I’m sure you’ll agree that one of your major priorities is the management of your company’s tax risk and the development of strategies and  policies to reduce these risks.  If you understand what SARS auditors look for when they’re scrutinising your payroll, you’ll be able to apply the insight to your own practices and policies. 

Ask yourself these five salary structure questions.  If you answer yes to all five, then SARS won’t question your salary structure.

1.  Are you entitled to the allowance?

If you’re not entitled to an allowance, then don’t try to claim it! If you never ever leave the office for work meetings, then you aren’t entitled to a travel allowance.

The following benefits and allowances aren’t taxable and you can’t claim them:

• Cell phone
• Computer
• Use of the pool vehicle
• Bursaries and scholarships
• Uniform allowance
• Meals, refreshments and also meal and refreshment vouchers
• Relocation allowance
• Foreign employment income
• Key man policies
• Income replacement policies

2.  What are the short-term, medium-term and long-term tax results?

You must understand how your allowances and benefits impact you.

In the case of travel allowances, the short-term effect is that the employee pays tax on 80% of the allowance. But what are the medium and long-term effects?  Let’s take a look …

Example

Mr Ashleigh’s salary package per month and he gets a vehicle allowance of R10 000 per month. His taxable income is R48 000 per month (R40 000 basic salary + 80% of R10 000 vehicle allowance).

His tax will amount to R800 per month less than what he would’ve paid if the salary package wasn’t structured but it costs his company the same amount of cash flow.

Also, the medium-term advantage is Mr Ashleigh can claim a further deduction after tax year-end. He’ll get a refund from SARS to the value of R130 036.80 on his private use of the car. This means he effectively saved about R22 636.80 in tax this year! If he deducts the full travel allowance of R120 000, he’ll get a refund of about R36 960, resulting in a total tax saving of R46 560.

 

3.  What limitations are there?

SARS has set guidelines limiting the size of allowances. These limits are a benchmark.  If you can justify why yours needs to be higher than the benchmark, then you’ll be allowed to exceed it.

Let’s look at travel allowances, as an example:  Generally, SARS says that vehicle allowances should be up to 30% of the employee’s gross salary.  If the employee is a serious traveller, as in the case of reps and sales staff, then SARS will allow you to give them an allowance of up to 40% of their gross salary.

If the travel allowance exceeds 40% of gross salary, then you MUST justify this.  The total of all allowances granted shouldn’t exceed 50% of the employee’s gross salary.

4.  Is this a salary sacrifice?

When an employee agrees to take a smaller salary, in exchange for fringe benefits, then he is making a salary sacrifice. The regular misconception is that salary sacrifices are “OK”.  But in reality, SARS will see it as a ploy to get extra tax benefits.  So be careful!

Make sure that the calculations you use to work out pension / provident fund contributions, UIF and other salary based deductions / ontributions are based on the correct amounts.

TIP

Don’t make this common mistake! The contributions to pension / provident fund, for example, are based on the salary before salary sacrifices. So all SARS has to do, to spot salary sacrifices, is to compare the contribution to the “actual” salary on your employment contract.  If there’s any variance, SARS will pounce on it!

In fact, don’t tip your staff off at all …

Companies usually send their employees a letter to inform them of salary increases.  But SARS will use this to compare the increase amounts on the letter with the additional amounts on your payslip.  It’ll easily spot the salary sacrifice.

5.  What backing documentation do I need for this structure?

The two most important documents are payslips and employment agreements.  SARS will use these documents to establish the intent and true nature of your employment.

The employment agreement will strengthen the salary structure, because in it, you are stating exactly which allowances are granted and how they’re linked to the job requirements.

Payslips show the monthly amounts used for calculations and deductions to establish taxable income and take home pay.

TIP

Ensure the documents in these files don’t contradict any allowance or benefit granted. For example, if you reimburse your employees for occasional business travel, but their employment contracts state that no travel allowance is given, then make sure you keep a record of staff reimbursement claims. Otherwise, SARS will question their reimbursement pay.

Checklist 2:  Ensure you structure your employees’ salaries legally and tax efficiently

 

Carrie-Anne Diniz

Cents Accountability

Source: Tax Bulletin – For more tax and VAT tips from some of SA’s top tax experts. 

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