extent, Stats SA, have been incredibly competent,” he said.
“Manuel is giving them the political backing for what they believe in, and they are giving him the technical know-how, so it’s really a team effort.”
Marais said it was unclear what would happen to the department if Manuel were to be replaced by a minister who shared the views of Cosatu and the SACP. “I do believe that what is happening, in terms of our economic policy, has got a lot to do with the director-general and his staff. There’s no doubt about that.”
Marais said the Treasury was the most important government department, drafting medium-and long-term goals that were fundamental to the country’s economic health.
He added that if the new leadership were to alienate Finance Department officials, “competent people would be grabbed by the private sector”.
They would be replaced by staff chosen for their political loyalties, and the Treasury would sink into the kind of incompetence that paralysed other departments, said Marais.
Tuesday, November 11, 2008
New VAT registration Process
- PricewaterhouseCoopers
SARS yesterday announced extreme new VAT registration procedures which are to be implemented with immediate effect.
From Monday, 10 November, persons applying for VAT registration will have to join long queues at their local SARS office in order to undergo a physical verification process. “This could result in CFOs of listed companies and business persons from remote areas having to spend most of the day in the queue at SARS offices which can process VAT registrations. The timing of this new procedure is particularly bad, given we are now in the tax filing season, and there are already long queues at all SARS offices” says Charles de Wet, PricewaterhouseCoopers SA Country Leader for Indirect Taxes. “Despite the electronic era in which we are living, with e-business being conducted globally, new applicants for VAT registration will now have to undergo a physical verification process. The representative person will have to present himself at a SARS office for fingerprinting, using biometric scanning functionality. While details of the new process are not yet known, the new requirements could have a dramatic impact on the already heavy administrative burdens carried by local businesses.”
Proof of residence (by way of an original Telkom, utility or electricity bill, which is not older than three months) will also have to be furnished. De Wet says that this will be a major hurdle for start up businesses which have no track record of their presence as yet.
The effect of the new verification process is that VAT numbers will no longer be allocated instantly on application at the counter. SARS will now validate the particulars before a VAT number gets allocated.
The new procedures not only impact businesses applying for VAT registration, but also affect those already registered, as VAT refunds will not be paid out until an applicants registered particulars have been verified. Where vendors cannot be contacted or traced in order to undergo the verification procedure, their VAT accounts may be suspended.
De Wet says that SARS revealed these measures yesterday by way of e-mails distributed to tax practitioners. “A formal media release announcing these changes has not even been published on SARS website.”
This is the third time in a relatively short period of time that South African businesses have been confronted with new VAT registration procedures. De Wet says that while the previous changes were aimed at streamlining the VAT process, these present changes move in the opposite direction, contrary to stated policy of simplifying tax processes, especially for small businesses.
De Wet says SARS has attributed the need for these new requirements to the prevalence of VAT fraud involving VAT refund scams.
“There is no doubt that VAT fraud is unacceptable and there are difficulties which SARS faces in identifying and combating it. The SARS commitment to terminate such fraud is essential and commendable but this should rather be done as part of its audit process. These new requirements are ill-considered and clearly against SARS policy and vision to enhance economic growth, support our integration into the global economy in a way that benefits all South Africans, simplify the tax compliance process and decrease administration costs for local businesses.”
De Wet concluded that SARS should reconsider the proposed implementation of such requirements, effective Monday, in the overall and best interests of the South African economy.
Wednesday, November 5, 2008
King breaks silence on Sars wars
by Peter de Ionno - Business Report
Dave King, whose multimillion-rand battle with the taxman has made him the country's most notorious alleged tax dodger, yesterday broke his eight-year silence, claiming that tax commissioner Pravin Gordhan had abused his powers in a personal vendetta against him.
King has fought furiously to hang on to the proceeds of the controversial 1998 JSE listing and the sale of shares held by him and a Guernsey trust in Specialised Outsourcing Limited, whose shares listed at R1.20 and rapidly rose to R80.
The firm's market capitalisation rose from R50 million at listing to more than R3.5 billion before the rush subsided and the share price collapsed amid market recrimination.
About 70 percent of the shares were held by King and trusts that had him and his family as beneficiaries. A central point of dispute in the fight with the SA Revenue Service (Sars) is whether the proceeds of the sale should be treated as capital or income, making it liable for taxation.
