Structuring your salary package is not about reducing your tax but rather about making every cent you earn work for you, Jerry Botha told the recent meetings of the Acsis/Personal Finance Financial Planning Club.
Structuring your salary to your advantage can be done only if your employer agrees to it, he says.
Botha is a partner in an independent tax advisory office, Tax Consulting, and chairs the Financial Planning Institute’s tax planning industry sector group.
If your employer chooses to pay you on a cost-to-company basis, you can structure the benefits to suit your needs. Cost to company means your company agrees to spend a certain amount and within that allows you to choose how much you want to spend on benefits, such as your pension fund and your medical scheme.
For example, if you are young, single and starting out in life, you may want to maximise the portion of your salary that is paid to you as cash and to minimise the amount that goes to retirement savings and medical scheme contributions.
This is because you are likely to be healthy and thus require a less expensive medical scheme option that covers little more than hospitalisation. You also have many years ahead of you in which to save towards retirement, so you can afford to peg your contributions at a lower rate.
At this stage, you are also unlikely to need a large amount of life cover. If your employer offers you a choice of the level at which you can insure your life – for example, one, two, three or even 10 times your annual salary – you are likely to choose the lowest level.
However, if you are older, earning more and are married with a family, you are likely to want the maximum amount of life cover – for example, 10 times your annual salary – and a comprehensive medical scheme option with cover for each member of your family.
It is also likely that you will want to keep your retirement fund contributions low, to maximise your take-home pay.
If your children have left home and you have only a few years left until retirement, you are likely to want to maximise your contributions to a pension fund.
Your medical scheme needs will still be higher than they were when you were single, because you may be paying for your spouse. At this stage of your life, and if your company allows it, you can probably reduce your life cover to, for example, the equivalent of just one times your annual salary.
Botha says if your company packages your salary correctly, it should give you personal flexibility that you can exercise annually or in response to life-changing events. There may be some tax efficiencies, but these should not be the focus of how you structure your salary.
You should have the ability to choose between better benefits and more take-home pay, he says.
If your employer offers benefits you do not want, you should be able to convert these into more valued benefits or cash. An employer that gives you the flexibility to choose your benefits promotes a more fiscally responsible lifestyle while still giving you the safety net of being employed, Botha says.
If your employer allows you to structure your salary package in line with your needs, its approach to remuneration will be more equitable and defensible, Botha says.
For example, medical scheme contributions will benefit all employees equally, because a single employee will be able to transfer to another benefit or convert into cash the money that an employee with a family would use to pay for more medical cover, he says.
Cost-to-company packages are becoming increasingly popular, Botha says, with 70 to 75 percent of professional companies using this kind of remuneration structure. These packages are not a vehicle for you to earn tax-free remuneration or to increase or decrease your remuneration. Instead, cost-to-company structures help employees to understand the full value of their cash and benefits, Botha says.
The benefits that can be included in a cost-to-company package are:
* A 13th cheque;
* Retirement fund contributions;
* Medical scheme contributions;
* Group life cover without having to undergo medical tests or fill in questionnaires;
* Life cover beyond group life cover on an individual basis with medical tests and questionnaires;
* Income protection;
* Lump-sum disability;
* Travel allowance;
* A company vehicle;
* Bulk-bought insurance for your vehicle;
* Bulk-bought private insurance;
* Accident insurance; and
* Life assurance that pays out if your spouse dies.
If your employer provides your relatives with a bursary for basic or higher education, the value of the bursary will be added to your income as a taxable fringe benefit, unless you earn R100 000 a year or less and the bursary is worth R10 000 or less.
In the Budget this year, National Treasury proposed increasing the amounts in the exemption from fringe benefits tax for bursaries provided by an employer to the relatives of employees.
Treasury proposed that employees who earn R200 000 a year or less will qualify for an exemption from fringe benefits tax for a bursary of up to R10 000 for basic education and up to R30 000 for higher education.
National Treasury also proposed that relief from fringe benefits tax is provided to lower-income earners whose employers provide them with housing on a rental basis and later transfer the property to the employee at a below market value. The details of this proposal have yet to be announced.
DERIVE THE FULL BENEFIT FROM TAX DEDUCTIONS AND ALLOWANCES
You are entitled to structure your salary in a way that minimises the tax you pay, but there are few opportunities left legally to lower the tax on your remuneration, Jerry Botha says.
Retirement fund
You should definitely take advantage of the tax deductions on the contributions you make to a pension fund. This is because you defer paying tax on those contributions, and the growth they generate, until you retire, when your marginal income tax rate may be lower, Botha says.
Your contributions to a pension fund can be deducted up to 7.5 percent of your retirement-funding income, which usually excludes the likes of your bonus and any allowances paid to you.
Currently, your employer can contribute to a retirement fund on your behalf without tax consequences for you. Your employer can deduct up to 20 percent of your remuneration to pay contributions to a retirement fund and a medical scheme on your behalf. As a result, in practice the maximum contribution that an employer allows when benefits are calculated on a cost-to-company basis is 27.5 percent of pre-tax income, Botha says.
National Treasury has proposed making your employer’s contributions to your retirement fund and any contributions paid to a group life or income disability scheme a taxable fringe benefit. At the same time, it is proposing to standardise the tax deductions allowed for retirement fund contributions so that everyone, regardless of the fund to which they contribute, can claim a deduction of up to 27.5 percent of their remuneration, but the deduction will be capped at R350 000 a year.
Botha says the change will have no impact on most employees, but retirement fund rules and employment contracts may have to be reviewed.
The continued tax-exemption of income disability policies will also be reviewed, but there is no detail on this, he says.
Travel allowance
Your travel allowance can be used to the maximum tax advantage if you keep your mileage for private travel low, Botha says.
If you have two cars, it is to your advantage to use one for most of your private travel and the other mostly for business travel, he says. (Remember that private travel includes travelling to and from work.)
It also pays if you claim for your most expensive vehicle, but this does not mean you should use a travel allowance to buy a vehicle that costs more than you can afford.
The deemed costs that you can use to claim your tax deduction for business travel were amended for the tax year that began on March 1.
The fixed costs were reduced, because, the South African Revenue Service says, interest rates have fallen since these costs were last amended, whereas the fuel and maintenance costs were increased.
Botha says if your claim for business travel is likely to be low, you may be better off if your employer agrees to pay you a reimbursement allowance rather than a travel allowance. The reimbursement allowance is for travel of less than 8 000 kilometres a year. You can from March 1 this year receive tax-free from your employer R3.24 a kilometre travelled for work purposes.
Medical scheme
It no longer makes any difference to the tax you pay whether your employer pays your medical scheme contributions on your behalf or supplements your salary to enable you to cover the cost of your contributions, Botha says.
The medical scheme contributions your employer pays on your behalf are added to your income as a fringe benefit, thus increasing your earnings, and then you get a tax credit or rebate for contributions paid for yourself and your dependants. The credit is based on the number of dependants for whom contributions are paid and not on who makes the contributions or the cost of the medical scheme option.
Income protection
The premiums your employer pays to an income protection policy are taxed as a fringe benefit but are then deemed to be an employee contribution, which is tax-deductible, leaving you in a tax-neutral position.
National Treasury has proposed scrapping the personal tax deduction for premiums on income protection policies. However, if it does this, the income you are paid when you claim on the policy will be tax-free. This will probably lead to employees adjusting the amount of income protection they buy, because they will need to provide only for an after-tax income and not a higher pre-tax income, Botha says.