Here are the five tax questions every small business owner should be asking their tax consultant this year.

It’s tough out there. Entrepreneurs need to do more with less and keep an eye on changes in the tax legislation, as these could affect their payroll calculations and the tax they need to pay on behalf of their employees.

Finance Minister Pravin Gordhan’s recent budget speech admirably brought a sound outline for the country’s framework for the next year with some changes in tax legislation.

Some of these legislative changes (as included in the amendment Acts and reiterated in the budget speech), such as employee contributions to retirement funds, will most probably have an impact on the company’s payroll systems.

1. What is happening with the Employment Tax Incentive (ETI)?

The 2016 Budget indicates that the ETI will be reviewed in the third quarter of 2016 with a view to extending its life for another year.

It is still debatable whether ETI has been effective in addressing the crisis of youth unemployment.

If the legislation is to be renewed, it needs substantial changes to make it more effective and to encourage wider participation by businesses. Areas of difficulty in the current legislation include:

  • Putting the responsibility for minimum wage compliance into the ETI Act has compromised its simplicity and effectiveness.
  • The three-step formula used to calculate the monthly incentive, results in complicated and poorly understood ‘grossing-up’ calculations that the payroll must perform if a ‘partial month’ is worked.
  • If employers claim the monthly incentive in a month in which they are inadvertently not tax compliant, penalties and interest can be the result. This risk is too high in the opinion of some employers.

Generally, some employers are of the opinion that the administrative costs and risks outweigh the financial benefit of the incentive. I am hopeful that pragmatic changes to the ETI Act can address these challenges and improve its effectiveness as a way to boost youth employment rates.

2. Will there be any changes to employee contributions towards retirement funds?

Yes. From March 2016, any employee contributions towards a retirement fund (pension, provident and retirement annuity) are tax deductible, subject to a limit which must be applied by the employer. Previously, contributions towards a provident fund were not tax deductible.

The employee may contribute more than these limits, but he/she will only receive the tax benefit up to the statutory limit. Any contributions made by the employee in excess of the limits will reduce the taxable value of any lump sum paid in future.

3. Am I obliged to register with SARS for skills development?

Yes. All employers registered with SARS for employees’ tax purposes in terms of the Fourth Schedule of the Income Tax Act, must register with SARS for skills development, irrespective of whether they are excluded from paying the levy by one of the following conditions:

  • any public service employer in the national or provincial sphere of government,
  • any national or provincial public entity, if 80% or more of its funding comes from government,
  • any religious or charitable institution,
  • any municipality in possession of a certificate of exemption, and
  • any employer where the total annual remuneration for the next 12 months is not expected to exceed R500 000.

4. Has there been any change to the income replacement policies since 2015?

No. Since March 2015 premiums towards an income replacement policy were no longer tax deductible and this remains the same. It has not been affected by the changes to retirement fund contributions and how it should be treated on the payroll.

5. Are medical aid contributions still no longer tax deductible on the payroll for employees who are 65 years or older?

Yes. Since March 2014, medical aid was no longer tax deductible for employees who are 65 or older.

If an employee contributes towards a medical aid, the employee will be entitled to a tax credit amount.

However, effective from March 2016, these individuals will also be allowed an additional medical tax credit on the payroll. This value is calculated by allowing 33.3% of the value of the medical aid contributions which exceeded 3 times the normal medical tax credits.

Closing words

I believe that the global economy is powered by SMEs. Economic stability, growth and employment are reliant on the success of SMEs. Entrepreneurs are the drivers of potential prosperity. This will only be possible if tax legislation and the country’s fiscal policy supports this section of the economy.

To learn more about PAYE legislation changes for the 2016/17 tax year simply download the Sage Payroll Tax Guide 2016/17.

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