King faces a claim for more than R900 million in tax. Ben Nevis, the holding company that is controlled by the Guernsey trust, faces a Sars claim of R1.3 billion.
King said yesterday that he had spent about R150 million - and claimed that Sars had spent more than R200 million - in round after round of court appearances.
King faces about 322 charges, including fraud, money laundering, racketeering and tax evasion between 1990 and 2001. He is also facing charges of failing to submit tax returns between 2002 and 2005. If convicted, he could face a minimum of 15 years in jail.
Sars's response to King's accusations of abuse of process and of using criminal charges to intimidate and force tax payers into submission was to point out that fear of an extended prison term was the reason for King's "constant filibustering".Despite King's protestations that he was prepared to pay his taxes and that his offers of a settlement at R300 million had been rejected, Sars responded with this statement: "King has had numerous opportunities over the past eight years to make a full and frank disclosure to Sars about his assets, income and tax affairs. He has so far steadfastly refused to do so, or alternatively has provided false information. In fact, King has repeatedly acted erratically by entering into negotiations with Sars under the pretence that he wants to resolve his tax affairs and has continuously walked away from negotiations."
For three hours King told his story, pacing back and forth in a reception room at the Johannesburg Country Club, speaking with a soft Scottish burr that recalled his Glaswegian origins. He said he had laboured to distil his tale from 300 000 pieces of paper into a 28-page statement.
But in the end, none of what he had to say - including allegations that unethical tactics were being used to enforce tax collection - was startling or surprising.
Wednesday, October 22, 2008
Making sense of your IRP Part 4: Claim those tax deductions
Steven Jones - Moneyweb Tax
Don't be disappointed, get the tax deductions you desire. Here's how...
The previous three parts of this series have dealt with earnings codes, but deductions are also vital to get correct on your IRP5 certificate. If the wrong code is used, the South African Revenue Service (Sars) may end up disallowing your deduction.
4001 / 4002 Pension fund contributions (current / arrear). Your current pension fund contributions are deductible up to 7,5% of income derived from retirement-funding employment (the income taken into account for determining fund contributions), while an additional R1 800 per annum may be deducted for past, or "arrear" contributions.However, even if your contributions exceed the deductible limits, the full amount must be shown under the relevant code. Any non-deductible amount is carried over to future years, and ultimately the non-deductible portion is treated as tax-free when you eventually retire.
4003 / 4004 Provident fund contributions (current / arrear). Although provident fund contributions made by employees are not deductible in their hands for tax purposes, the contributions must nevertheless be recorded on the IRP5 certificate. Upon retirement, such contributions are repaid tax-free.
4005 Medical fund contributions. Employee contributions to medical funds are disclosed here. If you are under the age of 65 years, and your employer contributions do not exceed the monthly tax-free "caps", any unused balance is deductible in full by the employee. Employee contributions in excess of the "caps" are still deductible, but are subject to the 7,5% rule, whereby medical expenses are reduced by 7,5% of taxable income.
If you are over the age of 65 years, or you or an immediate family member is "handicapped" (as defined in the Income Tax Act), medical fund contributions are fully-deductible.
4006 / 4007 Retirement annuity fund contributions (current / arrear). Although retirement annuity fund contributions are normally paid directly to the fund by the employee, the employer is entitled to take such contributions into account for employees' tax purposes, up to certain limits.
If you are not a pension or provident fund member, you can deduct up to 15% of your income, whereas if you are a member of such a fund, your deduction is generally limited to the greater of R3 500 less pension fund contributions, or R1 750. You can however still deduct 15% of income not taken into account for pension or provident fund contributions (i.e. your so-called "non retirement-funding employment" income).
4018 Premiums paid for loss of income policies. Income protection policies are tax-deductible, and the employer is once again entitled to take these contributions into account.
4101 SITE (Standard Income Tax on Employees). This is the portion of employees' tax deductible on the first R60 000 per annum for employees in so-called "standard employment", which covers most normal employment.
4102 PAYE (Pay As You Earn). Employees' tax on income exceeding R60 000 per annum is classified as PAYE, as well as employees' tax deducted from directors' remuneration, any allowances, and income paid to labour brokers or personal service companies.
Don't be disappointed, get the tax deductions you desire. Here's how...
