We are pleased to share clarity received from the Payroll
Authors Group of South Africa (PAGSA) on the proper application of the new
section 11(nA) and paragraph 2(4)(g) (of the Fourth Schedule) tax deductions. This
guidance is critical for administering refunds and corrections in the payroll
system, effective 1 March 2025.
For system implementation details regarding this functionality,
please refer to DLP release notes 76567 and 97340 (Section 11(nA) Employee Refunds – New Tax
Deduction) and (System enhancement on tax codes 4588 and 4589).
Key legislative amendments (effective 1 March 2025)
These amendments were introduced primarily to accommodate
the forthcoming requirement for SARS monthly payroll reporting.
Section
11(nA) Amendment: The insertion of the words "or is" in Section 11(nA)
clarifies that a deduction for a refunded amount is permitted only if the
amount was or is included in the taxable income of that person. The term
"or is" now allows the deduction to be applied in the payroll
during the same tax year the amount was refunded, addressing the prior
difficulty where the deduction was restricted to refunds occurring after
the end of the initial year of assessment.
Paragraph
2(4)(g) Introduction: This new paragraph allows the deduction for the
refunded amount (which was previously included in taxable income) to be
applied in the payroll for PAYE calculation purposes. This is intended to
assist the employee's cash flow by compensating for the PAYE that was
withheld earlier.
Proviso:
If the refund deduction exceeds the remuneration for the month, the
excess can be deducted in the next succeeding month, provided it is within
the same year of assessment. Any excess amount not deducted by the end of
the tax year must be claimed by the employee via the ITR12 assessment
process.
The Core Principle: accrual determines the adjustment or refund method
To ensure compliance when adjusting remuneration, the
critical question is: "Did the remuneration amount that must be adjusted
accrue?".
What qualifies as a "refund"?
SARS accepts two methods for the amount to be considered a
"refund" under s11(nA) and par 2(4)(g):
Bank-to-bank
Repayment: The employee repays the full amount of money from their bank
account into the employer's bank account. This is sometimes referred to as
a 'Refund Outside the Payroll'.
Reduction
of 'Net Pay' (Recoupment): A deduction from the employee's after-tax pay
(net pay) by agreement to settle the debt25. This is sometimes
referred to as a 'Refund Inside the Payroll' and is supported by the legal
understanding of 'recoupment'.
Important notes on the refund deduction method
Bursaries:
A repayment of a bursary that qualified for exemption under section 10(1)(q)
of the Act does not qualify for a s11(nA) deduction. This is because the
original amount was exempt and therefore was not "included in the
taxable income of that person".
Restraint
of trade refunds (s11(nB)): Refunds of restraint of trade payments are not
allowed as a deduction during the tax year in the payroll, as paragraph 2(4)(g)
is not linked to section 11(nB). The refund is typically paid to an
ex-employee.
The
total amount repaid by the ex-employee can be reported on information Code
4589.
However,
Code 4589 will NOT be used by the ITR12 assessment process, nor does it
replace the Refund Confirmation Letter (RCL). The ex-employer must still
issue an RCL, and the ex-employee must claim the deduction via the ITR12
process.
Impact
on other employment taxes and values: While the 2(4)(g) deduction
correctly adjusts the PAYE and SDL 'leviable amount’, amounts calculated
based on gross remuneration (which is not reduced by the refund deduction)
will be unaffected by the deduction. This includes:
UIF:
SARS confirms there is generally no provision for the refund of UIF as
the original amount remains 'remuneration'.
ETI
(Employment Tax Incentive): The ETI amount remains based on the gross
remuneration paid in the initial month.
Other
Remuneration-Based Values: Values such as the Retirement Fund deduction
cap (Section 11F), the commission determination (23(m)), and the
Remuneration Proxy are calculated on the gross remuneration amount and
are not reduced by the refund deduction in the payroll.
Instalments:
The par 2(4)(g) deduction can only be applied when the amount is actually
refunded. Therefore, if the amount is repaid in instalments, the deduction
must be applied for each month in which an instalment is paid.
Annualisation:
SARS accepts that payrolls may use an 'annualised' remuneration
calculation to deduct a large refund amount, provided that the monthly and
Year-to-Date (YTD) PAYE remains R0.00 or positive (this functionality will
be released in the future).
Tax
rates: The deduction must be applied in the year the refund is paid,
even if the tax rates were higher or lower in the year the original
payment was received.
Termination/ex-employee
refunds: If an ex-employee refunds an amount after employment
ends, the par 2(4)(g) deduction cannot be applied if no other remuneration
is paid43. If the refunded value cannot be captured in the
payroll under Code 4588, the employer must issue a Refund Confirmation
Letter (RCL) to the ex-employee to substantiate their s11(nA) deduction
claim via the ITR12 assessment process. Employers can refer to SARS
Interpretation Note 88 for more information on the RCL, which will also be
updated with the new legislation in due course.