Tax in February 2014
- The new employment tax incentive
- Section 24I (10A) – unrealised exchange gains and losses on loans between connected persons
- Income protection policies
- Taxation on unrealised accounting profits
From the recent State of the Nation Address, it is clear that employment is, and will likely remain, top of mind for South African citizens and politicians alike. South African businesses now have the opportunity to create new employment opportunities and claim rebates from the Employment Tax Incentive (ETI). Carin Grobbelaar, Senior Tax Consultant at Grant Thornton Cape, explains how businesses can participate and make use of the ETI.
In addition to the labour and employment issues that make daily news headlines, we are also plagued by the weakened Rand. While it is still trading at over R 11 to the US Dollar, we expect that many businesses will soon need Bruce Russell’s advice regarding the treatment of unrealised exchange gains and losses on loans between connected persons. Bruce is a Tax Consultant at Grant Thornton Cape.
And, while it isn’t always possible to plan our financial affairs to benefit from currency fluctuations, some planning may be required with the impending changes relating to the taxation of insurance policies that exist for the benefit of an employee, but are paid by the employer. The most recent legislated changes affect the taxation of income protection policies. While these changes will only be effective from 2015, employers and employees will both need to plan to adjust to the effect of these changes. Doné Howell, Tax Partner at Grant Thornton Johannesburg explains what the changes entail.
Nico Theron, Senior Tax Consultant at Grant Thornton Johannesburg looks at the changes to tax treatment of unrealised accounting profits for brokers and banks. From 1 January 2014, these taxpayers are no longer permitted to choose to pay tax on a market-valuation basis, as they were able to do in the past – a change that will undoubtedly have consequences on an array of other tax and business matters.
Budget 2014 – Monitor your Tax
With the big picture for 2014 now painted in the State of the Nation Address, we look forward to Minister Gordhan’s Budget speech to provide the financial roadmap to achieve the country’s objectives. As usual, Grant Thornton will provide commentary, useful tools and calculators for you to monitor your tax.
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The new employment tax incentive
By Carin Grobbelaar, Senior Tax Consultant, Grant Thornton Cape
The Employment Tax Incentive Act No 26 of 2013 was signed into law on 18 December 2013 and became effective on 1 January 2014. The Act aims to encourage private employers to employ young workers by providing a tax incentive, which will reduce employers’ cost related to hiring young people. The savings will be brought about through a cost-sharing mechanism with government, which if certain conditions are met, can run for a maximum of two years.
The incentive is available to all private sector employers that are registered with SARS for PAYE, across all economic sectors.
Young people are considered to be ‘qualifying employees’ if they –
- have a valid South African ID;
- are between 18 and 29 years old (please note that the age limit is not applicable if the employee renders services inside a special economic zone (SEZ) to an employer that is operating inside the SEZ, or if the employee is employed by an employer that operates in an industry designated by the Minister of Finance);
- are not domestic workers;
- are not “connected persons” (as defined in the Income Tax Act) in relation to the employer;
- were employed by the employer or an associated person to the employer on or after 1 October 2013; and
- earn at least the minimum wage applicable to the employer or R2 000 per month (where there is no minimum wage relevant to the employer) but less than R6 000 per month.
There is no limit to the number of qualifying employees that an employer can hire.
How does it work?
The employer will calculate and claim the incentive on a monthly basis, which will reduce the PAYE payable to SARS without affecting the amount paid to the qualifying employees. The amount of the reduction in PAYE will depend on the salaries paid to the qualifying employees. The incentive amount per qualifying employee will be calculated as per the table below.
PAYE is calculated in the normal way each month way for each qualifying employee and deducted from the employee’s salary and the employee receives the net amount. The employer then calculates the incentive value for each qualifying employee in accordance with the table below. The incentive amount is deducted from the PAYE withheld and the net amount paid to SARS.
|Monthly Remuneration ||Employment Tax Incentive per month during the first 12 months of employment of the qualifying employee ||Employment Tax Incentive per month during the next 12 months of employment of the qualifying employee|
|R 0 – R2 000 ||50% of Monthly Remuneration||25% of Monthly Remuneration|
|R 2 001 – R4 000 ||R1 000||R500|
|R 4 001 – R6 000 ||Formula:
R1 000 – (0.5 x (Monthly Remuneration – R4 000))
R500 – (0.25 x (Monthly Remuneration – R4 000))
The credit amount will be halved at the end of first 12 months of employment. In determining the first or the second 12-month period, only the months during which the employee was a qualifying employee can be taken into account.
Employer ABC employs two qualifying employees, Ms X and Mr Y in May 2015. Their monthly salaries is R2,500 and R5,000 respectively. Ms X is in the 5th month of employment with Employer ABC and Mr Y is in the 18th month. The incentive for Employer ABC for May 2015 will be:
- Ms X: R2,500 = R1,000
- Mr Y: R500 – (25% X (R5,000 – R4,000)) = R250
- Total credit for May 2015 = R1,250 (R1,000 + R250).
