Value Added Tax and Employee Taxation Notes

Value Added Tax (VAT)

• Introduced in South Africa on 30 September 1991.
• Current rate: 15% (as of 1 April 2018).
• Administered by the South African Revenue Services (SARS).
• VAT replaced the General Sales Tax (GST) system.

VAT Registration

• VAT Vendor: A person or business registered for VAT.
• Compulsory Registration: Annual turnover of taxable supplies exceeds R 1 000 000.
• Voluntary Registration: Annual turnover is between R 50 000 (R 60 000 for commercial accommodation) and R 1 000 000.
• Vendors must keep accurate records and submit VAT returns (VAT201) regularly to SARS.

VAT Registration Process

• Submit application to the nearest SARS office.
• Required Documents:
  • VAT101 form.
  • Identity and business registration documents.
  • Latest bank statements and a letter from the bank.
  • Proof of address (municipal account or lease).
  • Business plan or signed contracts showing turnover exceeds R 50 000.
• Refer to VAT 404 Guide for vendors (available at SARS offices or www.sars.gov.za).

VAT Periods

• Vendors are categorized, determining the length and end dates of their VAT periods.
• VAT transactions within a period must be accounted for in the applicable VAT201.
• Categories and VAT Periods:
  • A: 2 months, ending on the last day of odd months.
  • B: 2 months, ending on the last day of even months.
  • 0: 1 month, each calendar month.
  • D: 6 months, February and August.
  • E: 12 months, the year of assessment of the vendor.
• Vendors with annual taxable turnover > R 30 million, A and B vendors who wish to apply and vendors with consistent obligations defaults all falls under A and B categories.

Payments vs Invoice Basis

• Two bases for VAT registration: payments (cash) or invoice basis.
• Most businesses are registered on the invoice basis.

Payments (Cash) Basis

• VAT recorded as owing/refundable when money is received/paid.
• Eligibility:
  • Sole traders and partnerships (all partners must be natural persons) with turnover not exceeding R 2.5 million per year.
  • Associations not for gain and local authorities (regardless of turnover).
• Requires written permission from SARS.

Invoice Basis

• VAT recorded from the time of sale (when the invoice is issued).
• Output VAT is recorded in the tax period of the sale and paid over in the return for that period.
• Input VAT is recorded as refundable from the time of invoice.

VAT Return (VAT201)

• Summary of VAT transactions during the VAT period.
• Shows VAT input claimable and VAT output payable.
• Usually submitted by the 25th of the following month.
• Payments can be made electronically.

Individual Employee Taxation

• Tax liability calculated individually for each employee.
• Tax rates, rebates, and thresholds can change annually.
• The 2024/2025 tax year rates will be used (ending 28 February 2025).

Tax Rates for Individuals and Special Trusts (2024/2025)

• Taxable income ranges and corresponding tax rates (see table 6.2 for specific values).
• Individuals are taxed on a sliding scale relative to their income

Tax Rebates

• Discounts to ensure individuals with taxable income below a certain level do not pay tax.
• Primary, Secondary (65+), and Tertiary (75+) rebates (see table 6.3 for specific values).

Tax-Free Income Thresholds

• Income levels below which no tax is payable (see table 6.4 for specific values).
• Determined by dividing the primary rebate by 18%.

Employees' Tax (PAYE)

• Withholding tax deducted from gross earnings each wage/salary cycle.
• Based on taxable remuneration converted to an annual equivalent.
• SARS publishes deduction tables (weekly, fortnightly, monthly, annual) for convenience.
• PAYE replaced SITE (Standard Income Tax on Employees).

Definitions

• Remuneration: Any income paid or payable to a person (salary, wages, bonuses, commissions, etc.).
• Employer: Person who pays or is liable to pay remuneration.
• Employee: Person who receives remuneration.

Remuneration Includes:

• Amounts referred to in paragraph (a), (c), (CA), (d), (e), (eA) or (f) of the gross income definition
• Fringe benefits.
• Allowances and advances (excluding travel and allowable subsistence allowances).
• 80% / 20% of travel allowances received.
• 50% of an allowance granted to a holder of a public office.
• Any gains determined in respect of $S8B$ and $S8C$ (share options).

Remuneration Does Not Include:

• Fees paid to independent contractors (doctors, attorneys, auditors).
• Disability pensions in respect of certain Acts.
• Reimbursements for expenditure incurred during employment.
• Annuities under an order of divorce or similar settlement.

Employment vs. Independent Trade

• Crucial to differentiate for tax purposes.
• Not an independent trade if services are performed mainly at the payer's premises and subject to their control.
• Employing three or more unconnected full-time employees throughout the year deems it an independent trade.

Labour Brokers

• Natural person providing clients with other persons to render a service.
• Subject to PAYE unless holding an exemption certificate.

Personal Service Providers

• Company, close corporation, or trust where services are rendered personally by a connected person.
• Conditions:
  • Person would be an employee if not for the entity.
  • Service performed mainly at client's premises under their supervision.
  • More than 80% of income from one client.
• Not considered a personal service provider if employing three or more unconnected employees for core operations.
• PAYE withheld at 27% (company/CC) or 45% (trust).

Gross Earnings vs. Taxable Earnings

• SARS considers nearly everything an employee earns as taxable.
• Remuneration includes basic salary, commission, bonuses, allowances, and fringe benefits.
• Most allowances are fully taxable; 80% of travel allowance is taxable.
• Fringe benefits, though non-cash, are taxable.

Calculating Employees' Tax

• Based on the balance of remuneration after deducting:
  • Employer and employee contributions to pension or provident funds.
  • Employee contributions to retirement annuity funds (with proof of payment).
  • Employer contributions to retirement annuity funds.
  • Donations made by employer on employee's behalf (limited to 5% of remuneration).

Annual Bonuses

• Taxed under employees' tax system.
• May include leave encashment, profit share, or lump sum payments.
• Taxed at the employee's marginal tax rate.

Fringe Benefits

• Non-cash benefits subject to specific valuation rules.
• Examples:
  • Use of a company car.
  • Low-interest or interest-free loans.
  • Medical aid contributions.
  • Retirement contributions.
  • Acquisition of an asset at less than actual value.
  • Free or cheap holiday accommodation.

Right of Use of a Motor Vehicle

• Taxable value: 3.5% (or 3.25% with maintenance plan) x determined value of the vehicle less consideration paid by the employee.
• 80% of the fringe benefit is included in remuneration (reduced to 20% if business use is at least 80%).

Travel Allowance

• 80% of allowance is included in remuneration (reduced to 20% if business use is at least 80%).

Medical Aid

• Employer's contribution is a taxable benefit.
• Employee receives tax credits for themselves and dependants.
• Tax credits remained unchanged from the previous tax year.
• The employer's contribution to a medical aid fund on behalf of an employee will be included in the employee's taxable income as a taxable benefit

Balance of Remuneration

• Also known as 'taxable income.'
• Calculated by adding all taxable elements and deducting allowable contributions and donations.
• Formula: Salary + Bonus + Overtime + Commission + Allowances (car, cell, housing, computer) + Fringe Benefits - Employee's eligible retirement contributions.

Employee Deductions

• Section 11F: Deductions to pension, provident, and retirement annuity funds.
• Total deduction limited to the lesser of R 350 000 or 27.5% of the higher of:
  • Remuneration.
  • Taxable income.
• Contributions exceeding limitations are carried forward.