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A Brief Guide to Tax Filing

24 July 2017   (0 Comments)
Posted by: Author: Rob Cooper
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Author: Rob Cooper (robcooper@@sage.com)

Rob Cooper provides a basic guide to orientate yourself with your IRP5 and ITR12 forms by applying method to the seeming madness.

 

Most people do not realise that work is being done on their taxes not only once a year when SARS demands a return, but weekly. This often takes the form of payroll systems which assist employers with the calculation and withholding of PAYE from remuneration on a weekly or monthly basis during the course of the tax year. Then, at the end of the tax year, the payroll reports the financial totals for all employees on tax certificates. The tax certificate (i.e., your IRP5 form) is then used to complete the ITR12 annual return (i.e., the form you access on eFiling) which determines the final amount of assessed income tax payable by or refundable to you.

 

Remuneration during the tax year can be seen as an estimate of income at the end of the tax year and PAYE is an advance payment towards the final income tax amount.

 

The tax certificate provides the bulk of the information that informs the ITR12 form. However, the sometimes-complex work comes about when you (or your tax practitioner) complete the assessment and find that some information must be changed before it is submitted as a final declaration. For example, under certain circumstances, deductions can be claimed. This complex process can be further complicated by the fact that individual taxpayers are generally not familiar with the IRP5 codes stated on the tax certificates.

 

While the full range of complexities falls outside the scope of this article (some of them are dealt with in other articles in this issue), you will hopefully find this overview helpful.

 

What information must your employer provide to SARS?

 

Employers are required to record financial data for all employees for the tax year and to submit this data to SARS. This is almost impossible to do manually and the vast majority of employers use a computerised payroll system to perform this task.

 

At the end of the year, the payroll system creates a file which contains all the information required by SARS. In summary, this file contains the following categories of information (supplied in a layout prescribed by SARS in its PAYE Business Requirement Specification):

 

·         Employer details (basic identification details, registration numbers, and so on)

·         Employee demographic (non-financial) data

·         Employee financial data

·         Totals for validation and control purposes

 

The file created by the payroll system is imported into the SARS e@syFile Employer system. Once all the tax certificate information has been imported into e@syFile, the employer can reconcile its PAYE, unemployment insurance fund (UIF), skills development levy (SDL) liabilities, and, if applicable, the employment tax incentive (ETI) against the actual payments made during the tax year on a form called the EMP501 employer reconciliation declaration. The EMP501, and all the accompanying tax certificates, are submitted to SARS electronically via eFiling when e@syFile Employer and eFiling is synchronised.

 

The tax certificate information supplied by employers via e@syFile and eFiling is then used by SARS to populate your individual tax return (the ITR12 form) on the income tax system. If an employee was employed by more than one employer during a tax year, each tax certificate issued by each employer will be populated on a separate page in the tax return. If the employer provided incorrect tax information, the taxpayer cannot change the tax certificate information themselves. This can only be done by the employer when the employer resubmits a replacement tax certificate.

 

However, individuals can claim allowable deductions against some of the income codes on the ITR12 tax return by selecting the relevant deduction fields in the tax return wizard (i.e., the first page of the tax return).

 

A look at the key items and deductions

 

Travel allowances

Travel allowances are widely used, generally misunderstood and often incorrectly applied. It is an extremely complex area of remuneration and is unfortunately often abused. (A more in-depth article on travel allowances can be found on page 54.)

 

An employer, subject to the travel compensation policy, can grant a travel allowance to an employee who travels for business purposes in a privately-owned motor vehicle. This is normally a fixed monthly amount, estimated by the employer to be in line with the anticipated business travel expense value.

 

The employer must withhold PAYE from 80% of the allowance, unless the employee uses the vehicle at least 80% of the time for business purposes, in which case PAYE may be withheld from 20% of the allowance. The full (100%) value of the allowance is reflected against IRP5 code 3701 on the employee’s tax certificate, irrespective of whether PAYE was withheld on 20% or 80% of the allowance.

 

Normally, the employee will pay for all (i.e., private and business travel) running costs and fuel for the privately-owned motor vehicle. However, some employers grant their employees the use of the company’s petrol or maintenance credit card to pay for fuel and running expenses. These amounts paid by the company are an additional travel allowance amount and must be taxed as such in the payroll and reported on the tax certificate against IRP5 code 3701.

