Third Party Returns – Attorneys and Estate Agents, Are You Aware of Future Reporting Obligations?
03 July 2013
Posted by: Author: Bruce Russell
Author: Christel de Preez (Grant Thornton)
The issue whether a bonus provision raised at yearend may be deducted for tax purposes, or treated as a temporary difference and therefore added back in the calculation of taxable income, has always been a contentious one.
Position before 1 March 2013
In terms of the general deduction formula, an employer has always been entitled to deduct salaries and wages incurred in the production of income as a tax deduction.
Variable remuneration, such as commission, overtime and bonuses were deductible by employers, but only if the employer could argue that it had an unconditional legal obligation to pay the variable remuneration, regardless of it actually being paid out to the employee. Leave pay was the exception as it was limited as a deduction until such time when the leave pay was paid by the employer, thereby linking the employer’s tax deduction with the employee’s PAYE liability on the income received.
With bonus provisions there have always been some difficulty in proving that the company had an actual, unconditional liability at yearend.
In Nationale Pers BPK v KBI (1986 (3) SA 549 (A)), the taxpayer attempted to deduct a bonus provision for staff bonuses. The bonuses were only payable to employees after yearend and on condition that they were still in the employment of the company at the time of the bonus payments. The court held that the payment of the bonuses were contingent on a future event and were therefore not deductible and did not constitute expenditure actually incurred at yearend.
However, certain companies have in the past been able to argue that bonus provisions raised at yearend constituted expenses actually incurred, not subject to contingent conditions and were therefore tax deductible. This was typically the case where the bonus would have been paid out regardless of an employee resigning before the bonus payment. These companies would have claimed the bonus provisions raised at yearend as a tax deduction and would have only withheld PAYE from employees on the date the actual bonus was paid to the employee, resulting in a mismatch between the timing of the tax deduction for the employer and the taxability of the income for the employee.
Position after 1 March 2013
In order to address this mismatch between the tax deduction and withholding of PAYE on variable remuneration, section 7B was introduced into the Income Tax Act from 1 March 2013. It is applicable to amounts accrued and expenditure incurred on or after this date.
In terms of section 7B, an employer will now only be allowed a deduction for variable remuneration when it actually pays the remuneration to the employee, thereby aligning the timing of the employer’s tax deduction with PAYE withholding.
Employers should take note that although a deduction may have been allowed in the past where it could have been argued that the bonus provision was an unconditional legal obligation at year end; it will no longer be allowed as a tax deduction until such time as the bonuses are actually paid out to employees.
This could have a significant impact on the companies’ calculation of taxable income, as the bonus provision will now for the first time have to be added back in the tax computation as a temporary difference , which could result in a significant higher taxable income for the year and provisional taxes which have to be paid.
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