There is nothing wrong with Tax structuring of an employee’s salary. 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; the primary purpose cannot be tax avoidance or postponement.
Employers want employees to take home as much money and equity as possible to ensure they stay competitive in the market while keeping the company’s employment cost to a minimum.
Adopting a cost-to-company approach to salary structuring is a good way of ensuring that you legally structure employee’s packages. This is becoming an increasingly popular salary structure approach with the benefit of employees better understanding the full value of their cash and benefits.
The benefits that can be included in a cost-to-company package:
* A 13th cheque;
* Retirement fund contributions;
* Medical scheme contributions;
* Group life cover without having to undergo medical tests or fill in questionnaires;
* Life cover beyond group life cover on an individual basis with medical tests and questionnaires;
* Income protection;
* Lump-sum disability;
* Travel allowance;
* A company vehicle;
* Bulk-bought insurance for employee’s vehicles;
* Bulk-bought private insurance;
* Accident insurance; and
* Life assurance that pays out if an employee’s spouse dies.
Tax deductions for employees:
There are some allowable Tax deductions for employees that can reduce how much they owe to SARS monthly.
- Retirement Fund Contributions:
An employee’s total contributions towards retirement funds (Pension, Provident or Retirement Annuity) during the year are Tax deductible up to a limit of 27.5% of whichever is greater: their taxable income or remuneration (to a maximum of R350,000 per year). The tax deduction will always be limited to the actual contributions you made, not the 27.5% taxable income limit.
Depending on the type of remuneration structure, an employee may be able to claim a travel deduction (the travelling distance between the office and home is not included herein). An accurate and detailed logbook (with opening and closing distances for the Tax year) of all business travel and a record of vehicle expenses must be kept together with the purchase contract of the vehicle that was used for the travelling.
- Donations paid to Registered Public Benefit Organisations (PBOs):
These are donations you’ve made to registered Public Benefit Organisations, which are tax deductible up to a maximum of 10% of your taxable income. Make sure that the charity you’re donating to has a PBO number and can issue you with a tax certificate for your donation (called a section 18A certificate).
- Wear & Tear on assets used for work:
These include things like computer equipment, mobile phones and machinery (not your car). If an employee is using a device purchased and maintained in their personal capacity for work, they may be able to claim the depreciation on the device as a tax deduction. This deduction requires a letter from the company stating that the employee has permission to use the device for work purposes, and that the employee is not compensated with an allowance for it.
- Home office expenses
Salaried employees that work mainly from home in a specifically dedicated space, e.g. a study or office area not used for any other purpose, may be able to claim certain running costs associated with that space such as rent, rates, interest on mortgage bond, depreciation on office equipment, electricity, maintenance (repairs – not cosmetic improvements) proportional to the space used.
- Costs incurred in the pursuit of Commission
Expenses that was incurred as a result of earning your income, such as paying for parking while attending a work lunch or buying stock, can be claimed under this section. Although this is a broad category, you cannot claim any personal expenses.
- Medical expenses
Medical expenses are treated differently to the tax deductions discussed earlier, in that they are not deducted directly off your taxable income. Instead, a portion of your qualifying medical related spend is converted to a ‘tax credit’, an amount which is deducted from your overall tax liability (the amount of tax you must pay SARS).
The medical tax credit is made up of two parts:
- Medical aid contributions for which you will receive Medical Tax Credit. You will need your Medical Tax Certificate to claim for medical aid contributions – you are usually sent this by your medical aid.
- Out of pocket medical claims that are ‘qualifying’ expenses that you’ve paid for yourself, which have not been reimbursed from your medical aid. Make sure that you have relevant documentation for all your ‘out-of-pocket’ claims to request your SARS reimbursement.
PAYE 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 how to structure your salary or employee’s salaries for optimal tax benefit. Contact Deon Grové or Marcel Eksteen at 012 347 0561, or email firstname.lastname@example.org or email@example.com today for assistance.