Correct interpretation of changes in taxation of medical aid is essential.
With the new financial year imminent, companies should take care to verify that their payroll service providers are interpreting the changes to the Income Tax Act, 1962, as they apply to the taxation of medical aid in the payroll correctly, warns Karen Schmikl, tax legislation specialist at Softline VIP. What this taxation change entails, in plain language, is that the full value of a company medical aid contribution is now taxable as a fringe benefit of the employee.
While these changes will have no effect on employees’ net salaries, what this means for a company is that as the fringe benefit and therefore the taxable earnings of employees will be higher, therefore the company’s Unemployment Insurance Fund (UIF) contributions will be higher. Companies will also have to undertake, if not a software upgrade, at the very least a host of new calculations for those doing payroll manually.
But companies beware: several players in the industry, including payroll solution providers, have varying interpretations of the application of the income tax law changes, says Schmikl.
“VIP Payroll’s interpretation of the income tax law amendments has, however, been verified by the South African Revenue Service,” she says.
Our interpretation is as follows, Schmikl continues: Previously, when processing medical aid in the payroll, a cap amount was used to determine the value of the medical aid fringe benefit as well as the value of the medical aid tax deductible deduction. This cap amount is prescribed by legislation and determined by the number of dependents on a fund.
According to the new changes to the Income Tax Act, cap amounts no longer apply when determining the medical aid fringe benefit. The full value of the company contribution is now taxable as a fringe benefit. The law does, however, still exempt employer medical aid contributions of employees who are 65 years or older at the end of the tax year, or employees who have retired due to superannuation, ill-health or infirmity, as a fringe benefit.
Employee contributions to a medical aid scheme are still tax deductible. When calculating the tax deductible value, the actual employee contribution and the deemed employee contribution (the medical aid fringe benefit value is deemed an employee contribution) is taken into account.
The cap amounts still apply to the total medical aid deduction to limit the benefit that the employee may receive. The contribution of employees who are retired due to superannuation, ill-health or infirmity is also limited to the cap amount, says Schmikl.
With effect from 1 March 2010 there will be some significant changes relating to a travel allowance and how you claim this deduction. The changes have come about due to SARS noticing that many people use the so called “deemed” method in claiming this deduction. In order to prevent misuse of this benefit new requirements have been introduced:
Logbook
With effect from 1 March 2010, the deemed method to calculate business kilometres can no longer be used. Therefore if you receive a travel allowance, you must keep a logbook in order to claim this deduction. The law does still not define the format that the logbook should take, but based on samples issued by SARS the logbook should include:
The next change affects how the travel allowance is taxed. To prevent hardship should you not keep a logbook, SARS have increased the taxable portion from 60% to 80%. This means that you will now only get tax relief on 20% of your allowance during the year, with the balance being provided on assessment if you can justify the full allowance.
It is important to note that as a result you may see an increase in your monthly tax payable as your taxable income will increase.
This is now the time that you should be reviewing your travel allowance. You need to consider:
1) Do I use my own vehicle in performing my work duties?
2) Do I do sufficient trips to justify a travel allowance?
3) Am I prepared to maintain accurate details of my business trips to justify the allowance?
If the answer is yes to all three questions then retain your allowance. If you have answered no, you will be better off without an allowance, as while you may get the benefit during the year you will need to pay in on assessment, when you may not be able to afford a lump sum.
At the beginning of every year, as tax season approaches, SARS makes important changes to tax administration. Many companies are unaware of these changes, and many only adjust their own processes too late. “To benefit from the new SARS changes, companies should make sure they are prepared for the submission and informed about the process they need to follow,” says Karen Schmikl, tax legislation specialist at Softline VIP.
As a company whose business is making sure its clients’ payroll and HR systems are providing ultimate benefit to their businesses, VIP is always ahead of any changes to legislation and/or processes. Schmikl explains that this year’s tax submissions will require additional information. “Some of the mandatory fields for February 2010 are company related, and some are employee related,” she says. “Making use of a computerised payroll system will make it even simpler for companies to do the submission because the format of the files will be guaranteed to be correct and no manual process will then be required.”
