Employee Deductions: The Rules for Payroll Taxes 

By Wilna Scholtz, Director, KISCH Tax Advisory

Employers in South Africa are responsible for withholding various taxes from employees' salaries, including:

• Pay-As-You-Earn (“PAYE”)
• Unemployment Insurance Fund (“UIF”)
• Skills Development Levy (“SDL”) 

Reporting and filing requirements include:

• Monthly Declarations (EMP201)
• Annual Employer Reconciliation (EMP501)
• Employee Tax Certificates (IRP5/IT3a)
• Section 7F and Section 6A of the South African Income Tax Act No. 58 of 1962 effect how employers handle employee taxation with regards to retirement fund contributions (section 7F) and medical scheme fees tax credit (section 6A).

Employers are responsible for educating employees about tax-related issues, including inter alia understanding their IRP5/IT3a certificates, their deductions, their benefits and all the implications thereof. A sound understanding of and adherence to payroll tax withholding requirements is necessary for maintaining compliance and positive labour relations.

Increase in the annual earnings threshold: 1 April 2024

On 5 March 2024, the Minister of Employment and Labour announced an increase in the annual earnings threshold from R241 110,59 to R254 371,67, with effect from 1 April 2024. ‘Earnings’ means an employee’s regular annual remuneration before deductions including inter alia income tax, pension and medical, but excluding employer contributions, subsistence and transport allowances, achievement awards and overtime payments.

The earnings threshold is significant because it determines the application of certain provisions of employment legislation including?

1. Employees who earn in excess of the threshold are excluded from certain entitlements and protections under the Basic Conditions of Employment Act No. 75 of 1997 (“BCEA”), including overtime pay, ordinary hours of work, compressed working week, averaging of work hours, meal intervals, daily and weekly rest periods, Sunday pay, night work pay, and pay for public holiday work.
2. Employees who earn more than the threshold must refer disputes relating to alleged unfair discrimination under the Employment Equity Act No. 55 of 1998 (excluding sexual harassment) to the Labour Court for adjudication and are not permitted to refer the disputes to the CCMA for arbitration without their employer’s consent.
3. Employees who earn more than the threshold are excluded from the application of section 198A of the Labour Relations Act No. 66 of 1995 (“LRA”), under which an employee is deemed to be the employee of the client of a temporary employment service (“TES”) if the employee is not performing a temporary service. They are also excluded from the application of section 198B relating to fixed term contracts and the limitations on the use of fixed term contracts, and section 198C relating to part-time employment.

Tax requirements for foreign employers in South Africa: PAYE withholding obligations: 22 December 2023

Effective 22 December 2023, non-resident employers with a permanent establishment (PE) in the country are required to register as employers for employees’ tax (PAYE) purposes and to withhold PAYE from remuneration paid to their employees. This change means that foreign employers need to take greater care to ensure compliance regarding their remote working staff.?These foreign employers are also required to contribute to the SDL and the UIF, regardless of whether the foreign employer has a subsidiary/office in South Africa.?

 Understanding Permanent Establishments (“PEs”)

According to the South African Income Tax Laws, a PE is defined in line with Article 5 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, encompassing a fixed place of business or authority to conclude contracts through employees or agents in South Africa.?PEs form part of the OECD’s efforts to address The Base Erosion and Profit Shifting (BEPS) - ensuring that companies do not artificially extract profits from countries tax free i.e.: that income must be taxed in the country that the function/s is performed in.?

Foreign employers may not realise that their business activities have established a PE in South Africa, which can give rise to unintended consequences including non-compliance and penalties. Consider the following examples:

• A?building?site, a?construction, installation or assembly?project?constitutes a?PE if it lasts more than 12 months.
• If an employee works from their home office in South Africa and has the power of attorney to enter contracts on its behalf and exercises that power of attorney, this can create a PE.
• If significant management functions are carried out in South Africa, this may establish a PE.
• If storage and delivery activities are carried out in South Africa to fulfil of a foreign enterprise’s distribution business (thus, are not auxiliary in nature), this is likely to constitute a PE.

Determining a PE is established requires review of all relevant double taxation agreements/applicable multilateral agreements, as well as a comprehensive understating of the relevant company’s business’s operations in South Africa.?To ensure compliance, entities should:

1. Assess and verify PE status - only PEs are required to register as employers and withhold PAYE;
2. If a PE has been established, the entity must register as an “external company” with the Companies and Intellectual Property Commission (CIPC) to register as an employer with SARS; and
3. If CIPC registration is required, the business must then register as an employer with SARS and perform monthly payroll duties.? 

Employee tax structuring

Tax structuring of employee salaries (or salary sacrifice) is completely legal, as long as the primary purpose is bettering employees’ remuneration after tax. Adopting a cost to company approach to salary structuring is a good way of ensuring that you legally structure employee packages, however, it is important to get the following right:

• A correctly worded remuneration policy that employees are all aware of;
• A correctly worded “cost to company” clause in your employment agreement;
• Any further agreement/s where the employees agree to “salary structuring”;
• All payment advice must correctly reflect the above;
• Your fund rules must be detailed, clear, up-to-date, and correct; and
• All employees must be educated on the above.

Recap: “Deemed employment”

The LRA amendments (specifically section 198A(3)(b)) introduced the concept of “deemed employment” in instances where TES employees, who earn below the threshold, do not perform a temporary service as defined in the LRA. Under these circumstances, such employee is “deemed to be the employee of that client and the client is deemed to be the employer” (unless relating to fixed-term contracts – see the LRA). The client/employer is then under an obligation to ensure that the employee/s are fully integrated into the workplace and the employees are deemed to be employed on an indefinite basis by the client/employer (so the TES is no longer considered to be the employer after the three-month period has expired).

In Assign Services (Pty) Limited v National Union of Metalworkers of South Africa and Others (CCT194/17) [2018] ZACC 22 (26 July 2018), the Constitutional Court held that, after the expiry of the three-month period, the client becomes the sole employer of the TES employee and the TES is considered to be the employer of the placed employee only until the employee is deemed to be the employee of the client, at which point the TES ceases to be considered as the employer of the placed employee. The judgment applies to TES employees earning below the BCEA earnings threshold and TES employees who are employed on a fixed-term basis, but it does not apply to “substitute” employees or fixed-term contract employees. The judgment also applies retroactively - three months after the commencement of the Labour Relations Amendment Act 6 of 2014 (came into force on 1 January 2015).

If you have any queries on the above or require any tax advice, please contact:

Wilna Scholtz 
Director
KISCH Tax Advisory 
+ 27 83 265 2573 
Wilnas@kisch-ip.com