The payment of income tax

Highlights
Income tax is generally paid at interim periods over the relevant tax year depending on the type of taxpayer.

Taxpayers classified as provisional taxpayers are required to render provisional tax returns and make payment of provisional tax during the tax year.

Employers paying remuneration to employees are obliged to withhold the correct amount of employees’ tax. This tax may be in the form of PAYE or SITE, or a combination of both.

Provisional tax payments
The nature and timing of provisional tax payments

Provisional taxpayers are required to make three provisional tax payments in respect of each tax year. These payments are usually calculated as follows:

• The first payment is payable six months after the beginning of the tax year and must equal half of the total estimated normal tax liability for the year. The estimate of taxable income for the first payment may not, unless the SARS agrees to a lower estimate, be less than the taxable income for the latest preceding tax year in respect of which an assessment has been issued. Provided that the latest assessment does not precede the current tax year by more than 2 years. In cases where the latest assessment precedes the current tax year by more than 2 years an automatic 10% annual increase is applied to the latest preceding year’s taxable income.
• The second payment is payable on or before the last day of the tax year. The amount payable must equal the total estimated tax liability for the year, less the amount paid in terms of the previous paragraph. If the estimate of taxable income for the purposes of this payment is less than 80% of the taxable income ultimately assessed, a penalty of 20% of the amount underpaid as well as interest will be payable. If the first or second provisional payment is paid late, SARS will impose a penalty of 20% and interest at the prescribed rate. The penalty and interest are not deductible for tax purposes.
  • If the first or second provisional payment is paid late, SARS will impose a penalty of 10% and interest at the prescribed rate. The penalty and interest are not deductible for tax purposes.
• The third payment, which is a voluntary payment, is payable within six months after the end of the tax year. Taxpayers with February year-ends may make the third payment within seven months after the end of the tax year (i.e. on or before 30 September of each year). The taxpayer should estimate the taxable income for the tax year and pay over an amount equal to the total estimated tax liability for the year, less the first and second provisional payments already paid. Should it subsequently become apparent that the third payment was insufficient to cover the ultimate tax liability, the interest can be minimised if the taxpayer makes further ‘topping-up’ payments between the date of the third provisional payment and the date of the assessment, interest at the prescribed rate will be imposed on late payment.

Non-deductible interest will be payable if the estimate is less than the actual liability as finally assessed and the taxable income exceeds R20 000 in the case of a company or R50 000 in the case of any other taxpayer. If provisional payments exceed the liability as finally assessed, taxable interest (currently at the rate of 9.5% per annum (from 1 May 2009) is payable to the taxpayer, if taxable income exceeds the levels specified above or if the tax refundable exceeds R10 000. Overpayments of tax will be refunded.

The submission dates of the first and second provisional “return” is the same as the “payments” dates as specified above. If the return is submitted late a non-deductible penalty of 20% will be imposed on the amount of the actual liability as finally assessed less any tax credits for the year of assessment.

Where the taxpayer can show that the amount of the estimate was not deliberately or negligently understated and was seriously calculated, the penalty may be waived. Similarly, any interest payable may be reduced if the taxpayer can show that there were reasonable grounds for not including any amount or for claiming a deduction, in calculating the estimate of taxable income.

Allocation of interest and penalties
Payments are allocated in the following order:

• first, to any penalty imposed;
• thereafter, to interest, and finally;
• to tax or additional tax.

It can therefore be seen that, where less than the total amount of tax, penalty and interest is paid, a balance of tax will be left outstanding, and interest will therefore continue to accumulate until the capital sum is paid in full.

PAYE & SITE
PAYE
Any employer who pays an employee an amount of remuneration in the form of salary, wages, commission, bonuses, monthly pension, etc. must deduct from the amount so paid employees’ tax (PAYE), in accordance with the PAYE tables. This must be paid over monthly to SARS by the 7th of the month, following the month end during which the tax was deducted, otherwise a penalty of 10% may be imposed together with interest at the prescribed rate. Furthermore, additional tax of up to 200% can be levied where SARS believes an employer has evaded their obligations to deduct PAYE on remuneration paid to their employees.

Where the employer is a company, SARS can recover unpaid employee’s tax, interest, penalties and additional taxes from the directors and shareholders of the company that controls, or is regularly involved in, the management of the company’s financial affairs.

Tax must be deducted on the gross amount of salaries paid, plus the taxable value of fringe benefits (but including only 60% of a travel allowance), less contributions to a pension fund and retirement annuity fund, provided that proof of the retirement annuity fund contributions is made available to the employer. Employees can also take account of premiums paid in respect of an insurance policy that covers the employee against loss of income as a result of illness, injury, disability or unemployment.

