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Streamlining the timing for certain forms of variable remuneration

09 May 2013   (0 Comments)
Posted by: Author: Chris Basson
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Source: Chris Basson

This article deals with remuneration, specifically the new section 7B and the repeal of the old section 23E.

As most of us know, and for some who do not deal with tax matters that often, gross income includes all income "received or accrued” as stated in section 1 of The Income Tax Act. For an amount to constitute gross income the following elements must be present:

  • Total amount
  • In cash or otherwise
  • Received by or accrued to
  • Not of a capital nature
  • From a source within the Republic in the case of a person other than a resident.

Hence gross income includes all income received or accrued to an individual in respect of employment, and more specifically, "remuneration” paid by an employer to an employee. "Remuneration” is an expansive concept, covering salary, overtime pay, leave pay commission and bonuses, benefits-in-kind, amongst other employment-related income. 

In terms of the general deduction formula (section 11(a) of the Income Tax Act), an employer carrying on a trade is entitled to a deduction in respect of "remuneration” expenditure incurred in the production of income. However section 23E set a limit on the amount an employer could deduct under section 11(a) in respect of leave pay. Under that limitation, deductions were limited to the extent that the amount is actually paid or becomes due and payable by the employer. Employee income was deemed to have accrued on the same date, thereby ensuring a timely matching of employer deductions and employee income. 

In light of the above, amounts received by or accrued to the employee under "remuneration” are subject to employees’ tax (known as the pay-as-you-earn [PAYE] system of taxation). PAYE is based on the "remuneration” that the employer "pays or becomes liable to pay” to an employee in a certain month. PAYE requires the employer to withhold a calculated amount of tax on a monthly basis and the employer is then required to transmit the tax to SARS within seven days after the end of each month.  

More often than not, the accrual of a salary-related amount to an employee and the actual payment by the employer occur within the same month (e.g. basic salary and wages). However interpretation problems regarding the timing of accrual frequently arise with regard to variable "remuneration” (e.g. commissions, bonuses and overtime pay). For example, variable "remuneration” often accrues prior to payment because the amount is often left undetermined by close of the month. The delayed determination is often due to a lack of time (payroll cut-off) or internal controls.  

Furthermore, an accrual may be subject to a suspensive condition. This may arise where an employer has discretionary powers to determine the size or date of payment of a bonus.The determination of whether the bonus contains a suspensive element can only be determined by closely examining the facts of each case (including the employment agreement). An erroneous taxpayer-finding that a suspensive condition exists (where no suspensive condition actually exists) could easily result in an under declaration of PAYE.

Regardless of the reason, the net result is a differential between payment and accrual that may be separated by a few weeks/months. While employers should theoretically go back and correct the prior month’s withholding, this form of correction is difficult (if not impossible) as a practical matter:

First of all most employers make use of a payroll system that calculates PAYE on a cash-payment assumption. Only employers with specific capacity (expertise) would more than likely be able to make adjustments after the prior month’s withholding has been captured.  

Secondly, monthly adjustments are time consuming and costly from both an employer and a SARS point of view, particularly in the case of large employers with thousands of employees. The necessary adjustments can typically be made only during the annual payroll reconciliation process, thereby leading to additional penalties and interest for employers. 

A recent provision was inserted into the Income Tax Act and became effective on 1 March 2013, namely section 7B. Section 7B replaces the old section 23E. From a policy perspective, it is preferable to have a tax system that allows for the timely matching of the withholding obligation and the inclusion in the employee’s income. 

From now on the employee’s "gross income”, required PAYE withholding and employer deductions will be closely aligned. Rather than just adjust core principles and create unintended and unnecessary consequences, the alignment will only be required for items that have a history of causing recurring problems.  These problems may include: leave pay, over-time pay, commission, bonuses and travel reimbursement. 

Under the revised framework, the timing of the listed items will shift to a payment basis. Mere accruals and incurrals will be disregarded. In other words, the tax events for these items will be deemed to occur only when the underlying amount is paid by the employer to the employee for purposes of determining:

(i) Employee gross income
(ii) PAYE withholding, and
(iii) Employer deductions.

Hopefully the new section 7B will alleviate the problems that employers might have had with the PAYE system before 1 March 2013. Mere accruals and incurrals will be disregarded. From a practical perspective, this change poses to streamline the timing for certain types of variable remuneration and should alleviate the need for complex interpretation (thereby reducing the number of unintended SARS-taxpayer disputes) and PAYE mismatches without violating the integrity of the tax system overall. 

List of References

National Treasury. 2012. Explanatory Memorandum On The Taxation Laws Amendment Bill. Pretoria.


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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