Tax, ETI and UIF Amendments 2018/2019

Tax, ETI and UIF Amendments 2018/2019

Contents 1 General Explanatory Note 3 2 Explanation of Changes Affecting the System 3 2.1 Reimbursive Travel Allowance Included in Remuneration 3 2.2 Certain Dividends Included in Remuneration 4 2.3 Application of the R350 000 Annual Monetary Cap Amount 4 2.4 Employer Provided Bursaries (Two Changes) 5 2.5 Exempt Foreign Services Income 6 2.6 ETI Employed and Remunerated Hours Used in the Wage Qualifying Criteria 7 2.7 Unemployment Insurance Fund Contributions (UIF) 9 3 Explanation of Changes Not Affecting the System 10 3.1 Employers to Apply for Directives for Certain Dividends 10 3.2 Right of Use of Asset Clothing now Excluded 10 3.3 Bargaining Council Tax Relief 11 3.4 Postponement of the Annuitisation of Provident Fund Pay-Outs 11 4 Sources 12 Page 2 of 12

1 General Explanatory Note Changes required according to the Taxation Laws Amendment Act, 2017, Tax Administration Laws Amendment Act, 2017 and the Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2017. All changes are effective March 2018 except where mentioned otherwise. 2 Explanation of Changes Affecting the System 2.1 Reimbursive Travel Allowance Included in Remuneration Before March 2018, when an employee used a privately-owned vehicle for business purposes and the employer compensated the employee for business travel by paying the employee an amount/rate per business kilometre travelled, the travel reimbursements were not included in remuneration and were not subject to employees tax (PAYE) but may have been subject to tax on assessment. From March 2018, to simplify the calculation and administration of employees tax, the definition of remuneration includes 100% of the portion of the reimbursive travel allowance that exceeds the prescribed rate per kilometre (rate per kilometre for the simplified method, fixed by the Minister of Finance by notice in the Gazette), and is subject to PAYE, UIF and SDL irrespective of the total business kilometres travelled and reimbursed for the tax year. Examples: R3.55 was the prescribed rate for 2017/2018 and R3.61 is the prescribed rate for 2018/2019. During the month the employee travels 260 kilometres for business purposes and is refunded by the employer at R3.55 per kilometre. The employee will not travel more than 12 000 business kilometres for the tax year and does not receive other travel compensation. During the month the employee travels 840 kilometres for business purposes and is refunded by the employer at R5.00 per kilometre. Before March 2018 From March 2018 R923 (260 x R3.55) is not subject to employees tax. IRP5 code 3703. R4 200 (R5 x 840) is not subject to employees tax but may be subject to tax on assessment as the rate per kilometre exceeds the prescribed rate of R3.55. IRP5 code 3702. R938.60 (260 x R3.61) is not subject to employees tax as the rate per kilometre does not exceed the prescribed rate of R3.61. IRP5 code to be confirmed. R1 167.60 [(R5 R3.61) x 840] is subject to employees tax as the prescribed rate is exceeded with R1.39 (R5.00 R3.61) per kilometre. R3 032.40 (R3.61 x 840) is not subject to employees tax as this is the portion of the travel reimbursement that does not exceed the prescribed rate of R3.61. IRP5 code/s to be confirmed. Page 3 of 12

This value must be included in remuneration for the purpose of UIF, SDL, ETI and remuneration used to calculate the allowable tax deduction limit for contributions towards a retirement fund. At the time of publishing this document, no confirmation/information was provided on how SARS wants employers to report reimbursive travel allowance, and how SARS will administer reimbursive travel allowance on assessment. 2.2 Certain Dividends Included in Remuneration Effective 18 December 2017, dividends as specified in paragraph (kk) of the proviso of section 10(1)(k)(i) of the Income Tax Act are included in remuneration and are subject to PAYE. This value must be included in remuneration for the purpose of UIF, SDL, ETI and remuneration used to calculate the allowable tax deduction limit for contributions towards a retirement fund. At the time of publishing this document, it is unclear if SARS will create a new IRP5 code to report these dividends. Employers must apply for a directive to acquire the PAYE amount to be withheld, please see section 3.1 for more information. Please note that we advise clients to consult their auditor or a tax consultant to confirm if their dividends are exempt or included in remuneration. 2.3 Application of the R350 000 Annual Monetary Cap Amount An employee is allowed a tax deduction on the total contribution amount (employee contribution and deemed employee contribution) towards a retirement fund limited to the lessor of: 27.5% of remuneration (excluding retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit), or R350 000 per annum Before March 2018, the legislation made provision to fully utilise the R350 000 annual cap amount as quickly as possible until the full amount (R350 000) was exhausted, even though our payroll systems have spread the annual cap amount equally over the tax year. The reason why our payroll systems made use of the spread option: to prevent an employee to receive more than the R350 000 benefit should he/she work at more than one employer/s during a tax year and receive the full R350 000 at any one employer; and to prevent a sudden drop in the net take-home pay when the R350 000 cap is reached. From 1 March 2018, the legislation forces the annual R350 000 cap amount to be spread across the tax year using a cumulative calculation. The allowable tax deduction amount may not exceed the prorata amount calculated by using the ratio which a full year bears to the periods in respect of which the remuneration was received or accrued by that employer. The cumulative calculation of the R350 000 monetary cap amount only applies for employees tax purposes, and any unused portion will be taken into account on assessment. The amendment is in line with the calculations applied by our systems. Page 4 of 12

