The dos and don’ts of Salary Structuring
22 December 2009
Posted by: Author: Ron Warren
The dos and don’ts of Salary Structuring
Eight ways to structure your salary and get tax advantages
The days of gaining significant tax advantages from salary structuring with subsistence allowances,and the like, are gone—and only certain items can be legally taken as components of a total salary package.
SARS has tightened the law so that it is impossible to gain a tax advantage by structuring a subsistence allowance for those spending time away from home on business as a package component, unless some stringent accounting procedures are put in place, which most employers would not be willing to do.
The practice is still flourishing among some so called ‘independent contractors’ working through labour brokers, and employers don't realise that they are breaking the law until they suffer a PAYE audit.Then, when such practices are unearthed, the employer has to pay SARS the PAYE they thought they were saving the employee, plus a penalty of 210%, plus interest.Legal components of a salary package
The items that can legally be taken as components of a total salary package are:
•The employer's contribution to a pension fund, which must be calculated in accordance with the pension fund rules.
•The employer's contribution to a provident fund, which must also be calculated in accordance with the rules of the provident fund.
•A travel allowance, if the employee uses their private car or motor bike for business purposes.
•If the employee works at a fixed location where there is a canteen,a fixed amount to cover the cost of their meals at the canteen in a month.
•If there is no canteen, the monthly cost of sandwiches or other portable food to be supplied by the employer everyday. It is important that the employee consumes this food at the place of work, and not at the lace where it is bought.
•The estimated cost of the private usage of a PC or desktop computer or other related equipment which the employee owns and which is used mainly (i.e.more than 50%) for business purposes.The employer can pay the full cost of using them(including on line connection and usage) free of tax to the employee.
•If the employee owns a cellphone which is used mainly(more than 50%) for business purposes, let the employer take it over and pay for it free of tax to the employee, and the estimated cost of the private use of the cell phone can be taken as a package component.
•For a professional person, the payment of annual fees to a professional association by the employer, provided that the necessity to belong to such an association is made a condition of service.
The don'ts of salary structuring
Note that there is no tax saving achieved by asking for an employee's medical aid contribution to be paid by the employer as a package component,as the employee's tax payable remains the same whether the employer or the employee pays that contribution.
There is also no point in asking the employer to pay for items which are taxable fringe benefits,such as an employee's UIF contribution, or the employee's PAYE. This is because such items are regarded as the employer paying a debt due by the employee,which is a fully taxable fringe benefit. The only items an employer should be asked to pay are for items which are not taxable as a fringe benefit, most of which have been given above as package components.
Don't pay a car / travel allowance unless the employee is genuinely required to use a private vehicle for business purposes, and even then don't pay an allowance that is clearly excessive in relation to the amount of business usage.
In the event of a PAYE audit,SARS can estimate what a genuine car/travel allowance should be in the circumstances of each case, and any amount paid in excess of that estimate will be deemed to be a hidden salary.The employer will have to pay the difference between the PAYE that should have been deducted on this hidden salary and the amount actually deducted on only 60% of the allowance, plus a penalty of 210% and interest.
From March 2010 80% of a car/travel allowance will be subject to PAYE, and not just 60% as at present.Also from that date, the full amount of any medical aid contribution paid by the employer will be taxed as a fringe benefit. At present, the value of the fringe benefit can be reduced by the monthly cap amount allowed to a taxpayer against medical aid contributions (R625 for the member, R625 for the first dependant, and R380 each for additional dependants).
How SARS views salary structuring
Provided that the salary structuring is done as components of a total package, it is acceptable to SARS. However, the make up of the package must not be changed at intervals of less than a year(normally when an increase is given), unless there is a compelling reason for the change.
If a normal salary is paid (not a total package) and the salary is reduced by the equivalent of what would be a package component in a total package, SARS will probably regard it as tax evasion.There is a long history of court cases on this subject, and it is not worth taking a chance that SARS will accept the salary reduction.
Source: By Ron Warren (Tax breaks)