Taxation of variable remuneration: Changes are coming

Two retirement pots: Limited access, compulsory preservation
December 12, 2022
Never do things just ‘for tax purposes’
February 14, 2023

The Draft Taxation Laws Amendment Bill was published on 29 July 2022. The bill’s publication marks the start of the tax legislative amendment season. The proposed legislative amendments are currently open for public comment and participation. Executives and payroll administrators should take note of a proposed change to the way in which variable remuneration will be taxed, particularly from a timing perspective.

Currently, section 7B of the Income Tax Act provides for the matching of the timing between accrual and payment of various forms of variable remuneration. As a result, any amount of variable remuneration paid by an employer to an employee is deemed to accrue to the employee on the date during the tax year in which the amount is paid. Consequently, variable remuneration is taxed on the date when the amount is paid to the employee as opposed to the date that the amount would ordinarily accrue to the employee under the general accrual rules. This is an exception to ordinary rules.

Section 7B includes (amongst others) the following amounts in the definition of “variable remuneration”:

  • overtime pay, bonuses or commission;
  • an allowance or advance paid in respect of transport expenses;
  • an amount which the employee becomes entitled to as a result of unutilised leave; and
  • any night shift or standby allowance.

Given some anomalies in the legislation and that it does not cater for all circumstances, Government proposes amendments to this regime that will come into operation on 1 March 2023. The amendments are to ensure that:

  • Performance-based variable payments that form part of an employee’s salary in the informal sector are catered for, and
  • The date of accrual as relates to deceased employees is retained as the day prior to the date of death; and
  • The proposed changes are to be catered for through changes to be made to the definition of “variable remuneration” in section 7B of the Act to include these amounts.

Employers affected by the proposal must partake in the public process and alert the Government to how the proposed changes could affect them directly. It has recently been the experience that National Treasury considers submissions made and address shortcomings in proposals as necessary.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

We use cookies to improve your experience on our website. By continuing to browse, you agree to our use of cookies