Impact the Budget Speech and Income Tax amendments will have on your Payroll

Karen Schmikl, Legislation Manager at VIP Payroll, provides some insight on the affect that the budget speech and Income Tax Act amendments will have on your payroll from March 2011. “Adjustments were made to the income tax brackets and rebates, providing relief to individuals. A third rebate was added for individuals who are 75 years and older, which will go a long way in providing relief to the elderly,” says Schmikl.

The individual and special trusts tax will be calculated as follow as from March 2011:

Taxable Income  Tax Rate
0 – 150 000 18% of taxable income
150 001 – 235 000 27 000  + 25% of taxable income above 150 000
235 001 – 325 000 48 250 + 30% of taxable income above 235 000
325 001 – 455 000 75 250 + 35% of taxable income above 325 000
 455 001 – 580 000 120 750 + 38% of taxable income above 455 000
580 001 and above 168 250 + 40% of taxable income above 580 000

There is some good news on the horizon for pensioners. “A primary tax rebate has been pegged at R10 755 with individuals qualifying for a secondary rebate at the age of 65 and older of R 6 012. A tertiary rebate is allowed for persons 75 and older of R 2 000. The tax threshold for persons under 65 is now R59 750, with the threshold for persons aged 65 to 74 being R93 150, and persons 75 and older being R104 261,” says Schmikl. Taxation of personal service providers on the payroll remains unchanged, with Personal Service Provider companies being taxed at 33% and Personal Service Provider trusts being taxed at 40%.

As far as medical aid taxation is concerned, “The cap amount used in the calculation of the tax deductible value for medical aid has been increased to R720 for the main member and first dependant, with a further R440 for each additional dependant thereafter, allowing for a slightly greater medical aid benefit on payroll,” explains Schmikl.

One of the hot topics at the moment is related to travel allowances and company cars. “The change to the rates table will be to the advantage of individuals using their private vehicles for business purposes and also to individuals making use of company cars. The rates table is used to determine a rate per kilometre for vehicles, which is used in the calculation of travel allowances, reimbursed kilometre limits and company car allowed expense claims. Rates must be derived from the following table:

Value of vehicle (incl VAT) Fixed cost Fuel cost  Maintenance cost
Rands  Rand per annum  Cents per km  Cents per km
0 – 60 000 19 492 64.6 26.4
60 001 – 120 000 19 492 68.0 29.2
120 001 – 180 000 52 594 71.3 31.9
180 001 – 240 000 66 440 77.7 35.0
240 001 – 300 000 79 185 87.0 44.7
300 001 – 360 000 91 873 93.9 54.2
360 001 – 420 000 105 809 100.9 65.8
420 001 – 480 000 119 683 113.1 67.6
480 000+ 119 683 113.1 67.6

Company cars
The amendments to paragraph 7 of the Seventh Schedule to the Income Tax Act resulted in substantial changes to the calculation of the use of motor vehicle fringe benefit, which will require employers to revalue the use of motor vehicle fringe benefit values in March 2011. “The determined car value now includes VAT and must also include the value of any maintenance plan, if the vehicle was subject to a maintenance plan when the employer acquired the vehicle. An annual depreciation rate of 15% on the determined value is still allowed but the fringe benefit value is now calculated at 3.5% of the determined value. If the determined value includes a maintenance plan, the fringe benefit value is then calculated at 3.25% of the determined value,” explains Schmikl.

“The taxable value of the fringe benefit is calculated at 80% (previously 100%) and can be reduced to 20% if the employee uses the car at least 80% for business. The risk should however not be taken to apply the 20% taxation option if the employer is not assured that the vehicle is used at least 80% for business,” Schmikl warns.

It is required that employees keep a logbook in order to claim for private fuel and all maintenance expenses on assessment, as all the claims are based on ratios of private and business kilometres. “In the past employees received relief on the payroll which is no longer available. Claims on assessment to reduce the fringe benefit value are based on ratios of private and business kilometres and include costs relating to license, insurance and maintenance if the full cost is carried by the employee and the reduction of the fringe benefit value if the full cost of private fuel is carried.”

Travel allowances
The taxable value of the travel allowance is still calculated at 80%, but according to amendments made to paragraph (cA) of the definition of remuneration in the Fourth Schedule to the Income Tax Act employers now have the option to tax the allowance at 20%. “As with company cars, the taxable value of the travel allowance may be reduced to 20% if the employee uses the for at least 80% for business. It must however be strictly monitored to adhere to the rule,” Schmikl urges.

Additional changes to take note of from March 2011:
– The official rate of interest used to determine the benefit on a low interest loan has been linked to the Reserve Bank repurchase rate plus one percent, which currently results in 6.5%
– Employees were entitled to a cumulative R30 000 tax free benefit on lump sums paid in respect of termination of service. These lump sums will now be taxed in the same way as fund lump sums, where a cumulative tax free benefit of R315 000 is allowed. Employers must still apply for directives to determine the tax payable.
– Employer owned insurance policies may result in taxation of the company contributions to funds such as deferred compensation schemes and income replacement policies. Employers are urged to clarify the changes with their insurance firms.
– A subsistence allowance of R88 per day (for incidental expenses) and R286 per day (for meals and incidentals) respectively can be paid if the employee is required to spend at least one night away from his/her usual place of residence in RSA. Values per country when travelling outside RSA are available from SARS website.
– Overall, the changes are positive and will benefit employees in various ways. There are however quite a few factors that need to be included and amended in payroll in order to be 100% compliant as from 1 March 2011,” concludes Schmikl.

TAXtalk: www.taxtalk.co.za

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