No other deductions may be taken into account in the determination of the tax to be withheld unless a suitable directive is obtained from SARS.

Where an employer pays commissions to employees, the tax tables issued by SARS must be used, unless the employee presents an original and valid tax directive to the employer.

Where a person is retrenched, the employer should obtain a tax directive confirming that the amount paid to the employee upon retrenchment is exempt to the extent of R30 000 (less any amount previously so exempted) in accordance with Section 10(1)(x) of the Income Tax Act, any excess being taxed at the average rate in terms of Section 7A (4A) of the Act.

These directives will be granted where:

• the employer has ceased to carry on or intends ceasing carrying on the trade in respect of which the person was employed; or
• the person has become redundant in consequence of the employer having effected a general reduction in personnel or a reduction in personnel of a particular class.
  
  

It must be remembered that the retrenchment exemption is not available where the retrenched person:

• was at any time a director of the company; and
• at any time held more than 5% of the issued share capital (or members’ interest in the case of a close corporation).

The exemption will apply to any lump sum paid upon the person’s retrenchment, together with any leave pay owing to the person in question.

Persons over 65 years of age at the end of the tax year must advise their employer accordingly so that they can be granted the ‘over 65’ rebate.

Directors of private companies
PAYE is payable by directors of private companies and members of close corporations. However, the PAYE rules differ somewhat from those applicable to other employees in that the directors’ remuneration subject to PAYE is not necessarily based on the current salary in order to recognise that, very often, the remuneration of such directors is determined only after the end of the company’s financial year.

The legislation thus applies as follows:

• During any current year, the director is deemed to have received remuneration on a monthly basis based on the previous tax year’s remuneration. For example, the remuneration for August 2009 would be the remuneration receivable for the year ended 28 February 2009 divided by the number of months he or she was employed in that year.
• The deeming rule will not apply where the director of a private company derives 75% or more of their remuneration from fixed monthly payments (that is so-called salaried directors that are not owner managers).
• Where the previous year’s remuneration is not yet known, the remuneration for the previous financial year - in this example 29 February 2008 - plus 20% (or such other percentage as the Minister may from time to time determine by notice in the Gazette) is used.
• If the remuneration has not been determined for that previous financial year, the company must request a directive from the South African Revenue Service.
• If by the last day of February of any year the director’s actual salary (including bonuses) is known, then the actual PAYE for the year ending on the last day of February of that year must be calculated correctly and deducted (resulting in a possible ‘top-up’ PAYE deduction in that month).
• Unlike with ordinary employees, where the PAYE withheld represents the employee’s liability, but is the employer’s responsibility to withhold, the liability for directors PAYE is actually placed on the employer which then has a right of recovery against the director. However, if the company fails to exercise that right the PAYE paid may not be included in the director’s IRP 5 certificate.

With effect from 1 March 2006 a director of a private company is not regarded as a provisional taxpayer. This status will be dependent on whether they have other sources of income. However, if their remuneration is finally determined only after the end of the financial year, they will still be required to make their third or ‘top-up’ provisional tax payment at the end of September.

SITE
Employees who derive earnings in the form of salaries, wages and pensions are only subject to SITE, which is a component of PAYE, where remuneration does not exceed the rate of R60 000 per annum. In such cases the employee is not obliged to register as a taxpayer or render a tax return unless he or she either receives a travelling allowance or derives interest in excess of the exempt amount, rental or other income which is not subject to SITE.In the 2009 Budget Speech it was proposed that SITE be done away with by the 2011 year of assessment. In the 2009 Budget Speech it was proposed that SITE be done away with by the 2011 year of assessment.

Taxpayers earning up to R120 000 per annum that have a single employer and no additional income or deductions, are no longer required to submit an income tax return. These taxpayers are liable to register themselves.

An annuity received from a retirement annuity fund is subject to PAYE and not SITE, regardless of the amount. Any person receiving such an annuity will be obliged to register for tax purposes and submit a tax return. While it has been held by the Cape High Court that a ‘living annuity’ is a return of capital to the policyholder, SARS has indicated its intention to ‘clarify’ this by the insertion of a definition in the Pension Funds Act.

It is important to note that there is personal liability attached to certain employers, representative employers, shareholders and directors, where the employer or representative employer has failed to deduct or withhold employees’ tax or where employees’ tax has been deducted or withheld but not paid over to SARS within the required period. Where an employer is a company, every shareholder and director who controls or is regularly involved in the management of the company’s overall financial affairs shall be personally liable for the employees’ tax, additional tax, penalty or interest for which the company is liable.