Christmas Lunch is Tax Free—But Not End-of-Year Gifts
30 November 2011
Posted by: Author: Ron Warren
Christmas Lunch is Tax Free—But Not End-of-Year Gifts
A gift or a voucher is taxed the same as cash. When it comes to your lunch, however, SARS is not a total Scrooge
While some people are looking forward to receiving a Christmas bonus, or 13th cheque, others will receive gifts or vouchers which,contrary to popular belief, are not tax free, so there is no tax benefit to the employee.You may as well take the cash.While gifts are allowed, the cost to the employer must be reflected as a taxable fringe benefit on the employee’s payslip, and PAYE calculated and deducted on this amount.
Companies can give anything they like to their staff, as long as they reflect the cost of the gift as a taxable fringe benefit on the payslip, and calculate and deduct the appropriate PAYE. The only thing that would be tax-free is a Christmas lunch/party, which would be regarded as a non-taxable occasional meal.However, any gifts that go with the lunch would be taxable—other than those from the Christmas crackers!
The cost of any gifts must be shown on the employee's payslip,and PAYE must be calculated on the total of the cash paid to the employee plus the cost of the gifts.A good payroll system will show such items correctly as a non cash fringe benefit as I have indicated, but in some payroll systems it may be necessary to show the value of the gift as a "cash earnings” amount (like a cash bonus), and an equivalent value as a"cash deduction” on the payslip—which can be confusing for the employee.
Where a company buys gift vouchers from a retailer, and gives these vouchers to their own staff as Christmas gifts, the cost of the voucher given to an employee must be reflected on the payslip and taxed as set out above.Anything given to an employee as a gift is taxable, other than a long service award (after 15 year's service).The first R5 000 of the cost of such a gift is free of tax, and any excess is taxable as described above.
SARS has to adopt this seemingly harsh approach, as otherwise some employers would abuse the giving of tax-free gifts.They would pay the employee a lower taxable salary, and could, for example give him/her a car free of tax for Christmas.For the 2010 FIFA World Cup, a special amendment was made to the Income Tax Act allowing for FIFA related gifts to be made to an employee, tax-free up to a value of R750. This concession expired when the FIFA World Cup was over.
Bonuses—month- to -month calculations differ
Under South African labour law, if an employer wishes to pay or not pay a bonus to an employee, it is their decision to make—whether it be a Christmas bonus or 13th cheque—but must be covered in an employee’s terms and conditions of service.
If an employer has been paying employees an annual 13th cheque,but then wishes to discontinue or change the situation, such changes do constitute a change to the employee’s terms and conditions of employment, and must be negotiated with the employee.However,if the employer has sound and reasonable commercial reasons for making the change, then they can implement it after negotiations, even if all employees do not agree to it.
There are three common types of bonus, namely the Christmas bonus or 13th cheque as it is known, the performance bonus, and the production bonus.There is no difference in the tax payable on these bonuses over a year, but the month-to-month tax calculations may differ.For example, a production bonus paid each month is taxed in exactly the same way as a monthly salary.
However, because the rate of tax is based on the tax band into which an employee falls, it is always necessary when calculating monthly PAYE to estimate what the annual taxable income will be,calculate the annual tax on that annual income, and then divide the annual tax by 12 to arrive at the taxpayable for the month.
On the other hand, if an annual bonus is paid during a particular month, it would obviously not be necessary to multiply that bonus by 12 when calculating estimated annual income—the actual bonus would just be added to the estimated annual income arrived at by multiplying normal pay for the month by 12.The tax on the bonus would be the difference between the annual tax on total income including the bonus, and the annual tax on the estimated annual normal pay.Thus, the tax allocated to the bonus would be that calculated at the rate applicable to the final tax earnings bracket.
For instance, if the normal monthly salary was R20 000, this would be equivalent to R240 000 a year. The first R150 000 would be taxed at 18%, the next R85 000 at 25%, and the final R5 000 at 30%.From this total, the annual tax rebate of R10 755 would be deducted, giving annual tax payable of R38 995.
This total would be divided by 12 to give monthly tax of R3 249.58.This works out to an average tax rate of 16.25%.Then the tax on the annual bonus would be calculated at the rate of 30%,being the rate applicable to annual earnings in the tax bracket R235 000 to R325 000, giving tax due of R6 000.There would be no tax rebates deducted, as these had all been used up in calculating the tax on the normal salary.
Employees would query why the bonus had been taxed at a rate of 30%, whereas the normal salary was taxed at only 16.25%.At the end of the tax year, the total tax due on the total earnings of R260 000 (R240 000 salary plus R20 000 bonus) would be R44 995.PAYE deducted would be R3 249.58 x 12 = R38 995 +R6 000 = R44 995.If the bonus had been paid monthly (R1 666.67 per month), the monthly tax payable would have been R3 749.58.The total tax for 12 months would then have been R44 994.96 (i.e. R44 995), proving that the bonus is not being overtaxed.
Source: By Ron Warren (Tax breaks)