The previous three parts of this series have dealt with earnings codes, but deductions are also vital to get correct on your IRP5 certificate. If the wrong code is used, the South African Revenue Service (Sars) may end up disallowing your deduction.
4001 / 4002 Pension fund contributions (current / arrear). Your current pension fund contributions are deductible up to 7,5% of income derived from retirement-funding employment (the income taken into account for determining fund contributions), while an additional R1 800 per annum may be deducted for past, or "arrear" contributions.However, even if your contributions exceed the deductible limits, the full amount must be shown under the relevant code. Any non-deductible amount is carried over to future years, and ultimately the non-deductible portion is treated as tax-free when you eventually retire.
4003 / 4004 Provident fund contributions (current / arrear). Although provident fund contributions made by employees are not deductible in their hands for tax purposes, the contributions must nevertheless be recorded on the IRP5 certificate. Upon retirement, such contributions are repaid tax-free.
4005 Medical fund contributions. Employee contributions to medical funds are disclosed here. If you are under the age of 65 years, and your employer contributions do not exceed the monthly tax-free "caps", any unused balance is deductible in full by the employee. Employee contributions in excess of the "caps" are still deductible, but are subject to the 7,5% rule, whereby medical expenses are reduced by 7,5% of taxable income.
If you are over the age of 65 years, or you or an immediate family member is "handicapped" (as defined in the Income Tax Act), medical fund contributions are fully-deductible.
4006 / 4007 Retirement annuity fund contributions (current / arrear). Although retirement annuity fund contributions are normally paid directly to the fund by the employee, the employer is entitled to take such contributions into account for employees' tax purposes, up to certain limits.
If you are not a pension or provident fund member, you can deduct up to 15% of your income, whereas if you are a member of such a fund, your deduction is generally limited to the greater of R3 500 less pension fund contributions, or R1 750. You can however still deduct 15% of income not taken into account for pension or provident fund contributions (i.e. your so-called "non retirement-funding employment" income).
4018 Premiums paid for loss of income policies. Income protection policies are tax-deductible, and the employer is once again entitled to take these contributions into account.
4101 SITE (Standard Income Tax on Employees). This is the portion of employees' tax deductible on the first R60 000 per annum for employees in so-called "standard employment", which covers most normal employment.
4102 PAYE (Pay As You Earn). Employees' tax on income exceeding R60 000 per annum is classified as PAYE, as well as employees' tax deducted from directors' remuneration, any allowances, and income paid to labour brokers or personal service companies.
Making sense of your IRP Part 3: How to make sure you get lump sum tax deductions
Steven Jones - Moneyweb Tax
Did you receive a lump sum payment during this tax year? The classification code is critical.
Many an objection has been submitted to the South African Revenue Service (Sars) regarding the incorrect taxation of lump sums, and often this is due to the payment being disclosed against the incorrect code. Because the tax treatment of lump sums is so varied, having them coded correctly is critical.
3901 - Gratuities. These payments normally arise when an employee retires or is retrenched, and the amounts that can be classified as a "gratuity" are many and varied. In the case of a retrenchment, such a gratuity would normally include any severance pay forming part of the retrenchment package, while on retirement, the amount can be an actual gratuity paid (the cash equivalent of the traditional gold watch, perhaps?).
In both cases, accumulated leave pay is often included as part of the gratuity in order to take advantage of the preferential tax rates, whereas in the case of a resignation this is normally included with normal income.
The main tax benefit of a gratuity is that there is a "once-in-a-lifetime" tax-free amount of R30 000, with any balance being taxed at average rates.
3902 - Pension / RAF lump sums (resignation / transfer / surplus apportionment). Amounts included under this code comprise cash withdrawals from approved pension or retirement annuity funds (RAFs) upon resignation. Also included are transfers to non-approved funds or provident funds, as well as lump sums arising from pension fund surplus apportionments taken in cash. However, any such payments that are transferred to another approved fund should not be included under this code, since these transfers do not attract tax.
For the 2008 tax year, the first R1 800 of lump sums arising from withdrawal is tax-free, with the balance taxed at average rates. Currently under discussion is a proposal to allow a "once-in-a-lifetime" tax-free amount of R23 000 (based on 50% of the tax-free threshold in 2008/09), and the balance ring-fenced and taxed according to the tables.
