Employees Tax Tax considerations

1
Employees Tax Tax considerations best
practice
Presented By Jerry Botha April 2005
2
Overview

• Amendments in Budget Speech 2005/06
• Practical implications with examples
• SARS audit focus and travel allowances two tier
  approach
• Best practice on who qualifies for travel
  allowances
• Quantification of the travel allowance for
  qualifying employees
• Best Practice for non-qualifying employees
• Company vehicles structured as part of package

3
Overview

• Miscellaneous matters important to effect legal
  structuring
• Conclusion on travel
• 10 Employees Tax Exposures Successfully Attacked
  by SARS
• Share Scheme Amendments
• Considerations when deciding on an incentive
  scheme

4
WHAT IS A TAX LOOPHOLE?

• A tax loophole is something that benefits the
  other guy. If it benefits you, it is tax reform
• Russell B. Long

5
WHAT IS TAX REFORM?

• Tax reform is taking taxes off things that have
  been taxed in the past
• and putting taxes on things that havent been
  taxed before
• Art Buchwald

6
Budget Speech 2005/06

• Brief synopsis
• Anticipated clampdown on those not doing
  legitimate business mileage
• By readjusting the deemed split between business
  and private mileage
• By revising the table of deemed vehicle expenses
• PAYE remains at 50 on a monthly basis

7
Budget Speech 2005/06

• Deemed mileage
• 14000km private use 16000km from 1 March 2005
  and 18000km from 1 March 2006
• The upper split between business and further
  private mileage remains at 32000km

8
Budget Speech 2005/06

• Deemed fixed costs
• A vehicle is regarded as having a 30 residual
  value after 5 years
• Deemed fixed costs are now limited to a vehicle
  costing R360,000.00
• Example someone who does a total of 20000km per
  year, 30 of overall costs of vehicle as a
  business expense. In the coming year this
  percentage will be reduced to only 20 and in the
  next year only 10

9
Budget Speech 2005/06

• Deemed fuel and maintenance costs
• Deemed fuel and maintenance have finally been
  adjusted to incorporate inflationary changes
• This effect is diluted by the simultaneous
  decrease in the deemed fixed costs

10
Budget Speech 2005/06

• Company vehicle
• Taxation of deemed private usage has been
  increased from 1.8 to 2.5 with effect next
  fiscal year. Second vehicles remain unchanged at
  4

11
SARS Audit Focus Travel Allowances

• Purpose Tax assessment for under-deduction of
  PAYE
• Plan A
• Lets attack the quantum of the allowance
• Interpretation Note 14
• Fixed allowances limited per grade or all
  employees allowed to structure?
• Defence for prior years

12
SARS Audit Focus Travel Allowances(continued)

• Plan B
• Lets determine whether the allowance as
  envisaged by section
• 8(1)(c)
• Contracts of employment
• Remuneration policy
• Reimbursement policy

13
Best practice for those who qualify

• Business travel with a private vehicle must be a
  term and
• condition of employment
• Part of contract of employment
• Supported by remuneration policy reimbursement
  policy
• Reiterate in cost-to-company allocation schedule

14
Best practice for those who qualify(continued)

• Documentation to ensure appropriate sign-off
• - The fact that employees duties require travel
  allowance and
• - Quantum of the allowance verified.
• - Active enforcement as terms and condition.

15
Quantification for employees who qualify

• Travel calculator

16
Employee Education

• When do I qualify for a travel allowance?
• What is the allowance that I may be entitled to?
• What car should I buy?
• How will the value of the vehicle and distance
  influence my claim?
• Should I keep a logbook?
• What should my claim be the end of the tax year?
• When will I have to pay tax in or be refunded?

17
Remember

• The income tax created more criminals than any
  other single act of government
• Barry M. Goldwater

18
Non-qualifying employees

• Should not be granted a travel allowance or
• Where they are granted should not be taxed and
  disclosed as travel allowances envisaged by
  section 8(1)(c).
• Beware
• Labour law considerations (incl. practices with
  new employees) and
• Compensation benefit equality vs. Risk.
• Do not assume the Risk

19
Non-qualifying employees(continued)

• Beware (continued)
• Directors personal liability
• 200 penalties plus interest
• Criminal sanction and
• Custodians of Governance.

