Get your employee tax and payroll in order before SARS comes knocking.
In 2019, we have witnessed the new permanently appointed Commissioner of the South African Revenue Service, so it takes little guesswork to know that tax collection will become a key fiscal driver, and any offenders found guilty of non-compliance will be dealt with strictly, with the levying of harsh penalties and interest being the preferred method of ‘punishment’.
This was further corroborated during the budget speech where, the Minister of Finance, Tito Mboweni, announced, that there is, once again, a tax revenue shortfall – this time in the order of R43 billion. SARS will undoubtedly focus their eyes on employees’ tax, which still packs the strongest punch when it comes to contributing to the total tax revenue in South Africa, above corporate taxes and VAT.
Payrolls under the spotlight
Despite tax collection initiatives implemented by SARS, the revenue collection shortfall remains present, year on year. With the pressure mounting to make up the shortfall and collect more tax revenue, SARS has become both more assertive and aggressive with its collection strategies. Payroll audits seem to be SARS’s latest weapon of choice, albeit with a slight twist.
The reason behind SARS targeting employers’ payroll in the hopes of collecting additional revenue is purely because of the tendency to contain errors, as well as the potential to collect large sums of tax from a single taxpayer. Mistakes in the payroll systems are exaggerated by the size of the company’s payroll and SARS can, and will, collect any underdeclared taxes from the employer, as opposed to the individual employees.
New SARS audit approach
A new trend that has become apparent in SARS’s approach is to launch an audit into the company’s payroll after the submission of the company’s corporate tax return and financial statements as this provides SARS with a clear view of all the expenses related to payroll from an accounting point of view. Specifically placing emphasis on the payroll reconciliation prepared on the basis that there is usually a discrepancy between the company’s total cost of employment reflected in the financial statements when compared to the total of the IRP5s submitted. The reality is that the onus of proof is placed on a company to dispute this and to explain why the amounts making up the difference are either exempt or not taxable.
Where no proof can be provided by the company, SARS simply raises additional tax on these differences with penalties and interest.
Material exposures on the table
In the case of a large payroll with many employees, even the smallest errors can leave a company with a large tax exposure, as these errors are extrapolated over the entire employee population. The truth is that SARS will find something, and most employers only become fully compliant once they have gone through the ordeal of a payroll audit conducted by SARS, at the cost of additional tax.
“Run a tight ship”
It is therefore imperative that employers ensure their payroll systems are fully compliant and, as such, prepare an audit of the payroll before SARS knocks at the door. Otherwise, if SARS comes knocking, you are in for an unpleasant dispute with SARS and penalties that may exceed the actual taxes payable. The only mechanism available in law through which a company can regularize any non-compliance with SARS is by submitting a voluntary disclosure programme, which waives certain penalties that would have otherwise been imposed.
Tanya Tosen is a Tax & Remuneration Specialist at Remuneration Consultants, www.remunerationconsultants.co.za.