Complying with legislation that governs director’s PAYE for executive payroll is a complex undertaking and it makes business sense to outsource this function – including being able to leverage expertise to tick all the governance boxes.
One of the reasons for the complexity is because a directors’ remuneration is often only finally determined towards the end of the tax year or even in the following tax year.
In some cases, directors may receive nominal monthly remuneration and a large bonus at the end of the tax year, resulting in the majority of their tax liability being owed at that stage.
This creates a challenge in determining the amount of PAYE to withhold each month. Typically, the director is required to work out a deemed monthly salary using the average remuneration earned during the previous year of assessment.
A directors’ salary is subject to monthly PAYE and UIF deductions. This provision applies to directors of private companies and members and officials of close corporations who perform any functions within the CC, which are similar to those functions performed by Directors of Companies. Even ‘owner managed’ businesses where there is only one director and no employees, the sole director is deemed to be an employee per the Tax Act and his/her salary will be subject to monthly PAYE and UIF deductions and the business is also required to make monthly EMP201 submissions to SARS.
The relevance of deemed remuneration, as determined by a SARS formula, is to overcome issues with collecting monthly PAYE for directors.
The company says this applies to all directors, including members of CC’s, except if one of the following scenarios exists:
• The director’s remuneration in respect of the previous tax year has been finalised and more than 75% consists of fixed monthly payments;
• The director is newly appointed in the current year and wasn’t an employee of the company in the previous tax year; and
• A person ceases to be a director but remains an employee.
Since the Taxation Laws Amendment Act, 16 of 2016, was signed into law on 11 January 2017, one of the many changes that the Act brings into effect is the repeal of paragraph 11C of the Fourth Schedule to the Income Tax Act, 58 of 1962.
The purpose of paragraph 11C was to provide for the unique circumstances presented in directors’ remuneration, whereby actual remuneration for directors would often be inconsistent and amount to ad hoc payments decided and approved from time to time.
The provision is repealed effective 28 February 2017, which means that a new regime is introduced for deducting PAYE from directors’ remuneration effective for the 2018 tax year commencing on 1 March 2017. The new exception that now applies to directors’ remuneration is the same regime that has been applied throughout to regular employees, and these regimes can now be said to be aligned.
With the introduction of section 7B, dealing with “variable remuneration” in the Income Tax Act itself in 2013, policy in this regard appears to have changed with National Treasury. If ‘regular’ employees need to account for PAYE on an ongoing basis on variable remuneration (also inconsistent) received, the need to differentiate between employees and directors would fall away and no policy consideration would be required.
There should be differentiation made between the PAYE treatment of variable remuneration received by employees in relation to directors’ remuneration.
Directors’ remuneration will likely not form part of “variable remuneration” as defined in section 7B, and therefore PAYE cannot be accounted for merely on an actual payment basis. PAYE should be calculated and paid over as and when remuneration accrues to an employee (with the exception of variable remuneration), and likewise to directors now too.
The director will always be taxed on actual remuneration received each month. The tax on the actual remuneration is compared to that which is calculated on the deemed amount and, if the latter is higher, the company pays the difference over to SARS.
In such case, the director must apply to SARS for a directive to reduce the monthly PAYE payable whereupon SARS will issue an IRP3(d) directive to reduce the amount of PAYE payable by the company.
The administrative process can easily become complicated so outsourcing the executive payroll makes this simpler.
This is just the tip of the iceberg … we have not yet touched on the concept of non-executive directors.
Sandra Maritz is the Legislation Business Consultant at CRS Technologies.