2.4 Employer Provided Bursaries (Two Changes) There are two changes: Change 1: Relative of an employee From 1 March 2017, the exemption thresholds for bursaries granted by the employer (or associated institution to the employer) to a relative (without a disability) of an employee were increased to the following amounts: The scholarship or bursary is not exempt if the remuneration proxy exceeds R600 000 (was R400 000). If the remuneration proxy does not exceed R600 000 (was R400 000), then the first R20 000 (was R15 000) of a scholarship or bursary in respect of grade R to grade twelve or a qualification to which an NQF level from 1 up to and including 4 has been allocated, is exempt from normal tax. If the remuneration proxy does not exceed R600 000 (was R400 000), then the first R60 000 (was R40 000) of a scholarship or bursary in respect of a qualification to which an NQF level from 5 up to and including 10 has been allocated, is exempt from normal tax. If the bursary is taxable, it must be taxed as a fringe benefit (even though bursaries are not specified in the Seventh schedule which deals with fringe benefits) and reported against code 3809 for basic education and code 3820 for higher education. The exempt portion must be reported against code 3815 for basic education and code 3821 for higher education. Change 2: Family member (of an employee) with a disability From 1 March 2018, there are different exemption thresholds for bursaries granted by the employer (or associated institution to the employer) to an individual with a disability (as defined in section 6B(1)) who is a family member of an employee who is liable for the family care and support of that individual, namely - The scholarship or bursary is not exempt if the remuneration proxy exceeds R600 000. If the remuneration proxy does not exceed R600 000, then the first R30 000 of a scholarship or bursary in respect of grade R to grade twelve or a qualification to which an NQF level from 1 up to and including 4 has been allocated, is exempt from normal tax. If the remuneration proxy does not exceed R600 000, then the first R90 000 of a scholarship or bursary in respect of a qualification to which an NQF level from 5 up to and including 10 has been allocated, is exempt from normal tax. It will be the employer s responsibility to confirm the individual s disability status. The disability must be a disability according to the diagnostic criteria prescribed by the Commissioner and diagnosed by a duly registered medical practitioner. Currently the concepts of family member and family care and support are unclear. According to the Final Response Document 2017, further clarity could be provided through interpretation or guidelines issued by SARS. According to the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2017, in the case where the cost is carried by the employee, the expenses covered by the bursary/scholarship should include the elements that relate to educational services that are specific to learners and students with disabilities. These expenses are described in the SARS document titled: List of Qualifying Physical Impairment or Disability Expenditure. SARS confirmed that 4 new fringe benefit codes will be created to report the non-taxable and taxable values of the new exemption thresholds, which has not yet been made available at the time of publishing this document. Page 5 of 12

