Does the definition of ‘variable remuneration’ in section 7B of the ITA include profit sharing?
16 February 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: We would
appreciate clarity on section 7B of the Income Tax Act (ITA), pertaining to the
timing of ‘variable remuneration’ that shifted from an accrual basis to a
payments basis, effective 1 March 2013. Specifically that income should to be
included in taxable income when it accrues to an employee and be recognised as
a tax deduction in the hands of the employer on the date during the year of
assessment when the amount is paid to the employee by the employer.
After reading the
whole of section 7, and particularly with reference to ‘variable remuneration’,
would we be correct in concluding that profit share is not included in the
definition of ‘variable remuneration”? The profit share we are referring to
does not form part of the remuneration package of the members/directors.
financial year-end when financial statements are prepared, profits may be allocated
to members/ directors. The allocation of such profits has been recorded and
taxed in the same financial year.
In the light of
the shift to a payment basis as per section 7B(2), if profit share were to form
part of ‘variable remuneration’ as defined, such profit allocation would become
taxable in the hands of the member/director when it is paid, and only recognised as a tax deduction for
the CC/company in the subsequent year.
A: As noted section 7B applies to any bonus, commission or overtime
contemplated in the definition of "remuneration” in the Fourth Schedule (Sch)
ITA. It is our view that "profit share” can be done in various ways and would
be facts dependent as to whether it falls within the scope of section 7B ITA.
In our view if the "profit share” is paid as a bonus under IRP 5 code 3605,
then it would fall within the ambit of section 7B. If it is paid as directors
remuneration under IRP 5 code 3615 it would not fall within the provisions
The nature of the
amount and its disclosure would depend on the legal terms between the company
and the member/director in respect of such payment. In respect of directors of
private companies a separate taxing regime applies in para 11C Fourth Sch ITA
which in effect takes consideration of these amounts paid after year end to
determine any employees’’ tax withholding during the following tax year.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.