In an earlier edition, we cautioned employers, that as a result of statements made by the Minister of Finance during the 2010 Budget Speech, that there would be an increased focus on employees' tax this year.
A special project targeting all SARS Large Business Centre clients country wide has been launched. The audit questionnaire, which is of a limited scope, is targeting share schemes, expatriates and travel allowances. This focus creates significant risks for those individuals identified and their employers. The questionnaire states that a comprehensive audit may follow if areas of non-compliance are identified through the audit.
The SARS special project is similar to projects undertaken overseas. The Australian Tax Office Compliance Programme for 2010/2011 released earlier this month identifies a focus on globally mobile executives and other highly paid individuals. The Internal Revenue Service in the United States (US) announced earlier this year that they will be utilising a new National Research Project audit programme to cover employment taxes which will target 6 000 US companies over a three-year period. Commencing in February 2010, 2 000 US companies will be audited each year.
The SARS special project questionnaire, which is effectively an audit, can be particularly burdensome on employers. If selected for inclusion in the special project, taxpayers should secure the representation of a qualified tax professional to guide them through the often complex process. Now is the time to undertake a compliance review and get the house in order before the SARS auditors come knocking.
The special project covers three areas: share schemes, outbound and inbound expatriates and travel allowances.
employee share scheme rules
The employee share scheme provisions were overhauled in 2004. Requests will be made for various documents such as scheme brochures, trust deeds, trust rules, the resolutions containing the board approval and remuneration policies. Furthermore, employers will be required to state whether directives were applied for in terms of Paragraph 11A of the Fourth Schedule to the Income Tax Act No. 58 of 1962 for share gains on all transactions applicable to the relevant schemes at the employer company.
The questionnaire contains 22 questions on expatriates which indicates that the special project is focussed on compliance with the taxation of globally mobile employees. Companies ought also to be mindful that the provision of services by expatriate employees in South Africa for a significant period of time may create a tax presence for the foreign employer. The questionnaire also looks for instances where benefits are provided to the expatriates. No doubt the intention is to determine whether the fringe benefits granted are subject to employment taxes and whether they have been properly and consistently classified during the audit period. The audit period is in respect of years ending 28 / 29 February from 2004 to 2009.
The face of travel allowances has changed dramatically over the past few years and with those changes so has the need to review the adequacy of the documentation kept by employers to support their position. SARS will request a copy of the policies applicable during the audit period.
how to survive the special project
Employers should undertake a general compliance review so that a clear understanding of the relevant facts and circumstances is obtained. This ‘pre-audit' analysis will identify areas of interest and enable employers to ensure that they are correctly withholding employees' tax, and accounting for fringe benefits provided to employees under existing arrangements. To the extent that employers are not doing so then at least employers will be able to develop arguments early on in the audit process to resolve issues and negotiate settlements.
Going forward, employers need to understand the evolving framework for taxation of employee share schemes, expatriates and travel allowances and consider whether their existing arrangements are structured in the most tax effective manner.