The new information SARS will require includes company information such as SDL and UIF numbers and employer contact person and numberIn addition, employers can provide employee ID numbers or Passport number, income tax reference numbers and three addresses. This additional information will become mandatory from the next submission to SARS.
Taking effect from 1 March, the tax consequences of medical aid, retirement annuities and travel allowances are also changing. “The full company medical aid contribution is now taxable. However, the tax deductible deduction will include the ‘deemed’ employee contribution. This will result in a tax equal position for the employee,” says Schmikl. “In addition, the Income Act changed to include the employer contribution to a retirement annuity as a deemed deduction when calculating the tax deductible value. This means a larger benefit to the employee – and will especially be favoured by employers who structure retirement annuities into remuneration packages.”
She adds that the biggest talk has been around the travel allowance changes. “Although the act did not change that drastically, there seems to be a big panic among employers. Basically, the taxable value of the travel allowance increases from 60% to 80% as from 1 March 2010. In addition, the deeming provision against which one could claim travel expenses on assessment was removed – this means that all individuals who have a travel allowance will have to keep a logbook in order to prove their business expenses on assessment.”
When purchasing software that manages the Human Resource function or that claims to streamline the payroll function the purchaser must be sure that the supplier is intimately familiar with the legislative framework governing taxation and human resources in the corporate environment. A good yardstick to evaluating this knowledge is whether the vendor has a track record of successful software development which takes into account these parameters. When evaluating a vendor the quality of their client base and their relationship with this client base is an important indicator of their reliability. Asking for references is always a good idea.
Whether an organisation is small or large today’s business environment requires cutting edge software to ensure that client service and turnaround times are equivalent to best practice. The only way to ensure that these software solutions are going to give you the edge is to choose your software vendor with great care. A world class software solution is an investment in the future, and not a cheap one at that. Any business that is considering purchasing a software solution for either the Hr department or for payroll management must be aware that upgradeability is one of the most important considerations.
One of the ways a person can judge another is by the company that they keep. The same can be said of software vendors. If a company is about to retain the services of a software vendor the first thing that they should do is check the quality of the partners or clients that they have. In order to ensure that the vendor is right for them, has the right solution and offers the right fit as far as after sales service and upgradeability is concerned the enterprise should first check the vendors track record as far as service to other companies in related fields is concerned.
When choosing a vendor to supply solutions for either payroll management or to streamline the human resources function there are some common sense rules that should be followed to ensure that the vendor will be able to supply the proposed solution at the best possible price and ensure that the solution meets the unique needs of the enterprise. Firstly a vendor who supplies world class, market proven products should be selected. Secondly the vendor should be able to offer extensive after sales support that minimizes any downtime. Thirdly the vendor should be able to offer training to the company that ensures that the full functionality of the software is available.
If an employer does not install human resource software that accurately tracks leave patterns and trends and does not make this information available to the human resources manager in a manner that is user friendly the organisation is open to abuse of its leave policy. Abuse of this kind can be extremely damaging to the bottom line of the enterprise. Once abuse is entrenched and can quickly spread until it is business as usual. The company must ensure that it takes an evenhanded approach to leave applications. Today’s human resource management software can ensure that the company is not only fair to its employees but that it can balance this fairness with productivity.
Today’s business environment is very different to that of only a generation ago. During the 70’s employees were treated as an amorphous mass which could be handled in terms of job function and in essence treated as simple assets. This business view has given way to a more strategic approach that balances the utilisation of the employee with a more compassionate approach to employees as human beings. One of the factors that has allowed this approach is the ever more complex human resource software that is available on the market today. Using this software employees can track trends like application for compassionate leave and plan interventions that will increase productivity and decrease employee stress.
There is a saying that access to information is everything. This is especially true in the business environment, and nowhere more so than in the case of perceived leave due to the employee. By installing automated systems that manage the leave due to each employee and allowing the employee access to information on the leave due to him or her the company eliminates any charges of bias in the granting of leave and also allows the employee access to software that allows him or her the opportunity to evaluate leave due status on a daily basis. This not only allows the employee to plan their personal life more effectively, but also allows the business to preplan for any leave due to the employee.