3903 - Pension / RAF lump sums (retirement / death). In this case, the tax treatment is vastly different, which means that it is critical that codes 3902 and 3903 are not used incorrectly. There is a "once-in-a-lifetime" tax-free amount of R300 000, with the balance taxed on a sliding scale. For most people, these rates are far more preferential than for lump sums accruing on resignation.
3904 - Provident fund lump sum (resignation / transfer / surplus apportionment). The tax treatment for provident lump sums on retirement is similar to that of pension funds. However, since employee contributions are normally not tax-deductible, the repayment of such contributions is tax-free. Such employee contributions refunded should therefore not be included as part of the lump sum.
3905 - Provident fund lump sums (retirement / death). The tax treatment of provident lump sums on retirement or death has been harmonised with that of pension funds, except for the fact that as is the case with provident lump sums on resignation, any employee contributions previously disallowed are refunded tax-free, and are therefore not included as part of the lump sum.
Did you receive a lump sum payment during this tax year? The classification code is critical.
Many an objection has been submitted to the South African Revenue Service (Sars) regarding the incorrect taxation of lump sums, and often this is due to the payment being disclosed against the incorrect code. Because the tax treatment of lump sums is so varied, having them coded correctly is critical.
3901 - Gratuities. These payments normally arise when an employee retires or is retrenched, and the amounts that can be classified as a "gratuity" are many and varied. In the case of a retrenchment, such a gratuity would normally include any severance pay forming part of the retrenchment package, while on retirement, the amount can be an actual gratuity paid (the cash equivalent of the traditional gold watch, perhaps?).
In both cases, accumulated leave pay is often included as part of the gratuity in order to take advantage of the preferential tax rates, whereas in the case of a resignation this is normally included with normal income.
The main tax benefit of a gratuity is that there is a "once-in-a-lifetime" tax-free amount of R30 000, with any balance being taxed at average rates.
3902 - Pension / RAF lump sums (resignation / transfer / surplus apportionment). Amounts included under this code comprise cash withdrawals from approved pension or retirement annuity funds (RAFs) upon resignation. Also included are transfers to non-approved funds or provident funds, as well as lump sums arising from pension fund surplus apportionments taken in cash. However, any such payments that are transferred to another approved fund should not be included under this code, since these transfers do not attract tax.
For the 2008 tax year, the first R1 800 of lump sums arising from withdrawal is tax-free, with the balance taxed at average rates. Currently under discussion is a proposal to allow a "once-in-a-lifetime" tax-free amount of R23 000 (based on 50% of the tax-free threshold in 2008/09), and the balance ring-fenced and taxed according to the tables.
3903 - Pension / RAF lump sums (retirement / death). In this case, the tax treatment is vastly different, which means that it is critical that codes 3902 and 3903 are not used incorrectly. There is a "once-in-a-lifetime" tax-free amount of R300 000, with the balance taxed on a sliding scale. For most people, these rates are far more preferential than for lump sums accruing on resignation.
3904 - Provident fund lump sum (resignation / transfer / surplus apportionment). The tax treatment for provident lump sums on retirement is similar to that of pension funds. However, since employee contributions are normally not tax-deductible, the repayment of such contributions is tax-free. Such employee contributions refunded should therefore not be included as part of the lump sum.
3905 - Provident fund lump sums (retirement / death). The tax treatment of provident lump sums on retirement or death has been harmonised with that of pension funds, except for the fact that as is the case with provident lump sums on resignation, any employee contributions previously disallowed are refunded tax-free, and are therefore not included as part of the lump sum.
Making sense of your IRP5 - Part 2
Steven Jones - Moneyweb Tax
This week we look at the fringe benefit codes on your IRP5.
Now that you know what a 3601, 3605, and various other codes mean, and how they are taxed, it's time to have a look at the various fringe benefit codes, how they came about, and - most importantly - what they mean for your ultimate tax liability.
3801 - Acquisition of asset. Do you remember that last major computer upgrade your company did, and the bargain that you had when you bought one of the old PCs for home? If you don't, the South African Revenue Service (Sars) has just reminded you. Whenever your employer sells (or gives) an asset to you, they are required, for tax purposes, to value such asset at open market value, and if the price you paid is less than this amount, the shortfall gives rise to a fringe benefit, which is taxable.
