• By : Gary McLean CA (SA) | Member | Charteris & Barnes, Chartered Accountants (SA) | Prepared by CORE TAX
In 2013, Section 7B was introduced to the Income Tax Act (“Act”). The main aim of this section was to match the timing between accrual and payment of various forms of variable remuneration. Consequently, the introduction of Section 7B made provision for certain amounts to be deemed to accrue to the employee when they are actually paid.
However, the current scope of Section 7B is limited. There are certain types of variable remuneration that are not currently catered for in this section. This includes, for example, night shift allowances and standby allowances paid by employers to employees.
The proposed amendment to Section 7B replaces defined specific types of payments constituting variable remuneration with generic characteristics. The objective of the proposed amendment is thus to expand the definition of “variable remuneration” to include other types of income, for example, night shift allowances and standby allowances paid by employers.
The proposed wording currently appears to limit rather than expand the definition of variable remuneration. Like the principle underpinning the concept of “capital”, the principle underpinning the concept of “variable remuneration” as set out in the Explanatory Memorandum does not lend itself to precise description.
In many instances involving variable remuneration, the amount of the remuneration would be capable of determination “prior to the entitlement of payment” of that amount. An example of this would be an employee who approaches an employer for permission to work two hours of overtime. Furthermore, there is a provision that an amount will fall within the definition of variable remuneration to the extent that the amount cannot be determined prior to the entitlement of payment of that amount. For an amount to fall within a person’s gross income, it must be a determinable sum in the hands of the taxpayer. Thus, the current proposed amendments seem to be superfluous.
It is also problematic to suggest that an employer cannot determine the identity of its employees. Uncertainty exists as to why Section 7B would not apply if the employee becomes entitled to payment of the amount two months after the month in which the approval is given, and not in the month after approval was given as set out in the Explanatory Memorandum. Payments to employees that are approved by the employer, for example annual bonuses, are not always paid out in the month following the month in which the amount was approved by the employer. For example, the Remuneration Committee may approve the amount to be paid as an annual bonus to employees in say, October, with the intention of paying the bonuses to the employees in December.
Since the timing for payment of the bonus will not coincide with the timing in subsection (iii) of the proposed amendment, it will not fall within the definition of variable remuneration and will accrue to the employee once the employee becomes unconditionally entitled to the amount. This could result in the employer having to withhold employees’ tax in respect of the bonus prior to receipt thereof by the employee.
An employer will usually be able to determine the amount payable to the employee where the employee works a standard number of hours per night while on night shift and is paid in accordance with a specific hourly rate. However, where employees work night shift or are on standby they may be paid their nightshift allowance, and/or standby allowances for the full month, only on the last day of the month. A problem arises for the employer where the payroll run takes place earlier in the month, for example on the 25th of the month, and the employer is unable to undertake a second payroll run to pay the employees’ tax, Skills development Levies, and Unemployment Insurance Fund contributions over to the South African Revenue Service by the 7th of the following month, in respect of the night shift allowances paid to employees on the last day of the preceding month.
Therefore, problems are foreseen if the proposed amendments are not reconsidered in favour of the status quo with the addition of defined categories of remuneration that is sought to be included in Section 7B. The principle underpinning the concept of variable remuneration is not easily defined.