For years now, employers have been attempting to put more money in their employees' pockets, without simultaneously increasing their own costs, by structuring pay packages to comprise a combination of cash and non-cash benefits.
Structuring a package in this way tends to improve the employee's financial position, as the values of non-cash benefits are taxed according to special provisions in the tax legislation, often at a lower value than their cash cost.
So, for example, if you provide your employee with a company car, which costs R75 000 including VAT, the cost of providing that car to the employee might amount to, say, R1 800 a month (lease, petrol, insurance and maintenance). Your employee will, however, only be taxed on R1 184 per month. Thus, if you'd given your employee sufficient cash to buy the car, he or she would have been taxed on an additional R616 per month.
In order to ensure you do not end up out of pocket, as the employer, by providing non-cash benefits, and, similarly, to ensure that your employee does not lose out, the most effective method for determining what benefits you wish to provide, is to set a "total cost of employment" figure and to allow the employee to structure this figure with a combination of cash and non-cash benefits.
Remember, though, that the South African Revenue Services (SARS) has a way of increasing its collection of taxes, by scrutinising how salary structuring has been implemented and, where it finds errors, assessing the employer with the underpaid employees' taxes, plus interest.
So say you decided, some years ago, to adopt the policy that your employees would no longer be required to make their own contributions to their medical aid and provident funds, and that the full contributions would be made by you. You checked that the funds allowed you to do this and you changed the company's written policy relating to employees' remuneration, in order to reflect the decision.
The decision was a good one because it meant that, at no cost to you, you put more money in your employees' pockets. This is because medical aid and provident fund contributions are not tax deductible if the employee pays them, but if the amounts are paid by you, the employer, the amounts will be deductible in your hands (provided they don't exceed 20 percent of the employees' remuneration) and will not be fully taxed in the employees' hands (from March 1 1998, one third of the total medical aid contribution has been taxable in the employee's hands if the employer pays the full contribution).
So say you are prepared to incur a cost of R4 000 per month to employ someone.
The medical contributions relating to that person amount to R300 and the provident contributions, to R400. In terms of the scheme rules, you can either pay the employee R4 000 cash on which he or she would be taxed R588 and would then have to pay the contributions, leaving him or her with R2 712 or you can pay him or her R3 300, on the basis that you will pay the contributions. The tax will then be R408, and he or she will be left with R2 892 that is, better off by R180.
(If you implement this structure, be aware that if the retirement fund contributions are based on cash salary, the employee's retirement savings may be prejudiced.)
The decision could still backfire on you, depending on how the SARS choose to review it. SARS may decide that:
* The contributions to the funds continued to be reflected on the payslips;
* The contributions to UIF were based on the package figure (R4 000 in the example) and not the basic figure;
* You did not inform your employees properly of the change; and
* Your employees' letters of appointment and notifications of annual increases do not reflect your intention.