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.
Wednesday, October 22, 2008
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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