COVID-19 Tax proposals: How SARS is assisting taxpayers

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COVID-19 Tax proposals: How SARS is assisting taxpayers

• 03 April 2020
• Tax Administration
• Karen van Wyk and Duane Newman

INTRODUCTION

We have realised in the last couple of days that we are all in this fight against COVID-19, together.  Some are at the very frontline of this battle – our healthcare workers who are our unsung heroes!  But the army also consists of the mom at home trying to keep her kids safe, healthy and occupied during the nationwide lockdown.  It also includes the worker in the grocery store unpacking crates of food having to work double shifts under dangerous circumstances, drivers delivering our online orders of essential items, security companies, our national defense force and police service and many more.  And, finally, it also includes you and me – people involved in accounting and tax matters of business, advising business owners and employees on what to do in order to survive this pandemic from a financial perspective.  We have a significant role to play!  Our advice and involvement have a direct impact on the sustainability of businesses and the livelihood of many families’ dependent on these businesses.  Together we are stronger!  And together, South Africa will prevail!!

BODY

In a media statement issued by National Treasury and SARS on 29 March 2020, draft explanatory notes were published related to COVID-19 tax relief measures that became effective on 1 April 2020.  The three proposals are the following:

1.          Expansion of firstly the scope of relief provided in terms of the Employment Tax Incentive programme and secondly the value of this relief;

2.          Deferral of payment relating to employees’ tax liabilities; and

3.          Deferral of payment relating to provisional corporate income tax.

National Treasury has also given an indication of the requirements that must be met for the relief to be available to taxpayers.

 

Proposal 1: Expansion of the Employment Tax Incentive (ETI) in respect of age eligibility criteria and amount claimable

The ETI programme was introduced in January 2014. The incentive provides relief to employers via a reduction of the PAYE to be paid over to SARS. Its term has been extended on various occasions due to the programme being extremely successful in incentivising employment of South African youth (someone between the ages of 18 and 29) that earns a maximum of R6 500 per month.

Under normal circumstances, ETI only provides for relief in the first 24 months of employment and the value of the benefit is capped at a maximum of R1 000 in the first 12 months of employment and a maximum of R500 in the second 12 months of employment.

Furthermore, where the ETI exceeds the PAYE withheld from the remuneration of such employees, a refund is claimable bi-annually (at the end of every reconciliation process, namely February and August).

The tax relief proposals related to ETI are effective during the period 1 April 2020 to 31 July 2020 and can be summarised as follows:

Normal ETI programme		Additional relief proposed
ETI is only claimable in the first 24 months of employment		ETI is now claimable, regardless of how long the employee has been employed
ETI is only claimable related to employees between the ages of 18 and 29 earning a maximum of R6 500 per month		ETI is now claimable, regardless of the age of the employees, as long as the employee is earning a maximum of R6 500 per month
The maximum ETI benefit is capped at R1 000 in the first 12 months of employment and R500 in the second 12 months of employment		An additional R500 per month can now be claimed (i.e. increasing the maximum benefit to R1 500 in the first 12 months and R1 000 thereafter)
An ETI refund is claimable bi-annually		An ETI refund is claimable monthly

The first ETI claim that will be impacted by the abovementioned proposed relief will effectively be on 7 May 2020, as this is when PAYE is due.

Therefore, an ETI allowance can now be claimed on all employees earning a maximum of R6 500 per month (regardless of their age and regardless of whether they have been employed for longer than 24 months).

Also please note that the abovementioned relief is only available to employers registered with SARS as at 1 March 2020.

To illustrate the scope of the relief, consider the following examples:

• Will additional ETI relief be claimable for a 35-year-old employee who earns R6 000 per month?

o  Answer: Yes. R500 additional ETI relief can be claimed since the age requirement is not relevant during the period 1 April 2020 to 31 July 2020 (the relief is not only available to employees aged between 18 and 29, but available to all employees earning a maximum of R6 500 per month).

 

• Will additional ETI relief be claimable for a 35-year-old employee who earns R7 000 per month?

o  Answer: No. Additional ETI relief cannot be claimed since the monthly remuneration exceeds the maximum of R6 500.

 

• Will additional ETI relief be claimable for a 25-year-old employee who earns R5 000 per month and has been working for the employer for a period of three years?

o  Answer: Yes. Normal ETI relief would have been claimed for the first 24 months of employment of the employee.  Per the proposal, R500 additional ETI relief can now be claimed for this employee as the maximum term of 24 months has been removed for the period 1 April 2020 to 31 July 2020.

 

Proposal 2: Deferral of PAYE

Employers are required to withhold PAYE from remuneration paid to employees in terms of the Fourth Schedule of the Income Tax Act.  These amounts should then be paid over to SARS by the seventh day of the month following the month during which the PAYE was withheld.  If not, penalties will be levied, and interest charged relating to such late payment.