Summary of exemption criteria: Employee - with or without a disability Bursary Exemption Rules and Thresholds From March 2018 (no change) Exemption rule no change Exempt if employee agrees (in writing) to repay the full amount should he/she fail to complete the studies/course for reasons other than death, ill-health or injury. Relative (without a disability) of an employee From March 2018 (no change) Remuneration eligibility threshold R 600 000 Grade R 12, and NQF level 1-4 R 20 000 NQF level 5-10 R 60 000 Family member (with a disability) of an employee who is liable for the family care and support of that family member Remuneration eligibility threshold R 600 000 Grade R 12, and NQF level 1-4 R 30 000 NQF level 5-10 R 90 000 From March 2018 (change) 2.5 Exempt Foreign Services Income Currently, certain remuneration paid/accrued to a resident employee by any employer (of private sector companies only) in respect of employment services rendered on behalf of the employer in any country outside South Africa is exempt from PAYE if - the employee is outside South Africa for a period (or periods) exceeding 183 full days in any 12 months, and the employee is outside South Africa for a continuous period exceeding 60 full days in total in that period of 12 months. From 1 March 2020, certain remuneration paid/accrued to a resident employee by any employer (of private sector companies only) in respect of employment services rendered on behalf of the employer in any country outside South Africa is exempt from PAYE if the remuneration received for foreign services does not exceed one million rand, and the employee is outside South Africa for a period (or periods) exceeding 183 full days in any 12 months, and the employee is outside South Africa for a continuous period exceeding 60 full days in total in that period of 12 months; subject to a double taxation agreement if such an agreement exists. In the case where the resident employee s foreign remuneration exceeds one million rand for the assessment year, only the excess must be included in remuneration (subject to PAYE, UIF, SDL and remuneration used to calculate the allowable tax deduction limit for contributions towards a retirement fund). If an employee was taxed in the foreign country and in South Africa on the same remuneration, the employee can receive a tax credit on assessment in terms of section 6quat of the Income Tax Act (employee must be able to submit proof of foreign taxes withheld). According to the Final Response Document on Taxation Laws Amendment Bill 2017, employers can apply for a hardship directive from SARS that would take foreign employment taxes into account in the determination of PAYE, which will subsequently remove the incidence of being taxed twice during the course of the tax year, and only being able to claim foreign tax credits after the tax year has ended, to eliminate severe cash flow problems. Page 6 of 12

2.6 ETI Employed and Remunerated Hours Used in the Wage Qualifying Criteria The wage of the employee is used to determine whether the employee is a qualifying employee for ETI purposes (one of the qualifying criteria). The wage the employee earns should be at least the minimum wage according to the wage regulating measure (Collective Agreement, Bargaining Council, or Sectoral Determination), or at least R2 000 for a full month (which is 160 or more employed and remunerated hours ), if there is no wage regulating measure Before March 2018, the systems performed the following tests to determine if an employee earned at least the minimum wage: If a wage regulating measure is applicable (no change): The wage paid is compared to the minimum wage of the wage regulating measure in respect of that month. A rate per hour comparison is applied. If no wage regulating measure is applicable (change): The employee should earn at least R2 000 for 160 or more employed and remunerated hours in a month. If an employee is employed and remunerated for less than 160 hours in a month, then grossup the actual wage to 160 hours to determine if the monthly wage is R2 000 or more: Actual monthly wage / employed and remunerated hours for wage X 160. If the actual monthly wage (for 160 or more hours ) or the grossed-up monthly wage (for less than 160 hours ) is equal to R2 000.00 or more, then the employee passes the wage qualifying test. If an employee is employed and remunerated for at least 160 hours in a month, no gross-up of the actual wage is required to determine whether the monthly wage is R2 000 or more. If the employed and remunerated hours are 160 or more the actual monthly wage will be used to apply the wage qualifying test. If the actual monthly wage (for 160 or more hours ) or the grossed-up monthly wage (for less than 160 hours ) is less than R2 000.00, then the employee fails the wage qualifying test. To apply this test, the system must have the following: Actual wage for the month (no change), and Employed and remunerated hours in terms of wage (change) There was uncertainty as to which hours were included and excluded in employed and remunerated hours in terms of the wage qualifying test for which the PAGSA requested interpretation from SARS. SARS responded by issuing a Non-Binding Private Opinion on 7 February 2017 and explained that employed and remunerated hours are Employed (ordinary) hours less any unpaid hours (such as unpaid leave) plus, any additional hours (such as overtime) These hours are used in the calculation of the wage qualifying test for employees without a wage regulating measure, and Page 7 of 12

for the calculation of monthly remuneration and the ETI amount for all employees (whether a wage regulating measure is applicable or not). From March 2018, the legislation has been amended to clarify the exact hours to be included in employed and remunerated hours in terms of wage. From March 2018, employed and remunerated hours in terms of wage refers to ordinary hours only, and additional hours in excess or ordinary hours (such as overtime) must not be taken into account when calculating the employed and remunerated hours for wage. Any unpaid hours (such as unpaid leave) should reduce the employee s employed and remunerated hours for wage, because it is hours for which the employee was employed but not paid remuneration. In other words: Employed and remunerated hours for wage = + Ordinary hours - Unpaid hours Summary of change: Wage Test Hours for Employee Without a Wage Regulating Measure - Change Before 1 March 2018 From 1 March 2018 + Ordinary hours - Unpaid Hours + Additional hours + Ordinary hours - Unpaid hours Remuneration Hours for Employees with and Without a Wage Regulating Measure No Change Before 1 March 2018 From 1 March 2018 + Ordinary hours - Unpaid Hours + Additional hours + Ordinary hours - Unpaid Hours + Additional hours The employed and remunerated hours used to calculate the monthly remuneration and the ETI amount remain unchanged (ordinary hours/employed hours less any unpaid hours plus any additional hours). Remember: Wage is used to determine if the employee qualifies for ETI (wage test), and remuneration is used to calculate the incentive amount. Example: The employment contract states that the employee s ordinary hours of work are 40 hours a week, 8 hours per day for 5 days a week (Monday to Friday). March contains 4 weeks which is 160 ordinary hours (40 x 4). Employee A was appointed on 1 March (first day of the tax year). Employee A meets all other qualifying criteria in terms of ETI. In the month of March, employee A took 30 hours unpaid leave (unpaid hours) and worked 30 hours overtime (additional hours). Payslip: Salary = R2 400.00 Overtime = R675.00 Unpaid Leave = R450.00 Commission = R1 200.00 Page 8 of 12