Unfortunately it doesn't work the other way around - if you paid more than market value, the excess does not give rise to a tax deduction!
3802 - Use of motor vehicle. Despite the widespread move to cost-to-company remuneration packages, there are still those privileged few who enjoy the use of company cars. Unfortunately SARS wants their slice of this pie as well, and the taxable value of a company car benefit is calculated at 2.5% of the so-called "determined value" of the vehicle.
This "determined value" is based on the original cost of the vehicle, excluding VAT and finance charges, and remains static during the entire period in which you make use of this vehicle. If you are the second (or subsequent) user of this particular vehicle, the "determined value" is written-down by 15% per annum on a reducing balance basis.
For those who have reached the rarefied heights of the corporate hierarchy that entitled them to more than one company car, the more expensive of the two is taxed at 2,5% of "determined value", and the additional vehicles taxed at 4%.
3802 - Use of asset. If the employer owns any asset (other than vehicles or accommodation) that is made available for an employee's private use, such use gives rise to a taxable fringe benefit. The value is calculated at 15% of the lesser of cost or market value. If the asset is rented by the employer, the cost of the rental becomes the taxable value. However, if the private use of the asset is incidental to the business use (e.g. laptop computers and cell phones), no taxable benefit arises.
3804 - Meals, etc. This code is used for meals, refreshments, and meal vouchers supplied by the employer. However, this benefit normally arises in conjunction with the use of holiday accommodation provided by the employer where meals are included as well. The use of a subsidised canteen on company premises does not give rise to a taxable benefit, nor do meals provided as part of one's subsistence when out of town as well as meals enjoyed when entertaining clients.
3805 - Accommodation. If you enjoy a holiday at your employer's expense, this will give rise to a taxable fringe benefit. The taxable value is based on the greater of a predetermined formula or the cost thereof to the employer. However, accommodation provided by an employer to an employee who is making use of such accommodation while travelling on business does not give rise to a taxable benefit.
3806 - Services. The cost of any free or cheap services provided to an employee by the employer gives rise to a taxable benefit.
3807 - Loans or subsidy. Loans granted at interest rates lower than the "official" rate of interest, or subsidies (such as housing subsidies), give rise to a taxable benefit. However, there is no taxable benefit on interest-free "casual" loans not exceeding R3 000, as well as interest-free loans of any amount that are to enable the employee to study.
3808 - Employee's debt. If an employee is indebted to the employer, and part or all of such debt is waived, such waiver gives rise to a taxable fringe benefit. The same will apply in cases where the employer settles a debt on the employee's behalf. However, no taxable benefit arises from bona-fide bursary schemes for employees, where the tuition fees and books are paid for on a loan basis, with such loan being written off when the employee successfully completes the course of study.
3809 - Bursaries and scholarships. These are not bursaries and scholarships provided to the employees themselves, but rather those granted to relatives of the employee. If the bursary or scholarship is granted on the basis of the relative's employment, the value thereof is taxable. A common example is where children of teachers or lecturers receive subsidised or free tuition at the institution where they are employed. However, if the relative concerned applies for a bursary under an "open" scheme, and is successful in terms of criteria unrelated to the relative's employment, no taxable fringe benefit will arise.
3810 - Medical aid contributions. The portion of medical aid contributions exceeding the monthly tax-free "cap" gives rise to a taxable benefit. However, no taxable benefit arises where contributions are made on behalf of an employee who has retired, whether upon reaching the age of 55 or due to ill-health or incapacity.
3811 - Medical services costs. Medical expenses (other than medical aid contributions) paid by the employer will give rise to a taxable fringe benefit. However, if the employer is a hospital, doctor, or other medical service provider and the services provided form part of the prescribed minimum benefits provided for under the Medical Schemes Act, no taxable benefit arises. Medical expenses provided to retired employees are also not taxable.
This week we look at the fringe benefit codes on your IRP5.
Now that you know what a 3601, 3605, and various other codes mean, and how they are taxed, it's time to have a look at the various fringe benefit codes, how they came about, and - most importantly - what they mean for your ultimate tax liability.
