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What is salary sacrifice and what does it have to do with my company's payroll?

by , 11 September 2013
Since payroll is such a huge component of the tax net, it's an obvious target area for audits. That's why it's vital you pay close attention to your compliance strategies. A relatively small investment in time, thought and planning at the outset could potentially save you a world of trouble, penalties and sanctions. Read on to discover the link between salary sacrifice and payroll.

Salary structuring is the second component of payroll. The first is deciding who must be taxed and how they'll be taxed.

Paying tax on your income is unavoidable. But even SARS acknowledges that it's your right to arrange your financial affairs so you can pay the minimum amount of tax legally allowed.

This is the aim of salary structuring.

And that's where salary sacrifice comes in.

The link between salary sacrifice and your payroll

So what exactly is salary sacrifice?

The Practical Tax Loose Leaf Service explains salary sacrifice or income substitution as the process where you grant a benefit to your employee. And the cost of the benefit is recouped from your employee's salary, resulting in a reduced salary in return for the benefit.

Is salary sacrifice legal?

Yes, salary sacrifice is lawful, provided you meet certain procedural and substantive requirements.

The courts have previously held that salary sacrifice is a common commercial practice and that employers and employees are entitled to structure salary packages to achieve maximum tax effectiveness.

But while you're allowed to structure salaries to minimise tax, you have to be careful that this isn't the sole or overriding purpose of your restructuring exercise.

If SARS suspects a sham transaction, it can attack the contract and apply the principle of substance over form.

But you can avoid a fight with SARS over a salary sacrifice

To do this, stick to the following guidelines:

  • Make sure there's no sham in the restructured remuneration package. The employee's contract of employment must reflect the true intention of the parties.
  • Reflect the economic substance of the restructured remuneration package in your contract of service with your employee.

Here's a checklist of the procedures you follow when you enter into a lawful salary sacrifice arrangement:

  • Negotiate the new conditions of service with your employee.
  • Sign an enforceable agreement before the start of the new year. This is usually done at the time of the annual salary review. Your employee must agree to a reduction in his or her salary and you must undertake to provide some benefit in exchange.
  • Amend the service contract so that it records the salary sacrifice arrangement.
  • Amend the rules of the relevant benefit funds, if necessary.
  • Enforce the salary sacrifice scheme in accordance with its terms, as you've detailed them in the contract.

Again, you must be sure that your salary structure is legal or it'll be vulnerable to attack from SARS!

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