Page 648 - SAIT Compendium 2016 Volume2

IN 76 Income Tax acT: InTeRPReTaTIon noTes IN 76 formula: 70% of the tips are distributed to waitrons based on the number of hours each waitron worked and 30% of the
tips are distributed to the hostess, bartender and kitchen team based on the number of hours worked).
Examples of an owner not playing the role of a conduit and the tip being received by or accruing to the owner for the owner’s own bene t, include –
• all tips (cash and non-cash) are collected (in a tipping pool) and the owner has full authority to decide on the portion
of the tipping pool which will be distributed to employees and the amount that a particular employee will receive; or • the recipient and the owner agree in advance that the employee will receive a higher hourly wage rate and that the
owner will be entitled to all tips earned.
The Note does not deal with compulsory service charges* (for example, adding a 10% service fee to a restaurant bill for tables exceeding eight guests), however for completeness it is noted that the facts and circumstances applicable to a compulsory service charge will determine whether the owner receives the service charge for the owner’s own bene t (often but not necessarily the case) or as a conduit on behalf the owner’s employees.
In summary:
• The recipient may therefore receive a tip from a patron, from the owner acting as a conduit for the patron or from the
owner in the owner’s own capacity (which may be funded out of tips which were previously received by or accrued to
the owner or from other sources). The income tax consequences for the recipient are discussed in 4.1.
• The owner may receive the tip as a conduit and on-pay it to the recipient, or the owner may receive the tip for the
owner’s own bene t.† The owner’s potential employees’ tax, SDL and UIF obligations are discussed in 4.2.
• The patron’s potential employees’ tax, SDL and UIF obligations are discussed in 4.3.
3. The law
For ease of reference section 1(1) and the paragraphs of the Fourth Schedule used in this Note are quoted in Annexure A.
4. Application of the law
4.1 The recipient
From a recipient’s perspective it is necessary to consider whether a tip which has been received by or accrued to him constitutes gross income. Gross income is a critical element of a taxpayer’s taxable income calculation and has a direct impact on the amount of income tax payable.‡ It is also necessary to consider whether the recipient has any provisional tax responsibilities. These aspects are discussed in 4.1.1 and 4.1.2. The applicable UIF responsibilities are dealt with in 4.2.4 and 4.3.4.
4.1.1 Gross income
The term ‘gross income’ is broadly de ned in section 1(1) as the total amount, in cash or otherwise, received by or accrued to a resident during a year of assessment which is not of a capital nature. In addition, paragraph (c) of the de nition of the term ‘gross income’ speci cally includes ‘any amount, including any voluntary award, received or accrued in respect of services rendered or to be rendered.’
(a) Any amount received by or accrued to
The term ‘amount’ is not de ned in the Act. However, it has been the subject matter of various court cases and has been held to include money and receipts or accruals in a form other than money which have a monetary value. §
In Geldenhuys v CIR Steyn J stated that the words ‘received by’ as used in the de nition of the term ‘gross income’ –¶ ‘must mean ‘received by the taxpayer on his own behalf for his own bene t’’.
The term ‘accrued to’ was held by Watermeyer J (as he then was) in WH Lategan v CIR to mean –** ‘to which he has become entitled’.
The facts of each case must be considered, however, in most cases these requirements will clearly be met because tips are generally awarded in cash so the amount is easily ascertainable and the timing of the receipt or accrual generally coincides with the clearly identi able event of receiving the cash.
(b) In respect of services rendered
The courts†† have held that ‘in respect of’ connotes a causal relationship between the amount received and, in context, the taxpayer’s service. In the South African service industry it is a well-established practice and fact that recipients are
* Refer de nition of a “tip” which does not include a compulsory service charge.
† 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 is not 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.
‡ Section 5(1).
§ C: SARS v Brummeria Renaissance (Pty) Ltd and Others 2007 (6) SA 601 (SCA), 69 SATC 205; CIR v Butcher Bros (Pty) Ltd 13 SATC 21, 1945 AD 301; WH Lategan v CIR 2 SATC 16, 1926 CPD 203; CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9, 1990 (2) SA 353 (A).
¶ 1947 (3) SA 256 (C),14 SATC 419 at 430.
** 1926 CPD 203, 2 SATC 16 at 20. The correctness of the interpretation of ‘accrued to’ in Lategan’s case was subsequently con rmed by Hefer JA in CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9 at 24
†† Mariana Bosch, Brent James Curry, Ian Robert McClelland v CIR, case 12760, 12828, 12756, Tax Court, 14 September 2011; ITC 1493 53 SATC 187; Stevens v CSARS 2007 (2) SA 554 (A); Stander v CIR 1997 (3) SA 617 (C); De Villiers v CIR 1929 AD 227.
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