In our Tax Alert dated 18 February 2011, we discussed the South African Revenue Service's Binding Class Ruling No 27 (BCR 27), which dealt with the question of whether there is a liability on an employer to withhold pay-as-you-earn (PAYE) from tips received by the employees from satisfied customers.
Based on the particular circumstances the ruling provided that the transfer of the tips from the employer's bank account into the employee's bank accounts will not constitute the payment of "remuneration" as contemplated in paragraph 2(1) of the Fourth Schedule to the Income Tax No 58 of 1962 (the Act) and would thus not be subject to PAYE.
Some confusion recently arose around the application of BCR 27 with reports in the media stating that the effect of the ruling was that tips paid by an employer to an employee are not taxable (which will obviously create a stir). This confusion prompted the release of the updated BCR 27 which specifically confirms that the ruling does not mean that tips received by employees under the circumstances as described in the ruling, nor for that matter tips received in general, are not taxable. Amounts received by way of tips constitute "gross income" as defined in section 1 of the Act and will, therefore, be subject to income tax in the hands of the recipient. The fact of the matter is that tips (as contemplated in the ruling) will not constitute "remuneration" as defined in the Fourth Schedule, which merely releases an employer from the obligation to withhold employee's tax from these amounts, but does not release the recipient from the obligation to declare such tips for income tax purposes.
BCR 27 does not address the issue that the recipients should be aware that if the employer does not deduct PAYE from the tips, the employee may still be required to register as a provisional taxpayer. A provisional taxpayer under the Fourth Schedule to the Act includes any person who derives by way of income any amount which does not constitute remuneration or an allowance otherwise contemplated in section 8(1), but excludes a person exempt from the payment of provisional tax in terms of paragraph 18 of Fourth Schedule to the Act. In this regard, paragraph 18 of the Fourth Schedule specifically excludes any natural person who does not derive any income from carrying on any business, if the taxable income of that person for the relevant year of assessment will not exceed the tax threshold.
For instance, the tax threshold for the 2012 year of assessment for an individual under the age of 65 is R59 750. If such a person earns taxable income (not limited to tips) in excess of R59 750, such person will be required to register as a provisional taxpayer. It is therefore important to appreciate that:
- while tips received by employees may not constitute "remuneration" for purposes of the Fourth Schedule to the Act, such tips may in any event be taxable (ie provided the total taxable income of the individual exceeds the relevant threshold); and
- the recipient may be required to register as a provisional taxpayer and make payments for provisional tax on 31 August and 28/29 February each year, as the case may be.
In the end, the additional administrative consequences for a recipient of tips which are not subject to PAYE and where such recipient is required to register as a provisional taxpayer may prove to be more of a nightmare than if the PAYE had simply been deducted by the employer.