Since the inception of the retirement reform on the 1 March 2016, many employers maintained their payroll configuration appertaining to retirement and risk benefits and the tax treatment thereof or minor modifications thereof.
What employers should be aware of is that from the 1 March 2016 all company contributions towards either your retirement and risk benefits are now considered a fringe benefit and should be fully taxed on the payroll.
However, according to section 11(F) of the Income Tax Act of 1962 you will be allowed a corresponding tax deduction of the approved contributions limited to the lesser of the following (in summary):
- Actual approved employee and employer contributions; or
- R350,000 per annum; or
- 27,5% of the higher of taxable income or remuneration as defined.
Are you exposed?
Unknowingly to many companies, this has created a non-compliance issue whereby unapproved contributions are allowed as a tax deduction on their payroll system.
Unapproved benefits would typically include PHI (Permanent Health Insurance) / Disability benefits, unapproved GLA (Group Life Assurance) / Death Cover, Dread Disease cover to name but a few.
This in effect would mean a greater deduction from the taxable income for each employee on payroll therefore understating the PAYE value to SARS on a monthly basis.
We have found that this is most prevalent where the company’s retirement structure is inclusively costed, and the breakdown of these risk benefits are actually housed in a total employer percentage contribution amount.
The devil is in the detail and in our experience, this is the one area whereby most payroll configurations are potentially flawed.
How can we clean this up?
Ideally, what should have happened from 1 March 2016, is each individual risk benefit on the payroll should have been broken up into separate wage elements on the payroll for transparency and to ensure the correct tax treatment thereof.
With SARS not making budget especially with the Covid-19 pandemic, it is crucial companies remain totally compliant from a PAYE aspect. Should companies identify non-compliance appertaining to these items, they should consider embarking on a Voluntary Disclosure Program with SARS to rectify this non-compliance.
Are you covered for Covid-19?
In addition, another consideration that companies should be investigating during this Covid-19 pandemic, is to whether their risk benefit offering appertaining to GLA / Death Cover, PHI / Disability Cover and Dread Disease cover includes the contraction of Covid-19.
From a social responsibility aspect, companies should be enquiring about this cover with their said brokers / financial services advisors to ensure that there are no exclusions in their policies appertaining to Covid-19.
It would be most unfortunate to employees and their families, should these risk benefits exclude Covid-19. If this is the case, this in essence would mean that these payouts would potentially never materialise should employees’ contract or perish due to Covid-19.
Master Mobility and Tax Specialist