20
Non-qualifying employees (cont.)

• Plan the impact
• Impact on their take-home pay
• Retirement funding and
• Death disability, etc.
• Proper communication includes
• Letter notification with reasons for the change
• Backed by technical explanation
• New take-home pay and
• Allow opportunity to consult but remember This
  is the law
• Offer company vehicle as an alternative ?

21
Company vehicle structured

• Business usage is not absolute requirement
• Think of this as medical aid
• Company assumes a contractual responsibility and
  contracts this out to a third party
• This third party will manage the provision of the
  benefit in accordance with agreed rules
• Provider assumes risk and administrative burden

22
Company vehicle structured(continued)

• We advocate allowing choices with little downside
  for employer
• Employee must investigate whether this suites
  personal requirements
• Well-developed products by Banks, Avis, Imperial
  etc and
• Accounting treatment operational lease
  possible.

23
Miscellaneous matters to effect legal
structuring

• Term and condition of employment
• Cost-to-company methodology Ensures pre-accrual
  allocation of entitlement
• Proper conclusion and consistency of all
  documentation and
• Company vehicle ensure that employer provides a
  vehicle that employee may use privately.

24
Conclusion

• Strict enforcement of good travel allowance
  policy
• Who qualifies and
• Quantum of their allowance
• Company vehicle structured ?
• Employee education
• Is Human Resources accepted as custodians of Good
  Governance?

25
Support for those who feeling lost now

• The hardest thing to understand in the world
  is the income tax
• Albert Einstein

26
10 Employees tax exposures

• Integrated audit vs. Specialist teams
• Except more than one investigation
• Hot topics
• - Company assets required by employees who had
  the use thereof before security provided to
  employees
• - Medical aid investigation into non-medical aid
  portions (questionnaire?)
• - Subsistence structured

27
SARS investigations (continued)

• Labour brokers and personal service companies
• Regular payments to independent contractors
• Retirement funding contributions aligned with
  contracts and rules
• Detailed cashbook review
• Travel allowances
• Remuneration committee minutes and
• What is in your employment files?.

28
Section 8C

• Any right obtained before 26 October 2004
• Concept of vesting. When ?
• Acquire unrestricted equity instrument
• Restricted equity instrument becomes unrestricted
• When dispose of a restricted equity instrument
• When it is an option that terminates
• Before taxpayer dies

29
Section 8C

• Restricted defined
• Not being able to freely dispose
• Forfeiture
• Person retains right to impose restriction and
• Any stop loss provision.
• Rule of thumb?
• When transaction becomes 100 arms length then
  tax event occurs

30
Share Schemes Tax Treatment
Individual Marginal rate on full (net) value
gain on exercise/ maturity
Company Deduction not allowable as company, in
issuing, has not incurred an expense (Dilution)
Company Deduction allowable if subsidiary (SPV)
has acquired in open market. (No dilution)
Company Deduction allowable as company has
incurred an expense
Individual - equity settled CGT on subsequent
share disposal
31
Share Schemes Accounting Decision Tree
Performance Based
Share Based
Appreciation Units
Performance Units
Deferred Bonus
Share Appreciation Right
Performance share
Share Option
Phantom Unit
Equity Settled
Cash Settled
Equity Settled
Cash Settled
Equity Settled
Equity Settled
Cash Settled
IFRS2- Equity settled Fair value _at_ grant date,
vesting period spread, adjustment only for
non-market factors
IFRS2- Cash settled Initial fair value _at_ grant
date, subsequent fair value adjustments until
exercise
32
Strategic Design

• Conceptual design
• Allocation and vesting methodologies
• Legal formulation of rules for schemes trust
• Accounting treatment
• Tax treatment
• Administration system
• Implementation
• Communication

Communication
Allocation
Share Scheme / LTI
Scheme Rules
Implementation Administration
Taxation
33
Best Practice?

• Vest immediately or very late?
• Executives vs. Normal employees
• Deferred delivery still workable if no stop
  loss? and
• Certain classes of preference shares are not
  equity share capital and hence 8C is not
  applicable.

34
QUESTIONS