Page 192 - SAIT Compendium 2016 Volume2

IN 5 (2) Income Tax acT: InTeRPReTaTIon noTes IN 5 (2)
4.5 Right of recovery of PAYE paid by the employer
The employer has the right to recover the PAYE on the deemed remuneration from the director. This recovery may, in addition to any other right of recovery, be deducted from any amount which is or may become payable by the employer to the director. However, the company can arrange with the director to recover the PAYE on the deemed remuneration from the director’s current remuneration.
4.6 Details on the IRP 5
The remuneration shown on the IRP 5 must be the amount of the actual remuneration which is paid or is payable to the director for the year of assessment.
The amount of PAYE shown on the IRP 5 will be the sum of the PAYE that was deducted from the actual remuneration of the director and the PAYE paid by the company in respect of the deemed remuneration of that director. A director will therefore not be able to deduct the PAYE on the deemed remuneration from any income tax payable by the director where the PAYE was not recovered from the director by the company (see paragraph 28 of the Fourth Schedule).
If a person ceases to be a director but continues to be employed by the company, or an employee is appointed as a
director during the year of assessment, then only one IRP 5 needs to be issued for the year.
4.7 Relief for hardship
Relief can be obtained from the Commissioner where there is a veri able reason for hardship. An application for a tax directive [IRP 3 (d)] must be completed. In these situations, the Commissioner has the discretion to issue a directive (IRP 3) to reduce the amount of PAYE payable by the company.
4.8 Provisional tax for the directors
The de nition of ‘provisional taxpayer’ in paragraph 1 of the Fourth Schedule has been amended by section 49 (1) (a) of the Revenue Laws Amendment Act 31 of 2005 to delete items (b) and (bA) from that de nition, which means that directors will no longer be required to register as provisional taxpayers merely as a result of being directors of private companies. This amendment will come into operation on 1 March 2006 and applies in respect of years of assessment commencing on or after that date.
4.9 Appointment of director during the year of assessment
Where a person is appointed as a director of a private company during the year of assessment and the director was not previously an employee of that company, PAYE will be payable on the actual remuneration which is paid or is payable to the director during that year of assessment. The formula in paragraph 11C (1) of the Fourth Schedule will not be applied to deem any remuneration to have accrued to the director in the year of appointment. However, where the newly appointed director was previously an employee of the company, the formula will be applicable.
4.10 Termination of directorship
Where the person ceases to be a director but remains an employee of the company, the formula must no longer be
used and PAYE must be deducted from remuneration that is actually paid or is payable to the employee.
4.11 SITE versus PAYE
SITE is not deductible from the remuneration of directors because their remuneration is speci cally excluded from the de nition of ‘net remuneration’ in paragraph 11B of the Fourth Schedule. Employers must therefore only deduct PAYE from the remuneration of these directors.
4.12 Does PAYE paid by the company give rise to a fringe bene t?
The amount of tax that the company pays in respect of the deemed remuneration of each director of a private company is not considered to be a loan granted to that director for the purposes of paragraph 2(f) of the Seventh Schedule to the Act, i.e. it does not give rise to an interest-free loan fringe bene t. It is an amount that the company is liable for in terms of paragraph 11C (2) of the Fourth Schedule.
4.13 Amounts paid to directors after the year of assessment
Circumstances may arise where the remuneration of a director or portion thereof accrues in a year of assessment but the quantum of the remuneration is only determined in a later year. For example, the service contract of a director may provide that the director is entitled to a bonus of 10 per cent of the company’s pro ts for the year ending on 28 February 2003. The nancial accounts of the company are only nalised on 30 June 2003 when the quantum of the director’s bonus can be determined. As long as the accrual of the bonus is not dependent on any other event which happens after the year of assessment ending on 28 February 2003, the bonus will accrue in the year of assessment ending 28 February 2003. The bonus which is eventually quanti ed in the 2004 tax year of assessment will not, however, be included in the calculation of the actual remuneration for the determination of PAYE in either of the 2003 or 2004 years of assessment. Instead it will be included in the calculation of the deemed remuneration for the 2004 year of assessment (which must be re-calculated at the time of determination). The director must include the bonus in question with the IT3 (a) certi cate in his/her income tax return for the 2003 year of assessment. This is done in terms of the discretion available to the Commissioner in paragraph 2 (1) of the Fourth Schedule.
4.14 Dif culties in determining the deemed remuneration
Where the deemed remuneration cannot be determined in the prescribed manner as a result of the fact that the remuneration of the director has not been determined for the relevant years of assessment, the Commissioner must be approached to make the determination.
4.15 Where more than 75% of the previous actual remuneration consists of xed monthly payments
In terms of the newly inserted paragraph 11C (6) of the Fourth Schedule the legislator created an exception to the general rule. Where more than 75% of the previous actual remuneration consisted of xed monthly payments, the employer must ignore the provisions of paragraph 11C of the Fourth Schedule. To determine whether the provisions of paragraph 11C should be ignored, the employer must determine the value of ‘T’ in the formula contained in paragraph 11C (1) of the Fourth Schedule. If, during the same year of assessment on which ‘T’ is based, more than 75% of the value of ‘T’ in the formula was paid by way of xed monthly payments, the employer must ignore the deemed liability created under paragraph 11C (2) of the Fourth Schedule. In such a case, the employees’ tax
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saIT comPendIum oF Tax LegIsLaTIon VoLume 2