3801 - Acquisition of asset. Do you remember that last major computer upgrade your company did, and the bargain that you had when you bought one of the old PCs for home? If you don't, the South African Revenue Service (Sars) has just reminded you. Whenever your employer sells (or gives) an asset to you, they are required, for tax purposes, to value such asset at open market value, and if the price you paid is less than this amount, the shortfall gives rise to a fringe benefit, which is taxable.
Unfortunately it doesn't work the other way around - if you paid more than market value, the excess does not give rise to a tax deduction!
3802 - Use of motor vehicle. Despite the widespread move to cost-to-company remuneration packages, there are still those privileged few who enjoy the use of company cars. Unfortunately SARS wants their slice of this pie as well, and the taxable value of a company car benefit is calculated at 2.5% of the so-called "determined value" of the vehicle.
This "determined value" is based on the original cost of the vehicle, excluding VAT and finance charges, and remains static during the entire period in which you make use of this vehicle. If you are the second (or subsequent) user of this particular vehicle, the "determined value" is written-down by 15% per annum on a reducing balance basis.
For those who have reached the rarefied heights of the corporate hierarchy that entitled them to more than one company car, the more expensive of the two is taxed at 2,5% of "determined value", and the additional vehicles taxed at 4%.
3802 - Use of asset. If the employer owns any asset (other than vehicles or accommodation) that is made available for an employee's private use, such use gives rise to a taxable fringe benefit. The value is calculated at 15% of the lesser of cost or market value. If the asset is rented by the employer, the cost of the rental becomes the taxable value. However, if the private use of the asset is incidental to the business use (e.g. laptop computers and cell phones), no taxable benefit arises.
3804 - Meals, etc. This code is used for meals, refreshments, and meal vouchers supplied by the employer. However, this benefit normally arises in conjunction with the use of holiday accommodation provided by the employer where meals are included as well. The use of a subsidised canteen on company premises does not give rise to a taxable benefit, nor do meals provided as part of one's subsistence when out of town as well as meals enjoyed when entertaining clients.
3805 - Accommodation. If you enjoy a holiday at your employer's expense, this will give rise to a taxable fringe benefit. The taxable value is based on the greater of a predetermined formula or the cost thereof to the employer. However, accommodation provided by an employer to an employee who is making use of such accommodation while travelling on business does not give rise to a taxable benefit.
3806 - Services. The cost of any free or cheap services provided to an employee by the employer gives rise to a taxable benefit.
3807 - Loans or subsidy. Loans granted at interest rates lower than the "official" rate of interest, or subsidies (such as housing subsidies), give rise to a taxable benefit. However, there is no taxable benefit on interest-free "casual" loans not exceeding R3 000, as well as interest-free loans of any amount that are to enable the employee to study.
3808 - Employee's debt. If an employee is indebted to the employer, and part or all of such debt is waived, such waiver gives rise to a taxable fringe benefit. The same will apply in cases where the employer settles a debt on the employee's behalf. However, no taxable benefit arises from bona-fide bursary schemes for employees, where the tuition fees and books are paid for on a loan basis, with such loan being written off when the employee successfully completes the course of study.
3809 - Bursaries and scholarships. These are not bursaries and scholarships provided to the employees themselves, but rather those granted to relatives of the employee. If the bursary or scholarship is granted on the basis of the relative's employment, the value thereof is taxable. A common example is where children of teachers or lecturers receive subsidised or free tuition at the institution where they are employed. However, if the relative concerned applies for a bursary under an "open" scheme, and is successful in terms of criteria unrelated to the relative's employment, no taxable fringe benefit will arise.
3810 - Medical aid contributions. The portion of medical aid contributions exceeding the monthly tax-free "cap" gives rise to a taxable benefit. However, no taxable benefit arises where contributions are made on behalf of an employee who has retired, whether upon reaching the age of 55 or due to ill-health or incapacity.
3811 - Medical services costs. Medical expenses (other than medical aid contributions) paid by the employer will give rise to a taxable fringe benefit. However, if the employer is a hospital, doctor, or other medical service provider and the services provided form part of the prescribed minimum benefits provided for under the Medical Schemes Act, no taxable benefit arises. Medical expenses provided to retired employees are also not taxable.
Making sense of your IRP 5 - Part 1
Steven Jones - Moneyweb Tax
All those codes and numbers determine how much tax you will pay. MoneywebTax.co.za looks at what the codes mean.
