Employees’ tax and provisional tax measures to combat the economic effects of COVID-19: Who will benefit?

On 1 April 2020, National Treasury published the following documents regarding the tax relief measures announced:

• The 2020 Draft Disaster Management Tax Relief Bill (Draft Tax Relief Bill);
• The 2020 Draft Disaster Management Tax Relief Administration Bill (Draft Tax Relief Admin Bill);
• The Explanatory Memorandum on the Disaster Management Tax Relief Bill, 2020 (Draft) (Draft EM); and
• A media statement regarding the publication of the draft bills and the Draft EM (Media Statement).

In this article, we discuss two of the relief measures dealt with in the draft bills and the Draft EM, namely:

deferral of the payment of the employees’ tax liability for tax compliant small to medium sized businesses; and

deferral of the payment of provisional tax liability for tax compliant small to medium sized businesses.

Deferral of payment of provisional tax liability

As explained in the Draft EM, the Fourth Schedule to the Income Tax Act 58 of 1962 (Act) states the following regarding the liability to pay provisional tax:

• Every provisional taxpayer must make provisional tax payments in respect of their annual tax liability, which is based on an estimate by the taxpayer of its total taxable income for the year of assessment;
• The first provisional tax payment, which is 50% of the total estimated liability, must be made within six months after the commencement of the taxpayer’s year of assessment. The second provisional tax payment, equal to the total estimated liability less the first payment, must be made by no later than the last day of that year of assessment. For example, if a taxpayer’s year of assessment starts on 1 May, the first provisional tax payment must made before 31 October and the second provisional tax payment must be made by no later than 30 April each year;
• A 10% late payment penalty can be imposed for late payment of the first and second provisional tax payments;
• An underestimation penalty can be imposed where there is an underpayment of provisional tax for the second provisional tax period as a result of underestimation. The underestimation penalty is reduced by the 10% late payment penalty, if the latter was imposed; and
• Interest is imposed on the unpaid portion of a provisional tax liability.

To assist with alleviating cash flow burdens arising as a result of the COVID-19 outbreak, Government proposes reducing the provisional tax liability of tax compliant small to medium sized businesses, in the short term. The rationale for extending the relief to these businesses is stated in the Draft EM:

“Tax compliant small to medium sized businesses play an important role in stimulating economic activity, job creation, poverty alleviation as well as the general improvement of living standards, and are expected to be amongst the hardest hit… Allowing for a deferred payment of provisional [tax] liabilities should assist these businesses by providing additional cash flow during the crisis. This could be the difference between pushing a small or medium sized business into liquidation, or providing some space for the business to get through the crisis and add to the economic recovery, hopefully being a source of higher tax revenue in the medium term.”

The Draft EM states that the relief measures proposed, which apply for a period of 12 months, beginning 1 April 2020 and ending on 31 March 2021, are the following:

• Deferral of a portion of the payment of the first and second provisional tax liability to SARS, without SARS imposing administrative penalties and interest for the late payment of the deferred amount;
• The first provisional tax payment due from 1 April 2020 to 30 September 2020 will be based on 15% of the estimated total tax liability, while the second provisional tax payment from 1 April 2020 to 31 March 2021 will be based on 65% percent of the estimated total tax liability; and
• Provisional taxpayers with deferred payments will be required to pay the full tax liability when making the third provisional tax payment in order to avoid interest charges. In practice, this is the payment that will be made when the taxpayer’s income tax return for the year of assessment is submitted, and an income tax assessment is issued pursuant thereto.

The Draft EM states that for the purposes of this proposal, a small or medium sized business is defined as any company conducting a trade with an annual turnover not exceeding R50 million. According to the Draft EM, the eligibility criteria for individuals carrying on a business have yet to be finalised, but one possibility is that they will be eligible if their turnover is less than R5 million and no more than 10% of their turnover is derived from interest, dividends, foreign dividends, rental from letting fixed property and any remuneration received from an employer.

However, one should note that the Draft Tax Relief Admin Bill and the Draft Tax Relief Admin Bill use the term ‘gross income’ to define a “qualifying taxpayer”, that is, a taxpayer who can benefit from the relief measures. In terms of the Draft Tax Relief Admin Bill, a “qualifying taxpayer” is defined as a company, trust, partnership or individual that has a gross income of R50 million or less during the year of assessment ending on or after 1 April 2020 but before April 2021. The “gross income” must not include more than 10% of the income derived from interest, dividends foreign dividends, rental from letting a fixed property and any renumeration received from an employer. From the bills, it appears that the position regarding individuals carrying on a business is already catered for, but this will be clear from the final versions of the legislation, once it is released.

Furthermore, the Draft EM explains that the relief is not available to a provisional taxpayer that:

• has failed to submit any return, as required in terms of section 25 read with section 1 of the Tax Administration Act 28 of 2011 (TAA); or
• has any outstanding tax debt, as defined in the TAA, excluding a tax debt that is being paid under an instalment payment agreement under section 167; a tax debt compromised by agreement with SARS under section 204 of the TAA; a tax debt suspended in terms of section 164 of the TAA; or a tax debt that does not exceed the amount referred to in section 169(4) of the TAA.

Employee’s tax (PAYE) deferral

The Draft EM explains that in terms of paragraph 2 of the Fourth Schedule to the Act, every resident who is an employer or representative employer (where the employer is non-resident) must pay employees tax to SARS within seven days after the month in which the tax was withheld. Should the seventh day fall on a weekend or a holiday, the employees’ tax is paid on the last business day before the seventh day. Failure to pay over to SARS the employees tax withheld by the employer will result in penalties and interest being levied on the amounts of tax that should have been paid.

To assist with alleviating cash flow burdens arising as a result of the COVID-19 outbreak, Government proposes reducing the employees’ tax liability of tax compliant small to medium sized businesses, in the short term. Regarding the rationale for this proposal, the Draft EM states the following:

“Tax compliant small to medium sized businesses play an important role in stimulating economic activity, job creation, poverty alleviation as well as the general improvement of living standards, and are expected to be amongst the hardest hit… Several countries have implemented measures whereby businesses are allowed to defer the transfer of payroll taxes to the tax authority. This can be in the form of a temporary suspension of payments for a fixed period (for most countries the suspension period is between 3 and 6 months), or by allowing businesses to pay taxes in instalments. The purpose of such measures is to assist businesses with liquidity in a time where business activity is likely to see an unprecedented decline in turnovers. The benefit of the measure is immediate cash flow relief that could enable businesses to survive.”

The Draft EM states that the relief measures proposed, which apply for a period of 12 months, beginning 1 April 2020 and ending on 31 July 2021, are the following:

• Deferral of payment of 20% of the PAYE liability, without SARS imposing administrative penalties and interest for the late payment thereof.
• The deferred PAYE liability must be paid to SARS in six equal instalment over the six month period commencing on 1 August, that is, the first payment must be made on 7 September 2020. The Draft Tax Relief Admin Bill states that the six-month period will come to an end on 5 February 2021.

As is the case with the provisional tax relief, the relief is only available to so-called “qualifying taxpayers” and what is discussed in the provisional tax relief section of this article also applies here.

Comment

Although these proposed relief measures are certainly welcomed, the legislation will only be final once it has been adopted by Parliament and signed into law by the President. Only then will there be certainty as to who exactly will benefit. According to the Media Statement, the public has until 15 April 2020 to submit comments on the bills published.

In a later edition of our Tax & Exchange Control Alert, we will analyse the proposals in more detail and consider some of the issues that may need to be addressed before the legislation becomes final.