The tax relief proposals related to PAYE are effective during the period 1 April 2020 to 31 July 2020 and can be summarised as follows:

• Small and medium-sized businesses (i.e. with an annual turnover ≤ R50 million for the period ending April 2021) will qualify for the relief;
• Employers only need to pay 80% of the PAYE over to SARS by the seventh day of the following month without incurring penalties and interest relating to late payment; and
• The balance of PAYE not paid over to SARS during the four-month period ending 31 July 2020, i.e. the remaining 20%, is deferred and becomes payable in six equal monthly instalments in the period August 2020 to January 2021 (i.e. the first payment will take place on 7 September 2020).

Non-compliant employers with outstanding returns or certain outstanding tax debt will not qualify for the proposed relief.

It is important to note that interest and penalties could still be levied for understatement of PAYE during the four-month period.

Consider the following example:

Period	PAYE withheld from employees’ remuneration	Payment (80% of the PAYE withheld)	Amount deferred (20% of the PAYE withheld)
April 2020	R1 000 000	R1 000 000 x 80% = R800 000*               * to be paid over on 7 May 2020	R200 000
May 2020	R1 050 000	R1 050 000 x 80% = R840 000*       * to be paid over on 7 June 2020	R210 000
June 2020	R950 000	R950 000 x 80% = R760 000*            * to be paid over on 7 July 2020	R190 000
July 2020	R900 000	R900 000 x 80% = R720 000*                    * to be paid over on 7 August 2020	R180 000
Total	R3 900 000	R3 120 000	R780 000

Therefore, the amount not paid over (i.e. deferred) in terms of the additional relief proposal of R780 000 must be paid over to SARS in six equal monthly instalments of R780 000 / 6 months = R130 000 per month, with the first instalment payable on 7 September 2020 and the last instalment payable on 7 February 2021.

It is important to note to note that the 1st PAYE deferral is therefore on 7 May 2020 (and not 7 April 2020).

 

Proposal 3: Deferral of corporate provisional tax

The Fourth Schedule of the Income Tax Act requires that provisional taxpayers estimate their total taxable income and make provisional tax payments based on this estimate.  Only if it can be justified, can an estimate be based on an amount lower than the taxpayer’s basic amount.

Normally, the provisional tax payments are made as follows:

First provisional tax payment	Due six months after the end of the year of assessment	Equal to 50% of the total estimated liability
Second provisional tax payment	Due on the last day of the year of assessment	Equal to the total estimated liability, reduced by the first provisional tax payment

The tax relief proposals related to provisional tax are effective during the period 1 April 2020 to 1 April 2021 and can be summarised as follows:In the case of non-compliance, SARS can impose two penalties:

•             A late payment penalty of 10% imposed in terms of paragraph 27 of the Fourth Schedule, in the case of late payment of the first or second provisional tax payment; and

•             An underestimation penalty of 20% imposed in terms of paragraph 20 of the Fourth Schedule, in the case of underestimation of the second provisional tax payment.

Normal Provisional Tax		Additional relief
First provisional tax payment equal to 50% of the total estimated liability		First provisional tax payment equal to 15% of the total estimated liability
Second provisional tax payment equal to the total (i.e. 100%) estimated liability, reduced by the first provisional tax payment		Second provisional tax payment equal to 65% of the total estimated liability, reduced by the first provisional tax payment

It is interesting to note that the abovementioned proposal provides for relief without administrative penalties and interest being levied for late payment.

The balancing portion of the provisional tax liability (i.e. 35% of the total estimated tax liability which has been deferred) must be paid in the form of a third voluntary top-up payment

             seven months after the end of the year of assessment (in the case of a 28/29 February year of assessment); or

             six months after the end of the year of assessment in any other case

to avoid interest being charged.

The relief covers the following:

• First provisional tax periods ending on or after 1 April 2020 but before 1 October 2020; and
• Second provisional tax periods ending on or after 1 April 2020 but before 1 April 2021.

Small and medium-sized businesses (i.e. with an annual turnover ≤ R50 million) will qualify for the relief.  There is still uncertainty about whether natural persons who run businesses will qualify for the relief and what the eligibility criteria will be in that case. 

 

CONCLUSION

It is important to highlight that the current package of support does not include any VAT deferrals or reductions, except those on offer under rebate item 412.11 on imported goods.

The tax proposals discussed above are aimed at providing temporary cash flow relief to businesses in an attempt to curb the negative impact of the COVID-19 pandemic.  Businesses should investigate whether the relief mechanisms are available and should pursue these, where relevant.

 

REFERENCES

• Ministry of Finance media statement issued on 29 March 2020.
• Explanatory notes on COVID-19 tax measures.

 

WEBINAR COMMENTARY

Join The Tax Faculty in a free webinar that focuses on unpacking the resources made available by Government as well as the explanation of any Practice Notes to be issued by SARS.Please click here.

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