Filing Season 2008 has opened, youve received your letter from the South African Revenue Service (Sars) inviting you to apply for your income tax return, and your employer has handed you your employees tax certificate (IRP5).
But whereas last year you received a salary, bonus, and car allowance, your IRP5 for 2008 shows that you received a 3601, 3605, and a 3701. What do these codes mean? And how do they ultimately affect what tax you are liable for?
This article covers the more common codes you are likely to encounter.
3601 - Income (PAYE). Normal salary and similar payments are reported under this code. Such amounts are fully taxable, and your employer should have deducted the appropriate employees tax. There are however very few deductions that can be claimed against such income, other than medical expenses, retirement fund contributions, and approved donations.
3603 and 3604 - Pensions. Taxable pensions are reflected under code 3603, while non-taxable pensions (such as war or disability pensions) are reflected under code 3604.
3605 - Annual payment. This code is used for bonuses, ""13th cheques"", and similar payments of a non-recurring nature.
3606 - Commission (PAYE). Many a taxpayer receiving commission has had their employer incorrectly reflect their commission under code 3601, which has prevented them from claiming deductions allowable under Section 11(a) (the general deduction formula) or Section 11(e) (wear and tear on assets used for the purposes of earning income). If you have earned commission and such commission is not reflected under code 3606, contact your employer urgently.
3607 - Overtime. Any overtime payments are reflected under this code.
3615 - Directors remuneration. If you are a director of a private company or member of a close corporation, your remuneration should be reflected under this code. It is essentially the same as code 3601, except that the employees tax consists entirely of PAYE and should not be split between PAYE and SITE.
3616 and 3617 - Independent contractors / labour brokers. If you fall into either one of these categories, your income should be categorised under 3616 (independent contractor) or 3617 (labour broker). Once again, if such income is classified under 3601, contact your client urgently as this error will prevent you from claiming certain business expenses.
3701 - Travel allowance (PAYE). Fixed travel allowances are included under this code. If you earn income other than that classified under 3606, 3616, or 3617, and you receive a travel allowance, such allowance must be classified under code 3701 or your travel deduction will be disallowed.
3702 and 3703 - Reimbursive travel allowances. Travel allowances reimbursed on a "per kilometre" basis are included here. 3702 is for reimbursements exceeding the prescribed rate per kilometre (R2.46 for the 2008 tax year), or where you receive a fixed travel allowance in addition to the reimbursement, or do more than 8 000 business kilometres per annum, and is taxable. You can however submit a claim for business expenditure in the same way as you would for a normal (3701) travel allowance. 3703 is a tax-free reimbursement, and you are therefore unable to submit any claim under such an allowance.
3704 and 3705 - Subsistence allowances (local travel). If you are required to travel out of town for business purposes, your employer may pay you a subsistence allowance to cover certain out-of-pocket expenses. Such allowance must however be over and above your normal remuneration package. For the 2008 tax year, if the subsistence allowance did not exceed R208 per day (meals and incidental costs), R63.50 (incidental costs only), it will be tax-free and disclosed under code 3705. Subsistence allowances in excess of these amounts are taxable and shown under code 3704. You can then submit a claim for subsistence against such allowance.
3715 and 3716 - Subsistence allowances (foreign travel). Subsistence allowances for travel outside of South Africa are tax-free if they do not exceed US$200 per day (disclosed under code 3716), and taxable if this amount is exceeded (code 3715).
3709 - Uniform allowance. If you receive an allowance to defray the cost of uniforms, such allowance is tax-free provided that the uniform in question is a condition of employment and such uniform is clearly distinguishable from everyday clothing.
3710 - Tool allowance. If you are required to purchase your own tools for business use, your employer may grant an allowance for this purpose. The allowance is taxable and you would need to submit a claim for expenditure incurred.
3711 - Computer allowance. If you are required to purchase your own computer for business purposes, an allowance may be granted under this code. It is fully taxable, and you can submit a claim for wear and tear (33% per annum for 3 years) as well as any expenses incurred (paper, printer cartridges, software licences, maintenance, and insurance for the computer).
3712 - Telephone / cellphone allowance. This allowance is fully taxable, but you can claim the cost of business calls, as well as a proportional amount of the monthly rental / subscription.
All those codes and numbers determine how much tax you will pay. MoneywebTax.co.za looks at what the codes mean.