 

On assessment, the IRP5 code 3701 allowance is included in the taxable income of the individual, but business travel expenses can be claimed against the IRP5 code 3701 amount.

 

A logbook that records the business kilometres travelled is necessary to substantiate this deduction. The actual expenditure or the deemed expenditure can be claimed as a deduction, but is limited to the actual allowance amount.

 

Note that, if business kilometres are not claimed, 100% of the travel allowance will be included in the taxable income and will be subject to income tax. The payroll would have withheld PAYE on either 80% or 20% of the allowance, resulting in 20% or 80% being taxed on assessment.

 

In order to claim business travel expenses against the IRP5 code 3701, the individual should select the following block in the wizard:

 


 

Reimbursive travel allowances

 

If an employer reimburses an employee for business kilometres travelled, no PAYE needs to be withheld on the payroll, irrespective of the amount which is paid per kilometre. Note that there is some dispute on this matter and we are waiting on amendments to the law to clarify this.

 

The reimbursement is reflected against IRP5 code 3702, if:

 

  • The rate of reimbursement exceeds the prescribed rate; or
  •  More than 12 000 business kilometres are reimbursed in the tax year; or
  • A travel allowance is paid in addition to the reimbursed amount; or
  • The reimbursed value is more than the prescribed rate per kilometre multiplied by 12 000 km.

 

The reimbursement is reflected against IRP5 code 3703, if:

 

·         The rate of reimbursement does not exceed the prescribed rate; and

·         Up to 12 000 business kilometres are reimbursed in the tax year; and

·         A travel allowance is not paid in addition to the reimbursed amount; and

·         The reimbursed value is less than the prescribed rate per kilometre multiplied by 12 000 km.

 

The amount reflected against IRP5 code 3703 is not assessed and no deduction is allowed against it.

 

The amount reflected against IRP5 code 3702 is added to the travel allowance (code 3701) amount on assessment and the total is treated as a travel allowance. The individual is taxed on the full amount (remember, there was no PAYE withheld from the reimbursement), unless a deduction is claimed by submitting a logbook which specifies the business kilometres travelled.

 

The individual can claim a deduction based on the actual costs for business travel or claim a deduction based on the actual business kilometres travelled multiplied by the deemed costs per kilometre, as determined by SARS.

 

The same block as used for IRP5 code 3701 (travel allowance) should be selected in the wizard to claim against this code.

 

Subsistence allowance

To qualify for a subsistence allowance benefit, the employee must spend at least one night away from his or her usual place of residence for business purposes.

 

The allowance, which is deemed to be spent for business travel within South Africa, is R122 per day for incidental expenses and R397 per day for meals and incidental expenses. If the employee travels outside the borders of South Africa, the employer needs to consult the SARS website for a list of the deemed expense limits for each country in the world.

 

An employer may pay more than what is prescribed by SARS, but should consider the potential tax implications.

 

Subsistence allowances are reported as follows on the tax certificate:

 

 

The amounts reflected on code 3704 and 3715 will be included in taxable income and subsequently taxed if the individual does not indicate that he or she indeed travelled for business purposes to receive the tax benefit. The deduction which may be claimed is either the rate which is deemed to be spent according to SARS (as mentioned above) or the actual costs.

 

The expenses claimed for local travel must be reflected as IRP5 code 4017 in the “Other Deductions” section of the return and, for foreign travel, the expenses to be claimed must be reflected as IRP5 code 4019 in the “Other Deductions” section of the return. These fields are only created if the “Other Deductions” option has been selected in the wizard.

 

Medical aid tax credits

If contributions are made to a medical scheme, the payroll takes the monthly medical tax credits into account, before calculating PAYE. (For an in-depth article on medical expenses, turn to page 52.)

 

For the 2017/2018 tax year, the medical tax credits are R303 for the main member, R303 for the first dependant and R204 for each additional dependant.

 

If the medical aid contribution is not administrated through the payroll, an employee may provide the employer with proof that he or she is contributing to a medical scheme in his or her private capacity. The employer can then decide whether to apply the medical tax credits on a monthly basis in the payroll. Alternatively, these tax credits can be claimed by the individual on the income tax return.

