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South Africa: Increased employee tax audits expected

South Africa: Increased employee tax audits expected

The South African Revenue Service (SARS) is expected to increase audit activity across all taxes, and in particular with regard to employee and employment taxation.

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Individual income tax is South Africa’s largest source of revenue. The majority of individual income tax is collected monthly via employees’ tax (also known as Pay-As-You-Earn) withholding. The balance of individual income tax collection comes from provisional tax and assessed tax collections. SARS has delegated its collection responsibilities to employers in relation to employees’ tax. The employer is required to withhold employees’ tax and remit these taxes to SARS. In addition, the employer must keep detailed records of remuneration paid to employees and the relevant taxes withheld, and provide this information to SARS for each employee by way of an employees’ tax certificate (forms IRP5/IT3A).

Payroll management is administratively intense. The larger the payroll (number of compensation and benefit items and/or the size of the employee population), the greater the risks to the employer. SARS may select a person (taxpayer) for verification, audit, and investigation based on random selection or risk assessment basis. SARS may issue questionnaires to employers in relation to employees’ tax, with a statement that the questionnaire is a:

pre-audit assessment which may be followed by a field audit. The practice of SARS may also include interviews with a random selection of your employees.

Employers therefore need to be aware of what could be an information gathering process versus an official SARS audit. Rather, SARS must issue employers with a formal “Notification of Audit” letter from a specific SARS auditor. A payroll questionnaire from SARS is not a formal “Notification of Audit.”

Audits can include a variety of compensation and benefit entitlements such as (not an exhaustive list):

  • Cash remuneration and benefits paid to expatriate employees
  • Cash remuneration and benefits paid to local employees
  • Cash remuneration and benefits paid to executives and directors
  • Retirement benefits provided to employees
  • Payments to personal service providers, labour brokers and independent contractors *hot topic*
  • Share incentive schemes
  • Cash book payments
  • Gifts, prizes, awards and gift vouchers
  • Loans to employees
  • Company cars (a hot topic)
  • Travel allowances and reimbursements (a hot topic)

Moreover, there has been a prevalence of SARS audits as relates to employment tax incentive (ETI) claims. ETI is an incentive whereby an employer may claim a deduction against the monthly employees’ tax liability if a certain category of employee is employed. This immediate cash-flow benefit can be significant and if not claimed correctly, can result in substantial penalties for the employer.

Payroll audits can take up to 12 months to be finalized. Therefore, employers selected for audit may need to devote time and preparation for interactions with the SARS auditors. It may be prudent for employers to conduct periodical payroll reviews to determine the degree of compliance in anticipation of the SARS audit.


Read a June 2019 report [PDF 104 KB] prepared by the KPMG member firm in South Africa

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