When structuring a salary package, negotiate on your net salary, writes Belinda Beresford
It’s great getting a new job. But just because you and your employer have signed your sides of the contract, things may not be quite as straightforward as they seem. One cloud about to rain on your parade could be the taxman.
If you negotiated a structured salary deal you may not see quite as much moolah landing in your bank account as you’d anticipated, unless you had the foresight to agree to a net pay package based on the sum you actually take home.
Structured pay packages have gained in popularity. Employees have woken up to the benefits of tax planning and are more likely to demand a tax efficient pay package rather than straight salary payment.
Employers have also realised that by using a good tax advisor they can give workers more take-home pay without adding to the payroll cost – except for the fees of a good tax advisor.
However, the government is equally aware of the effects of tax planning on its coffers and has been taking steps to restrain such activities. It has declared its intent to create a “fair and equitable” tax system. The intention is that people with equal gross salaries will pay the same amounts of tax, regardless of their salary structure.
So tax breaks are steadily being eroded: for example, past government budgets have chipped away at the tax benefits of second company cars and holiday accommodation.
>From the end of this financial year, employers will have to fill in the new, more exhaustive IRP5 tax certificates for employees.
The detail demanded in these new IRP5 certificates will enable the taxman to cast a more searching light on people’s affairs. In combination with a new computer system, the certificates will also allow easier cross-checking of information between what you said on your tax return and what your employer said.
According to Old Mutual Employee Benefits, the new IRP5 will allow the revenue service to “more accurately assess the limits of the taxpayer’s deduction for contribution to pension and retirement annuity funds … It could also help SARS [the South African Revenue Service] in investigations of other employee benefits such as salary sacrifice arrangements”.
Employees could be in for a nasty surprise of having to pay more tax as the receiver gains greater clarity about their financial affairs.
The shock may be compounded if it proves impossible to persuade your employer to contribute to the difference, although common sense would suggest that companies which value their employees are likely to be flexible on the issue. From PAGE34
Combined with growing efficiency in the revenue service and its new computer systems, this stricter attitude to tax breaks has made employers more cautious about salary packages.
Fisher Hoffman Sithole director Beverley Penny says some companies are starting to stipulate that if there is a change in tax laws, employees have no recourse to their employer.
But, according to Penny, while room to manoeuvre still exists, the trick for smart employees may be to agree in writing to a salary on a net rather than gross basis. Often people have an informal agreement as to what their final take-home pay will be when agreeing on a salary package. The difficulty comes in proving it when problems arise.
But bad though it may be to know you have to pay more tax in future, an even worse scenario occurs if your employer has erred in calculating your taxes, such as giving you an allowance to which you were not entitled. This will probably see you not only paying extra tax, but also having to fork out for back payments. According to a revenue service representative, while your employer is liable to the tax authorities, tax laws allow the missing money to be recouped from you. Ultimately, the tax liability lies with the money-earner.
However, if this situation does occur, labour legislation may allow for some recourse against your employer.
If you accepted a job with a salary package later discovered to be incorrect, you will suffer a fall in take-home pay due to your employer’s error. According to some tax experts, this could amount to a breach of contract by your employer.
So think about getting your union or lawyer to look into the matter. But before resorting to legal threats – and assuming you want to stay with your employer – try arguing for compensation and repayment on the best terms you can get. And certainly bring the issue up when you’re next involved in pay negotiations.