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Are your employment contracts in line with the requirements of the Income Tax Act?

by , 30 July 2013
You probably know that a watertight employment contract is as good as money in the bank. But did you know the Income Tax Act requires your employment contracts to meet certain requirements? Read on to find out what these requirements are so you can comply.

The Income Tax Act requires that you address the following aspects in your employee's employment contract.

Here's are the three things the Income Tax Act says you must address in your employment contracts

You must stipulate:

#1: The cash amounts due to your employee

  • This includes salary and allowances (company cars). Cover the allowances thoroughly. Remember, if your employee uses his own motor vehicle, laptop computer cellphone and home office for business purposes, but he covers the costs associated with this, then you can reimburse him or give him an allowance.
  • Describe all fringe benefits and attach a monetary value to these and make sure you stick to the values approved in the Income Tax Act.
  • Fully describe the remuneration structure. Keep in mind that if you reimburse employees for any expenses, you must refer to the reimbursement in the contract of employment. Clearly specify any limits and the procedure to be followed when your employee makes a claim.

#2: If either you or your employee will contribute to a benefit fund (medical aid, pension or provident fund) then you must state exactly who contributes what.

Make sure contributions to benefit funds (such as medical aid and retirement fund schemes) by both you and your employee are not only stated in the employment contract, but are also in line with the rules of the schemes concerned, says the Practical Tax Loose Leaf Service.

When SARS does a PAYE audit, the auditors cross-check between actual payments, payslips, employment contracts and scheme rules to ensure everything is in line.

#3: If your employee has to provide any tools for the trade, for example, his own car, you must state clearly who's responsible for the costs.

Remember, if your employee receives an allowance for his computer, cellphone or home office, then he'll be taxed on the allowance without being allowed to deduct his actual expenditure.

So, in this instance, it's better for your employee if you reimburse actual expenditure, rather than giving him an allowance.

There you have it. Addressing these three aspects in your employee's employment contract will ensure you comply with Income Tax Act.

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