A number of amendments made at the end of 2016 take effect from 1 March 2017. This includes amendments relating to PAYE. Two such amendments are particularly likely to affect remuneration of directors or executives. The first relates to a requirement to withhold PAYE on deemed remuneration in respect of directors of private companies. The second amendment deals with the taxability of dividends in respect of certain unvested equity instruments and PAYE obligations on certain dividends.
The 2016 Taxation Laws Amendment Act and Tax Administration Laws Amendment Act contain a number of amendments that take effect from 1 March 2017. This article reviews two of these developments that may impact on PAYE to be withheld on executive remuneration.
Scrapping of paragraph 11C of the Fourth Schedule
Where a director of a private company did not derive more than 75% of his or her remuneration in the previous year of assessment from fixed monthly payments, the employer was required to pay PAYE to SARS based on a deemed remuneration amount in terms of para 11C. Any remuneration package that consisted of more than 25% bonuses or other performance payments would therefore have been subject to the deemed remuneration rule. The deemed remuneration was based on the director's remuneration earned during the previous year, adjusted for certain once-off type of payments. This provision could have affected the structuring of the remuneration package of a director to align tax implications with cash flow, especially where a large component of the remuneration is dependent on the performance of the company for a year.
In 2013 a specific provision (s 7B) was introduced to align the tax on variable remuneration with the cash flow. Variable remuneration includes amongst others bonuses. In contrast to PAYE on deemed remuneration, section 7B resulted in PAYE following the timing of the actual payment of the variable remuneration. From 1 March 2017 the deemed remuneration rules are scrapped, removing the above PAYE timing conflict. This affords private companies the flexibility to structure performance based- remuneration without the obstacle of PAYE on deemed remuneration.
Anti-avoidance rules and PAYE obligations in respect of dividends closely linked to service
The Income Tax Act has a number of provisions that aim to ensure that dividends received by an employee as part of his or her remuneration package are taxed as remuneration rather than exempt dividends. These provisions are mostly found in exceptions to the dividend exemption rules (i.e. dividends not qualifying for exemption). One such exception exists in respect of dividends that accrue to an employee in respect of unvested equity instruments awarded to that person by reason of employment (section 10(1)(k)(i)(dd)).
This provision however allows for certain dividends received in respect of such unvested instrument to still be exempt (subpara (A) to (C) of para (dd)). The National Treasury proposed to remove these exceptions as this exemption was used to extract value from unvested instruments in the form of dividends, which left little or no value taxable as remuneration upon vesting. This removal would have meant all dividends received in respect of unvested instruments would be taxable. This proposal was not implemented; instead, anti- avoidance rules were introduced to target specific mechanisms used to extract value from unvested instruments. Dividends derived from three types of transactions identified as having been used to extract pre-vesting instrument value will no longer be exempt from 1 March 2017 (s 10(1)(k)(i)(jj)).
In addition, remuneration for PAYE purposes has been widened by the addition of dividends that do not qualify for exemption based on its close linkage to employment (paragraph (g) of this definition). This means that PAYE must be withheld by employers from such dividends from 1 March 2017 onwards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.