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Are you sure your employment contracts are legally compliant?

by , 20 September 2013
An employment contract's only binding and enforceable when there's been an agreement. This means you've made an offer to the employee in writing, and he's accepted it in writing. To ensure SARS doesn't scrutinise your employment contracts, make sure your contracts meet these three legal tax obligations.

You probably know you have a legal obligation to give your employees a written employment contract. But do you know that your contracts must reflect these three tax obligations?

Three legal tax obligations your employment contracts must meet

The Practical Tax Loose Leaf Service urges you to address all aspects relating to the employment in the contract. You must stipulate:

Obligation#1: The cash amounts due to your employee:

  • Cover all salary and allowances thoroughly. For example, if your employee uses his own car, laptop, cell phone or home office for business reasons, but he covers these costs, you must reimburse him or give him an allowance.
  • Describe all fringe benefits and attach a Rand value to these (and make sure you stick to the values approved in the Income Tax Act).
  • Fully explain the remuneration structure. This'll help ensure your contracts can stand a challenge from SARS.

Obligation#2: If either you or your employees contribute to a benefit fund (for example, medical aid, pension or provident fund) you must specify who contributes what.

Keep in mind these contributions must be in line with the rules of the schemes concerned. When SARS does a PAYE audit, auditors cross-check between actual payments, payslips, employment contracts and scheme rules to ensure everything's in order.

Obligation#3: If your employee uses his own tools for the trade (for example, his own car), you must detail who is responsible for the costs.

One word of caution: If your employee receives an allowance for his cell phone or home office, he'll be taxed on the allowance and can't deduct his actual expenses.

In this case, it's better for him if you reimburse actual expenses, rather than giving him an allowance. But, if these amounts are of a capital nature (for example, a computer, office furniture), your employee can claim a wear and tear allowance for the value of the item he uses for business purposes.

Please note this doesn't apply to employees who receive more than 50% of their income as commission.

Remember, if your employment contracts don't' meet these important tax obligations, your business could end up being audited by SARS. Don't take that risk. Make sure you comply with the Income Tax Act.

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