Save tax now - structure your salary package as a mix of cash and fringe benefits.
The taxman's about turn on the legality of salary sacrifice schemes is very good news for taxpayers.
The policy change opens the door for employers and employees to sit down and plan a range of fringe benefits which will lower the employee's tax bill.
There's absolutely no excuse now for employers not to provide this service for their employees.
A salary package structured in terms of both cash and fringe benefits will significantly reduce an employee's monthly tax payments because generally fringe benefits are not fully taxed.
In the past, the taxman's official policy was to attack salary sacrifice schemes (also called income substitution schemes) if they converted the employee's cash salary into perks.
In other words, if an employee earned a cash salary of R6 000 one month, and the next month a cash salary of R3 000 and fringe benefits of R3 000, the taxman would have rejected the new order and taxed the employee on the full R6 000 anyway.
It is for this reason that many employees could only benefit from a tax structured package at the time of their annual salary review (and then only on a limited basis) or when they started a new job.
But the taxman's policy about turn has changed all that.
An employee can now structure his or her salary package at any time.
Salary sacrifice schemes
The commonly used salary sacrifice schemes are car allowance, entertainment allowance, subsistence allowance and rentals on leased housing premises.
Two other important benefits which have now been sanctioned by the taxman's new policy are non-contributory medical aid, pension and provident funds.
The tax significance of non-contributory schemes is that they are not taxed as fringe benefits - they are completely tax-free to the employee (but the contributions are still deductible to the employer).
Non-contributory means that the employer pays the total contribution to these funds (effectively, the employee's pre-tax salary is reduced by this amount and he is taxed on the lower salary).
As Rob Stretch, tax partner of accounting firm Ernst & Young in Durban notes, it is crucial that the rules of the medical aid and retirement fund allow for the contributions to be paid by the employer and do not obligate the employee to pay his share of the contributions.
"For example, if the rules of the medical aid fund provide for 'x' amount to be paid by the employer and 'y' by the employee but the company contributes the full premium, then the employee's portion will be treated as a fringe benefit and taxed in his hands," says Stretch.
But the rules of a fund can be changed to allow for a non-contributory payment basis.
An important point raised by Stretch is that the percentage contribution to a pension or provident fund must not be based on the lower cash portion of the employee's structured salary, but rather on the total cost of the employment package.
If the lower amount is used in the calculation, you stand to lose significantly on your payout from the fund on resignation or retirement.
Written agreement
In any salary sacrifice scheme the employment contract is crucial.
The taxman insists upon a written agreement between the employer and employee.
The exact wording in the contract is vital.
Stretch suggests the following clause be stated in the contract (a total annual package of R100 000 is assumed).
"The total annual cost to the company of employing you will be R100 000, including all benefits."
No other mention of salary or benefits should be made in the employment contract.
Attached to the contract there should be a supporting schedule detailing the make-up of the salary package, as follows.
Compilation of monthly salary package
15% to non-contributory provident fund:
R1 250
Company will contribute the monthly premiumto the medical aid fund on a non-contributory basis:
R700
Car allowance:
R1 500
Entertainment allowance:
R200
Cash salary:
R4 683
Total:
R8 333
Should any of the other amounts increase from time to time, the cash salary will reduce accordingly.
The employee payslip should not reflect details of any employer contributions made.
There are a number of fringe benefits available to employees.
Enlightened employers should seek the help of a qualified tax consultant to take full advantage of the new policy.
A word of warning: the taxman will challenge an employee's structured employment contract if the terms are unrealistic and unreasonable (for example, a R9 000 car allowance in a R10 000 salary package).
The taxman's view is that the contract must be based on an arm's length transaction between employer and employee.