Employers may not reduce their PAYE liability in circumstances where they have outstanding tax returns or outstanding tax debts. Should employers reduce their PAYE in these circumstances, SARS may levy normal penalties for underpayment of PAYE. However, where an employer fails to claim the credits in any particular month (due to an outstanding return or tax debt), the amount of the unclaimed credits may be rolled over as a credit to the next month.
Should an employer reduce its PAYE in respect of an employee that does not qualify for the incentive, the employer will be liable for a penalty equal to 100% of the credit received, and will also have to pay back the incentive amount to SARS. Further, where an employer is deemed to have displaced an existing older, non-qualifying employee (in circumstances that constitute an automatically unfair dismissal in terms of the Labour Relations Act), and the employer replaces that dismissed employee with a ‘qualifying employee’, the employer is liable to pay a penalty of R30 000 in respect of that employee and may be disqualified from receiving the employment tax incentive.
The incentive is currently scheduled to end on 31 December 2016 and employers are urged to participate in this incentive.
Section 24I(10A) – unrealised exchange gains and losses on loans between connected persons
By Bruce Russell, Tax Consultant Grant Thornton Cape
Section 24I of the Income Tax Act (“the Act”) governs the income tax treatment of exchange gains or losses made in respect of both realised and unrealised foreign exchange transactions.
Unrealised exchange differences on foreign denominated debts between connected persons have been subject to an array of income tax treatments over the past few years. Realisation of the exchange difference is triggered to the extent that the related debts have been repaid, setoff or settled in any other manner.
Previous tax treatment of unrealised exchange differences
Unrealised exchange differences that arose in respect of foreign denominated capital loans and advances between connected persons, before November 2005, are included, or deducted from the taxpayer’s taxable income over a maximum ten year period.
For foreign denominated loans and advances between connected persons made in tax years after November 2005, the tax treatment of unrealised exchange differences is different:
- Firstly, unrealised exchange differences on all loans and advances, including trade receivables and trade payables, are deferred for income tax purposes.
- Secondly, only when exchange differences are realised are these amounts included in, or deducted from, taxable income.
Because of these provisions, South African tax resident companies may have significant unrealised exchange gains or losses that have not yet been subject to income tax adjustments.
Further changes to the treatment of unrealised exchange differences
A new regime, introduced by section 24I(10A), now regulates the income tax treatment of unrealised exchange differences on loans between connected persons. This new regime seeks to align the income tax and IFRS treatment of unrealised exchange differences, unless a good reason exists for these differing treatments.
The intention behind this new section is that these previous and future unrealised exchange differences must continue to be excluded or not be deducted from taxable income, only if all of the following conditions are applicable:
- The loan or advance is not a current asset or a current liability under IFRS;
- The loan is not funded directly, or indirectly, by persons forming part of the same group of companies as the debtor or creditor;
- The loan is not funded directly, or indirectly, by persons who are connected persons in relation to the debtor or creditor; and
- No forward exchange contract or a foreign currency option contract has been entered into to hedge against exchange differences arising on the loan.
In other words, if any of these conditions do not apply, then the unrealised exchange differences must be included in or deducted from taxable income.
Section 24I(10A) of the Act is effective for years of assessment commencing on or after 1 January 2013.
Consider the changes to the treatment of unrealised exchange differences between connected persons:
Taxpayers are advised to consider the implications of unrealised exchange differences relating to loans between connected persons. These considerations include:
- Is there an unrealised exchange gain that should be included when determining provisional tax to be paid?
- Is there an unrealised exchange loss that can significantly decrease a company’s taxable income allowing for a reduced provisional tax assessment?
- In preparing financial statements, are there any unrealised exchange gains or losses that must no longer be recognised in deferred tax?
Income protection policies
By Doné Howell, Tax Partner Grant Thornton Johannesburg
The latest in the wave of changes that affect the taxation of insurance policies that exist for the benefit of an employee, but are paid by the employer, is the recent legislation regarding the taxation of income protection policies.
Although the effective date of this legislation is 1 March 2015 (the 2016 tax year), it is important for employers to be aware of the impending changes to the PAYE system and to consider the possible review and renegotiation of your policies in the next year.
- Employer-paid premiums in respect of insurance policies for the benefit, whether directly or indirectly, of an employee or his or her spouse, child, dependant or nominee, is a taxable benefit and is reported on the IRP5 certificate against code 3801.
- However, to the extent that the premiums are in respect of a policy which (i) “… covers that person against loss of income as a result of illness, injury, disability or unemployment” and (ii) “the amounts payable in terms of the policy… constitute or will constitute income as defined” and are treated as a taxable benefit in the employee’s hands, the employee is deemed to have paid such premiums and will therefore be entitled to a tax deduction of the same amount. This deduction is reported on the IRP5 certificate against code 4018.
- Although there is an initial inclusion as a taxable benefit in the employee’s hands, the corresponding deduction in calculating the PAYE results in a nil PAYE liability.
- Taxpayers who pay premiums to such policies are also entitled to a tax deduction. The deduction is allowed in terms of section 11(a) of the Income Tax Act, No.58 of 1962 (‘the Act’) read with section 23(m)(iii) of the Act.