Actual wage Employed and remunerated hours used for wage Grossed-up wage March 2017 March 2018 R1 950.00 (wage unpaid leave) 160 (ordinary/contractual hours unpaid hours + additional hours) No gross-up required as the employed and remunerated hours are 160 or more. R1 950.00 (wage unpaid leave) 130 (ordinary/contractual hours unpaid hours) R1 950 / 130 x 160 R2 400.00 Employee does not qualify Employee qualifies Actual remuneration R3 825 R3 825 Employed and remunerated hours used for monthly remuneration and ETI amount Grossed-up remuneration ETI Amount 160 (ordinary/contractual hours unpaid hours + additional hours) No gross-up required as the employed and remunerated hours are 160 or more. R0.00 (does not pass the wage qualifying test) 160 (ordinary/contractual hours unpaid hours + additional hours) No gross-up required as the employed and remunerated hours are 160 or more. R1000.00 2.7 Unemployment Insurance Fund Contributions (UIF) Before March 2018, the following employees were exempt from contributing towards the unemployment insurance fund employee employed by an employer for less than 24 hours a month learners employed according to section 18(2) of the Skills Development Act, employees in the national and provincial spheres of government, persons who will be repatriated at the end of the period or service, the President, Deputy President, a Minister, Deputy Minister, a member of the National Assembly, a permanent delegate to the National Council of Provinces, a Premier, a member of an Executive Council or a member of a provincial legislature any member of a municipal council, a traditional leader, a member of a provincial House of Traditional Leaders and a member of the Council of Traditional Leaders. From 1 March 2018, only the following employees are exempt from contributing towards the unemployment insurance fund employee employed by an employer for less than 24 hours a month employees in the national and provincial spheres of government, the President, Deputy President, a Minister, Deputy Minister, a member of the National Assembly, a permanent delegate to the National Council of Provinces, a Premier, a member of an Executive Council or a member of a provincial legislature any member of a municipal council, a traditional leader, a member of a provincial House of Traditional Leaders and a member of the Council of Traditional Leaders. Page 9 of 12

The following UIF exemptions are no longer applicable and these employees must contribute towards UIF: learners (learners employed according to section 18(2) of the Skills Development Act), and persons who will be repatriated at the end of the period or service). *Please note that there is a mismatch in the wording of the UIA (Unemployment Insurance Act) and UICA (Unemployment Insurance Contributions Act) which results in the fact that the following individuals will not contribute towards the Unemployment Insurance Fund but will be able to claim UIF benefits once the amendments to the UIA become effective, and further clarity must be provided in this regard: The President, the Deputy President, permanent delegates to the National Council of Provinces, Premiers, Traditional leaders, members of the Provincial House of Traditional leaders and members of the council of Traditional leaders. 3 Explanation of Changes Not Affecting the System 3.1 Employers to Apply for Directives for Certain Dividends Before March 2018, the legislation did not specify whether employers should apply for directives in order to acquire the amount of PAYE to be withheld from certain dividends included in remuneration. However, the SARS PAYE Business Requirements Specification Document V16.1.1 stated that an employer must apply for a directive. From 1 March 2018, the legislation is amended to clarify that an employer must apply for a directive to acquire the PAYE amount to be withheld from dividends that are not exempt in terms of paragraph (dd), (ii), (jj) and (kk) of the proviso of section 10(1)(k)(i). Application form IRP3(s) must be used to apply for a directive. According to the Final Response Document, 2017, listed shares are processed via a Central Securities Depository Participant (CSDP). Where an employee holds shares through a share incentive scheme, the employer or person from whom the shares were required, acting on behalf of the employee, should withhold employees tax from the dividends and inform the CSDP under section 64H(2) of the Income Tax Act, that no dividends tax must be withheld from the relevant dividend in terms of section 64H(1)(l) of the Act. 3.2 Right of Use of Asset Clothing now Excluded If an employee is required (as a condition of his/her employment) to wear a uniform (which is clearly distinguishable from ordinary clothing) while on duty, the allowance or uniform is exempt from tax in terms of section 10(1)(nA) of the Income Tax Act. According to paragraph 6(4)(a) of the Seventh Schedule of the Income Tax Act, there shall be no fringe benefit value if an employee has been granted the right to use an asset if such use is incidental to the use of the asset of the employer s business, or the asset is provided as an amenity to be enjoyed by the employee at his/her place of work, or for recreational purposes at that place or a place of recreation provided by the employer for the use of its employees in general. Employers have by-passed the special uniform requirement according to section 10(1)(nA) to provide tax free clothing by simply ensuring the ownership of the clothing remains the employer s and does not transfer to the employee, and therefore provides the employee with the right of use of clothing as tax free according to paragraph 6 of the Seventh Schedule of the Income Tax Act. Page 10 of 12