 

The following are the tax certificate codes in respect of contributions to a medical scheme. Note that the fringe benefit (employer contribution) is reflected against IRP5 code 3810 and IRP5 code 4005 because it is deemed to be an employee contribution and subsequently a medical expense.

 

                                                                                  

In addition to the medical tax credits in respect of contributions to a medical scheme, employees are entitled to an additional medical expense tax credit.

Payrolls are allowed to calculate this additional medical expense tax credit for 65-year-old and older employees and it is reflected on the employee’s tax certificate against IRP5 code 4120.

On assessment, the block “Did you incur any medical expenditure” must be selected in the wizard.

 

Even if the employer applied the medical tax credits, the number of medical aid dependants must be indicated per month, otherwise SARS will disregard the medical tax credits which will result in income tax being calculated.

 

The individual must also indicate his or her total medical expenses to claim for additional qualifying medical expenses.

 

Where the medical contributions were not deducted through the payroll, the total amount of the contributions paid by the individual must be completed against IRP5 code 4040 and, where the contributions were deducted through the payroll, a zero must be completed in this field as SARS will use the amount indicated under IRP5 code 4005 for calculation purposes.

 

Remuneration earned while working in a foreign country

 

The income earned for services provided outside of South Africa for a period exceeding 183 days, of which at least 60 days are continuous, is exempt from income tax in South Africa. Some South African employers apply the exemption, while others prefer to withhold PAYE from the employee’s remuneration. (An insightful article on page 68 takes a deeper look at this complexity.)

 

Irrespective of whether the employee is entitled to the exemption or not, the remuneration earned in the foreign country must be reflected against IRP5 code 3651 and not against IRP5 code 3652, as believed by some. This is clearly specified in the SARS PAYE Business Requirement Specification.

 

The remuneration reflected against IRP5 code 3651 will not automatically be exempt from income tax. The individual must indicate that remuneration was earned in respect of services rendered in a foreign country and, if all requirements are met, the exemption will be granted. There seems to be some misunderstanding that the exemption will automatically be applied. If the question “Did you receive remuneration for foreign services rendered?" is not indicated as “Y”, then the exemption will not be granted.

The tax return requires that the periods that the individual worked outside South Africa are completed to determine whether the individual qualifies for the exemption.

 

Note that the 2017 budget proposed changes to these provisions to prevent double non-taxation and these amendments will no doubt unfold during the course of the 2017/18 tax year.

 

Retirement annuity

 

From 1 March 2016, deductions, subject to specified limits, have been allowed if contributions are made to any retirement fund, including pension, provident and retirement annuity funds.

 

Pension and provident fund contributions are always administered in the payroll and, therefore, the allowable deduction is applied by the payroll.

 

A retirement annuity fund can either be paid directly by the employee or it can be administrated through the payroll. If the contribution is administrated through the payroll, the deduction is applied on a monthly basis. The contribution towards the retirement annuity fund is reflected against IRP5 code 4006. This code includes the employee’s contribution as well as the fringe benefit, if the employer contributes on behalf of the employee.

 

If the contribution is not administrated through the payroll, the tax deduction may be applied at the discretion of the employer. The fringe benefit is deemed to have been paid by the employee.

 

On assessment, the block “Did you make any retirement contributions for the benefit of yourself?" must be selected in the wizard for claiming purposes.

 

Even if the contribution is reflected on the individual IRP5 form againstIRP5 code 4006 and the individual received the tax benefit on the payroll, the individual must still claim the deduction again on eFiling. The tax deduction is not automatically applied on assessment.

 

Thus, ensure that the “Did you make any retirement contributions for the benefit of yoursef?" is indicated as “Y” and that the full contribution amount is entered against IRP5 code 4006 on the ITR12.

 

 

IT34 personal assessment

 

Once deductions have been claimed, the IT12 is submitted to SARS. An IT34 assessment is then generated indicating whether the taxpayer owes SARS or whether a refund is payable by SARS.

 

Please click here to complete the quiz.

 

This article first appeared on the July/August 2017 edition on Tax Talk. 


 

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