FAQ - 11 November 2015
11 November 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Am I classifying a lump sum correctly as a severance benefit?
Q: As a result of dispute one of our directors will be leaving employment and could be paid a severance package. To be fully compliant, I need to ensure that we have sufficient grounds to categorise the payment as a severance pay.
A: You say that the employee will be leaving employment due to a dispute and then also that it is severance pay. It is a severance benefit that enjoys special tax treatment (different rates). A payment from the employer after a dispute will not necessarily be a severance payment, unless the person has attained the age of 55. See for instance Interpretation note 26. The fact that he is a director will not be relevant unless he held shares in the company.
Remember that the employer must obtain a directive from SARS and would have to correctly code the amount or describe it on the application for the directive.
In terms of the definition in section 1(1) " ‘severance benefit’ means any amount (other than a lump sum benefit or an amount contemplated in paragraph (d) (ii) or (iii) of the definition of ‘gross income’) received by or accrued to a person by way of a lump sum from or by arrangement with the person’s employer or an associated institution in relation to that employer in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s office or employment or of the person’s appointment (or right or claim to be appointed) to any office or employment, if—
(a) such person has attained the age of 55 years;
(b) such relinquishment, termination, loss, repudiation, cancellation or variation is due to the person becoming permanently incapable of holding the person’s office or employment due to sickness, accident, injury or incapacity through infirmity of mind or body; or
(c) such termination or loss is due to—
(i) the person’s employer having ceased to carry on or intending to cease carrying on the trade in respect of which the person was employed or appointed; or
(ii) the person having become redundant in consequence of a general reduction in personnel or a reduction in personnel of a particular class by the person’s employer,
unless, where the person’s employer is a company, the person at any time held more than five per cent of the issued shares or members’ interest in the company:
Provided that any such amount which becomes payable in consequence of or following upon the death of a person must be deemed to be an amount which accrued to such person immediately prior to his or her death;”
2. Should an employee be taxed on employer provided entertainment i.e. year-end functions?
Q: It is my understanding from the SARS Fringe Benefit guide that there is no fringe benefit on the entertainment/meals for special occasions.Will this include year-end functions for a weekend away, or is there a fringe benefit due to the fact that it is accommodation provided for a weekend, which should be calculated in terms of the relevant formulas?
Will the reimbursement of travel costs (petrol and toll) to the year-end function also be deemed for entertainment on a special occasion on which there is no fringe benefit or should this be included in the 3703 and 3702 fields of the IRP5?
It is further to my understanding that a fringe benefit arises from your relationship with an employer, is it safe to say when spouses are included for entertainment after hours / special occasions this will not be included as a fringe benefit?
A: It is paragraph 8(3) of the Seventh Schedule that no value shall be placed under paragraph 8 on:
(b) any meal or refreshment supplied by an employer to an employee during business hours or extended working hours or on a special occasion; or
The Act doesn’t define ‘special occasion’ and the SARS guide also doesn’t provide any further clarification. A year end function may well constitute such a special occasion, but the employer will of course have to meet the onus of proof in this regard.
Paragraph 8 only deals with meals, etc. Paragraph 9 deals with an accommodation benefit. In terms of paragraph 9(7) no rental value shall be placed under this paragraph on any accommodation away from an employee’s usual place of residence in the Republic provided by his employer while such employee is absent from his usual place of residence in the Republic for the purposes of performing the duties of his or her employment.
And paragraph 16 (1) provides that for the purposes of the Seventh Schedule and of paragraph (i) of the definition of ‘gross income’ in section 1(1) of this Act, an employee shall be deemed to have been granted a taxable benefit in respect of his employment with an employer if as a benefit or advantage of or by virtue of the employee’s employment with the employer or as a reward for services rendered or to be rendered by the employee—
(a) the employer has granted a benefit or advantage (whether directly or indirectly) to a relative of the employee, other than a benefit or advantage in respect of which paragraph 10 (2) (d) applies; or
(b) anything is done by the employer under any agreement, transaction or arrangement so as to confer any benefit or advantage upon any person other than the employee (whether directly or indirectly), and such benefit or advantage, if it had been granted directly by the employer to the employee, would have constituted a taxable benefit contemplated in paragraph 2.
So the benefit enjoyed by a relative may be a taxable benefit for the employee. With regard to the accommodation at the special function it may well be that the employee is absent from his usual place of residence in the RSA for the purposes of performing the duties of his or her employment and that no benefit arises for the employee and relative.
The reimbursement of travel costs (petrol and toll) will be treated as a normal travel allowance or advance and would only not be subject to inclusion (employees’ tax or gross income) if it falls below the rate per kilometre published in the notice (R3,03 for 2016).
Disclaimer: Nothing in these queries and answers 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 answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.