Employee Tax Structuring

We are dedicating this section to human resource professionals seeking advice on how to structure employee remuneration. Employees who want to structure their packages are also welcome to read, however should remember that tax structuring can only be done of a package where your company agrees thereto. It is not something you can do on your own and therefore you are at the mercy of your employer’s effectiveness and willingness to help.

The problem that one face is being caught up between conflicting needs:

• The need on your employee’s to take as much money and equity home as possible and your need to ensure this otherwise you are not competitive in the market
• The need to treat employees fairly and equitably otherwise you may stand accused of not good employment practices, have unhappy employees and make fail in achieving good governance
• The company’s need to keep employment costs to a minimum;
• Some aggressive payroll tax audit teams from the South African Revenue Service will really make you pay where you contravene rules. This has been the end of many streetwise human resources professional who decided not to care about employees’ tax rules

Here are some important things to remember:

• There is nothing wrong with tax structuring of an employee’s salary or, as it is know as, salary sacrifice. South African income tax case law confirms that it is fine to structure an employee’s remuneration to pay as little as possible tax
• Structuring an employee’s package can also not be subject to the anti-avoidance provisions of section 103(1) of the Income Tax Act. Case law has confirmed that where the primary purpose is bettering employees’ remuneration after tax, the primary purpose can not be tax avoidance or postponement
• You can still achieve a good PAYE outcome by careful planning. However, this is something that you can only get right where your remuneration policy (if you do not have one you should get one for tax and other reasons), employment agreements, payment advices and other documentation is not correct. Getting this right is not such a big deal if you approach this correctly
• Adopting a cost to company approach to salary structuring is a good way of ensuring that you legally structure employee packages. However, tax cases have been lost because non-professionals tried their hands at implementing this. This is simply something that your payroll company or most accountants or consultancies can not get right from a tax perspective. Give us your thoughts on this statement of fact under Your Tax Questions.

The following must be in place:

• Correctly worded remuneration policy
• Correctly worded “cost to company” or “compensation” or “basic package” or “total package” etc. clause in your employment agreement
• Any further agreement where the employee and employer agree to the “salary structuring” or “salary allocation” or “salary sacrifices” etc. This is a must. If you do not have this you will loose as is now entrenched in tax case law on the topic
• The payment advices must correctly reflect the above
• Your rules of funds must be correctly and specific. Many fund rules are unclear. They require further actions, such as that “retirement funding income will be agreed with the employee”. Guess what, it is seldom specifically agreed anywhere. The contributions percentages will be “agreed with the employee”. No surprise, very few employers actually agrees this. The South African Revenue Service teams know this and they will be legally correct in assessing you for under payment of PAYE
• Your employees must be educated on the above so that when the South African Revenue Service interview them they confirm the treatment

The following may still be achieved when you have all documents, rules and procedures correct:

• Non-contributory provident funds. This means only the employer makes a contribution to the fund and not the employee. Some employers allow their employees to allocate a portion of their bonus towards the provident fund as an employer contribution. This may be legally achieved where documentation, such as the remuneration committee minutes and notification to employee, is correct and further the fund rules must allow for these type of contributions
• Medical aid contributions will be optimal where the employer contributes 2/3rd and the employee 1/3rd. Where the company contributes everything the employee will not be able to claim any medical aid expenses. Where the employee contributes more, the employee will pay more PAYE than necessary. The rules of the fund must be correctly worded. Any payment towards non medical aid portions such as lifestyle portions are fully taxable
• Travel allowances or company cars may be structured. See the special section dealing herewith under Travel Allowances

This is an area that the South African Revenue Service targets in their audits. Let us know should you have specific questions or need more details on what we know of that is currently targeted.