Reasons for change
- Although the insurance industry may have differing names for disability policies, essentially there are two types of cover; capital protection and income protection.
- Capital protection is essentially cover against a person’s loss of income earning capacity, while income protection is cover against a person’s loss of future income.
- Currently premiums paid towards capital protection are not deductible but future policy pay-outs will be tax-free. Premiums paid for income protection are tax deductible however; the income from future policy pay-outs will be taxed.
- The Legislature’s motivation to align the tax treatment in respect of these types of policies is that it believes that both types have a similar objective, which is “to protect the financial future of an individual and his or her family through insurance against an adverse personal event (death or disability).” This alignment will also ensure a similar tax treatment as applied in respect of life insurance policy premiums.
Consequences of the change
- As from 1 March 2015:
- Any premiums paid by an employer for the benefit of an employee will be treated as a taxable benefit;
- The employee will not be entitled to a tax deduction of the corresponding value;
- An individual will not qualify for a tax deduction in respect of his or her premium paid; and
- All policy pay-outs will be tax-free, irrespective of whether historical premiums qualified as tax deductions and irrespective of whether the policy pay-out is in the form of a lump sum or an annuity.
- Notwithstanding the increase in PAYE to be suffered by an employee, employers will also bear an increase to their skills development levies and unemployment insurance fund contributions costs.
- As it will no longer be necessary to provide for tax deductions when calculating the amounts in respect of future pay-outs, employees could be over-insured and employers will need to review and re-negotiate income protection policies.
- Furthermore, the employee’s net take home pay will be reduced due to the increase in PAYE and therefore the possible re-negotiation for a lower policy pay-out would have a corresponding reduction in the premiums payable.
- It will be necessary to educate employees proactively to ensure they comprehend the future tax implications of these policies.
Other employer-paid policies
- As a reminder, from 1 March 2012 (the 2013 tax year) a taxable benefit arises in respect of employer paid contributions to an insurer in respect of an insurance policy, whether directly or indirectly for the benefit of an employee, his or her spouse, child, dependent or nominee.
- The policies that will be affected by this taxable benefit provision are ‘unapproved’ policies, i.e. policies that are owned/in the name of an employer.
Therefore, it is vital that employers ascertain whether their policies qualify as ‘approved’ or ‘unapproved’ policies. Any premiums the employer pays towards an approved policy, i.e. a policy that is part of a pension or provident fund as policyholder, does not qualify as a taxable benefit as the tax treatment is the same as employer contributions to pension or provident funds.
Taxation on unrealised accounting profits
By Nico Theron, Senior Tax Consultant, Grant Thornton Johannesburg
In South Africa, income tax is usually payable on actual receipts and accruals, but for every rule, there are always exceptions. One exception to this rule applies to companies that deal in instruments, interest rate agreements, or option contracts. The exception allows them, if they so choose, to pay tax on a market-valuation basis. This means, irrespective of actual receipts and accruals, the interest and amounts payable or receivable on option contracts and interest rate agreements are taken into account for tax purposes, according to changes in the market value of the underlying instruments over a period.
However, in terms of the Taxation Laws Amendment Act, No 31 of 2013 (“TLAA”), brokers that are members of the JSE (that are companies) and any bank, branch, branch of a bank or controlling company as defined in section 1 of the Banks Act (hereinafter collectively referred to as “the covered persons”) are (as from 1 January 2014), no longer permitted to choose to pay tax on a market-valuation basis. This however does not mean that the covered persons will now be paying tax on receipts and accruals only.
The TLAA includes a provision that will see the covered persons paying tax on the accounting fair value adjustments of certain financial assets and financial liabilities as defined in the relevant International Accounting Standards (“IAS”).
The section introduced by the TLAA, section 24JB of the Act, requires covered persons to include in, or deduct from their income, all amounts in respect of certain financial assets and financial liabilities that are recognised in profit or loss in the statement of comprehensive income, in respect of financial assets and financial liabilities that are recognised at fair value in profit or loss in terms of IAS39.
The section applies in respect of any fair value adjustment passed after 1 January 2014.
The section however also applies in respect of 33% of any fair value adjustment made before 1 January 2014 for the first three years of assessment from 1 January 2014. The resulting effect on a covered person is that for the first three years of assessment (that ends after 1 January 2014), that covered person will, in addition to fair value adjustments that are required from 1 January 2014, have to assess how any past fair value adjustments of certain financial assets and financial liabilities affect their taxable income and provisional tax estimates.
While the newly introduced section seems simple and straightforward, it does give rise to other consequences that may not be immediately evident. For instance, if a covered person holds an equity share classified as held for sale for accounting purposes, the covered person will be required to pay income tax on the accounting fair value adjustment of that equity share, irrespective of whether or not the share has been disposed or not, and irrespective of whether or not that share has been held for more than three years. A situation, which in the absence of section 24JB, would have been capital in nature.
We recommend that covered persons obtain advice from both professional accounting and tax advisers as soon as possible to assess the impact of the proposed section on future provisional tax estimates.