Filing Season 2008 has opened, youve received your letter from the South African Revenue Service (Sars) inviting you to apply for your income tax return, and your employer has handed you your employees tax certificate (IRP5).
But whereas last year you received a salary, bonus, and car allowance, your IRP5 for 2008 shows that you received a 3601, 3605, and a 3701. What do these codes mean? And how do they ultimately affect what tax you are liable for?
This article covers the more common codes you are likely to encounter.
3601 - Income (PAYE). Normal salary and similar payments are reported under this code. Such amounts are fully taxable, and your employer should have deducted the appropriate employees tax. There are however very few deductions that can be claimed against such income, other than medical expenses, retirement fund contributions, and approved donations.
3603 and 3604 - Pensions. Taxable pensions are reflected under code 3603, while non-taxable pensions (such as war or disability pensions) are reflected under code 3604.
3605 - Annual payment. This code is used for bonuses, ""13th cheques"", and similar payments of a non-recurring nature.
3606 - Commission (PAYE). Many a taxpayer receiving commission has had their employer incorrectly reflect their commission under code 3601, which has prevented them from claiming deductions allowable under Section 11(a) (the general deduction formula) or Section 11(e) (wear and tear on assets used for the purposes of earning income). If you have earned commission and such commission is not reflected under code 3606, contact your employer urgently.
3607 - Overtime. Any overtime payments are reflected under this code.
3615 - Directors remuneration. If you are a director of a private company or member of a close corporation, your remuneration should be reflected under this code. It is essentially the same as code 3601, except that the employees tax consists entirely of PAYE and should not be split between PAYE and SITE.
3616 and 3617 - Independent contractors / labour brokers. If you fall into either one of these categories, your income should be categorised under 3616 (independent contractor) or 3617 (labour broker). Once again, if such income is classified under 3601, contact your client urgently as this error will prevent you from claiming certain business expenses.
3701 - Travel allowance (PAYE). Fixed travel allowances are included under this code. If you earn income other than that classified under 3606, 3616, or 3617, and you receive a travel allowance, such allowance must be classified under code 3701 or your travel deduction will be disallowed.
3702 and 3703 - Reimbursive travel allowances. Travel allowances reimbursed on a "per kilometre" basis are included here. 3702 is for reimbursements exceeding the prescribed rate per kilometre (R2.46 for the 2008 tax year), or where you receive a fixed travel allowance in addition to the reimbursement, or do more than 8 000 business kilometres per annum, and is taxable. You can however submit a claim for business expenditure in the same way as you would for a normal (3701) travel allowance. 3703 is a tax-free reimbursement, and you are therefore unable to submit any claim under such an allowance.
3704 and 3705 - Subsistence allowances (local travel). If you are required to travel out of town for business purposes, your employer may pay you a subsistence allowance to cover certain out-of-pocket expenses. Such allowance must however be over and above your normal remuneration package. For the 2008 tax year, if the subsistence allowance did not exceed R208 per day (meals and incidental costs), R63.50 (incidental costs only), it will be tax-free and disclosed under code 3705. Subsistence allowances in excess of these amounts are taxable and shown under code 3704. You can then submit a claim for subsistence against such allowance.
3715 and 3716 - Subsistence allowances (foreign travel). Subsistence allowances for travel outside of South Africa are tax-free if they do not exceed US$200 per day (disclosed under code 3716), and taxable if this amount is exceeded (code 3715).
3709 - Uniform allowance. If you receive an allowance to defray the cost of uniforms, such allowance is tax-free provided that the uniform in question is a condition of employment and such uniform is clearly distinguishable from everyday clothing.
3710 - Tool allowance. If you are required to purchase your own tools for business use, your employer may grant an allowance for this purpose. The allowance is taxable and you would need to submit a claim for expenditure incurred.
3711 - Computer allowance. If you are required to purchase your own computer for business purposes, an allowance may be granted under this code. It is fully taxable, and you can submit a claim for wear and tear (33% per annum for 3 years) as well as any expenses incurred (paper, printer cartridges, software licences, maintenance, and insurance for the computer).
3712 - Telephone / cellphone allowance. This allowance is fully taxable, but you can claim the cost of business calls, as well as a proportional amount of the monthly rental / subscription.
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