Salaries sacrifice arrangements explained
PRETORIA – On April 9, President Cyril Ramaphosa, urged executives of large companies to donate one-third (1/3) of their salaries to the Solidarity Fund. On April 23, Finance Minister Tito Mboweni announced the following relief measures for employees who make this donation:
- There must be deducted from the remuneration so much of the 1/3 donated as does not exceed five percent (5%) of the remuneration.
- The tax-deductible limit for donations (currently 10% of taxable income) will be increased by an additional 10% for donations to the Solidarity Fund during the 2020/21 tax year.
Where an employee’s salary package is altered, these relief measures are only allowable for valid salary sacrifice arrangements. It is important to note that the Minister of Finance in stating the reliefs relating to the donations did not specifically state the legal requirements which necessitate a valid sacrifice arrangement and subsequently trigger the application of the reliefs are overridden. It is therefore assumed that the reliefs will apply to a valid salary sacrifice arrangement.
A valid salary sacrifice is an arrangement in which a portion of an employee’s salary is foregone in exchange for a non-cash benefit. A valid salary sacrifice arrangement enables an employee to structure their salary package in the most tax effective manner which legally reduces the employee’s tax liability and accommodates for the employee’s needs and interests into their salary package.
According to the law in South Africa valid salary sacrifice arrangements are permissible. The matter of contention surrounding most salary sacrifice arrangements are the legal requirements governing the validity of the salary sacrifice, which require employers and employees to be meticulous in the structuring of the salary sacrifice arrangements.
Succinctly put, the objective of a valid salary sacrifice arrangement is to satisfy the notion that the employee does not have a vested right to the amount sacrificed. If not satisfied, this notion is the basis upon which the payroll tax audit division from South African Revenue Service (SARS) may argue that the amount sacrificed constitutes gross income to be taxed in the hands of the employee. In which case the employer is also posed with the likelihood of SARS levying a penalty of 10% on the amount the employer failed to pay employees’ tax as it was believed the salary sacrificed constituted a valid reduction in remuneration.
The generic legal requirements of a valid sacrifice arrangement include:
- There must be antecedent divestment of the entitlement to the amount sacrificed.
- The employee must forgo the power over the amount sacrificed.
- The salary sacrifice must be made prior to the accrual of any monetary amount.
- There must be a legitimate diminution in the remuneration package.
- The employee must transfer their obligation to pay over the sacrificed amount towards the benefit desired – that is the employer must unconditionally undertake the obligation.
- The salary sacrifice arrangement must be documented in the employment contract – with specific inclusion of the terms ‘salary structure arrangement’.
- If the salary sacrifice arrangement is entered into after the employment contract has been signed, an amendment to the employment contract must be made and signed, or an enforceable agreement for the salary sacrifice must be signed.
- The intentions of the salary sacrifice arrangement must be stated.
- The monetary and tax implications of the salary package must be shown.
- The salary sacrifice arrangement must be rolled-out in the exact manner as documented in the signed agreement.
- The employer and the employee must both sign.
It is important to note that the legal requirements for a valid sacrifice arrangement are specific to the arrangement and special care must be taken to meet the specific legal requirements of the arrangement in addition to above generic legal requirements.
In terms of Section 102 of the Tax Administration Act a taxpayer bears the burden of proving that an amount qualifies for a reduction in tax payable. Therefore, the employer and the employee bear the onus of proving that in the salary sacrifice arrangement the amount foregone in its entirety does not accrue to the employee and defray any ambiguity that may suggest otherwise. It is advisable to maintain the follow records in discharging this onus:
- The original or amended employment contract detailing the salary sacrifice agreement.
- Payslips prior and subsequent to the signing and implementation of the salary sacrifice arrangement.
- Remuneration policies and any subsequent amendments made.
- Minutes of meetings of the discussion and finalisation of the salary sacrifice arrangement.
- Documentation essential and specific to the salary sacrifice arrangement which was signed.
Willem Oberholzer, CA (SA), MCom Tax, is executive director at Probity Advisory (Kreston South Africa).