From 1 March 2018, the amended legislation confirms our interpretation that any use of employer provided ordinary clothing (uniform which is not clearly distinguishable from ordinary clothing) will result in a taxable fringe benefit value. 3.3 Bargaining Council Tax Relief Background: Some bargaining councils have not withheld PAYE from holiday, sick leave and end of year payments. Their liability for penalties and interest put these bargaining councils at risk of closure and therefore, a certain level of relief will be provided: Relief: Non-compliant bargaining councils are required to pay a bargaining council levy of 10% of the total employee s tax that should have been deducted from all payments made by the bargaining councils to their member between 1 March 2012 and 28 February 2017. The 5-year period is linked to the period of record keeping required in terms of section 29 of the Tax Administration Act. Bargaining councils must submit a return, and pay the bargaining council levy to SARS on or before 1 September 2018. Bargaining councils that were tax compliant will not be entitled to this relief and subsequently will not be entitled to tax refunds. Bargaining councils must be fully compliant from assessment year 2018 (March 2017 February 2018) going forward, and will not be afforded relief in the future. This is a once-off relief concession. 3.4 Postponement of the Annuitisation of Provident Fund Pay-Outs Background: In 2015, amendments were made to the Act regarding the tax treatment of provident funds to enhance preservation of retirement fund savings during retirement, to prevent retirees from spending all their retirement assets too quickly. Currently, if you contribute towards a pension fund or retirement annuity, two thirds may be paid out as an annuity (meaning an amount will be paid out on a monthly basis) and one third may be paid out as a lump sum cash amount on retirement. However, if you contribute towards a provident fund, the full amount may be paid out as a cash lump sum on retirement. As a result of the amendments, it was proposed that on retirement, a member of a provident fund will be permitted to take up to a third of the retirement benefits as a lump and annuitise the remaining twothirds (this will only be applicable to contributions made to a provident fund after the implementation date, all contributions made before the implementation date, and growth on those contributions, may still be taken as a lump sum on retirement). The initial effective date was 1 March 2016, but government postponed the annuitisation requirement for provident funds for two years until 1 March 2018 to provide sufficient time for the Minister of Finance to consult with the interested parties including NEDLAC. Further Postponement: Since the discussions are still underway, the compulsory annuitisation requirement of provident funds are postponed for another year, from 1 March 2018 to 1 March 2019. Page 11 of 12

4 Sources Taxation Laws Amendment Act, 2017 Tax Administration Laws Amendment Act, 2017 Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2017 Explanatory Memorandum on the Taxation Laws Amendment Bill, 2017 Memorandum on the Object of the Draft Tax Administration Laws Amendment Bill, 2017 Memorandum on the Object of the Tax Administration Laws Amendment Bill, 2017 SARS Non-Binding Private Opinion on 7 February 2017 Final Response Document on Taxation Laws Amendment Bill, 2017 and Tax Administration Laws Amendment Bill, 2017 Budget Speech 2018 DISCLAIMER Although care has been taken with the preparation of this document, Sage South Africa makes no warranties or representations as to the suitability or quality of the documentation or its fitness for any purpose and the client uses this information entirely at own risk. COPYRIGHT NOTICE Copyright 2018 by Sage South Africa, a division of Sage South Africa (Pty) Ltd hereinafter referred to as Sage, under the Copyright Law of the Republic of South Africa. No part of this publication may be reproduced in any form or by any means without the express permission in writing from Sage. Page 12 of 12