Page 647 - SAIT Compendium 2016 Volume2

IN 76 Income Tax acT: InTeRPReTaTIon noTes IN 76
• ‘employer’ as de ned’ means an ‘employer’ as de ned in paragraph 1;
• ‘owner’ means a person who employs a recipient and pays the recipient a salary or wage, and potentially pays a tip in
his or her own capacity or distributes tips paid by patrons to the recipient;
• ‘paragraph’ means a paragraph of the Fourth Schedule to the Act;
• ‘patron’ means a person, other than an owner, who awards a recipient a tip for services received;
• ’recipient’ means a person who receives a tip from a patron or owner for services rendered and includes, for example,
waitrons, ushers, casino personnel, car guards, hotel personnel, petrol pump attendants, car guards, concierges, porters,
tour guides, hairdressers, taxi drivers and car washers;
• ’SDL’ means the Skills Development Levy as levied under the Skills Development Levies Act 9 of 1999;
• ‘section’ means a section of the Act;
• ‘services rendered’ includes services rendered and services to be rendered;
• ‘the Act’ means the Income Tax Act 58 of 1962;
• ’tip’ means a voluntary payment that is primarily awarded by a patron to a recipient who renders a service. The amount
of the tip may be related to the quality of the service but it is also often awarded because of social custom or out of
kindness;
• ‘UIF’ means the Unemployment Insurance Fund contribution payable under the Unemployment Insurance
Contributions Act 4 of 2002;
• ‘waitron’ means a waiter or waitress; and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note discusses and clari es the potential income tax, SDL and UIF implications for a recipient on the receipt of tips encountered in (but not limited to) the service industry. This Note will focus on a ‘tripartite’ tipping relationship between the following three parties:
• The patron
• The recipient • The owner
For example, a customer (the patron) pays a waitron (the recipient) a tip for excellent service in a restaurant owned and operated by the owner. In some circumstances, the owner may also pay the recipient a tip in the owner’s own capacity. This Note considers an employee’s potential obligation to include the receipt of tips in gross income and that employee’s related provisional tax and UIF responsibilities. It also considers the owner and a patron’s possible obligations to withhold employees’ tax on such tips and to account for SDL and UIF.
2. Background
2.1 The form of tips
Tips are generally awarded in money, for example, cash, cheque or by adding the tip to the total amount paid when making a credit or debit card payment. However, tips are not restricted solely to money and may take another form, for example, tickets to a sporting or entertainment event or, especially in the gambling industry, a casino chip or token.
2.2 The manner of payment or distribution
Tips may be paid directly by a patron to a recipient. For example, a patron gives a waitron a R50 note as a tip in recognition of the service rendered. Alternatively, the patron may pay the tip to the owner. It is important to determine what role the owner is playing when receiving a tip from a patron, that is, whether the tip has been received by or accrued to the owner for the owner’s own bene t (or potentially for the owner’s own bene t) or, alternatively, whether the owner is purely acting as a conduit between the patron and the recipient of the tip.* In the role of a conduit, the owner is merely a channel which the patron is using, sometimes unknowingly, to transmit the tip to the recipient. The owner could either immediately distribute the tip to the employee in the form of cash, or the owner could distribute the tip later in, for example, cash or by depositing the amount into the recipient’s bank account.
The facts and circumstances of each situation must be considered in determining the role the owner is playing. A unique feature to tips is that, although the patron’s intentions are not disregarded, it is critically important to look at the arrangement for tips. The reason for this is because the arrangement will determine who is bene cially entitled to the tips and therefore whether the owner is acting as a conduit or as a receiver in his or her own right. For example, a patron may assume that the tip is being paid to the recipient, however, the recipient and the owner may have agreed that the owner will be entitled to all tips earned and that the employee will receive a higher hourly wage rate in view of this arrangement. An owner plays the role of a conduit if, for example –
• all tips (cash and non-cash) for a speci c recipient are accumulated and subsequently paid by the owner to that recipient (for example, a patron adds 10% to his or her restaurant bill which is settled by credit card, and the owner subsequently
•
pays that 10% to the waitron who served the patron); or
all tips (cash and non-cash) for all recipients are collected (in what is often referred to as a ‘tipping pool’) and are
subsequently distributed according to a pre-agreed formula to all recipients and possibly other employees who are part of the chain of service (for example, all tips are collected and subsequently distributed according to the following
* Although not part of the subject matter of this Note, it is noted that in the conduit situation the tip is not received by the owner for his or her own bene t and does not form part of the owner’s gross income. However, when the tip is received by the owner for the owner’s own bene t it must be included in the owner’s gross income.
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 639