Income Tax Act – Pay Solutions bring you the latest changes
INCOME TAX ACT – ANNUITY INCOME AND TEMPORARY DISABILITY – THE UNPREDICTED OUTCOME
Since March 2015, monthly annuity income from an income protection policy has changed from being taxable income, to non-taxable income. Before assessing all the facts, one would simply assume this is great news! However, once examining the facts more closely it becomes clear that the issue is much more complex.
An employee that is booked off work on temporary disability and only earns the income from the income protection policy, will still be “Employed” by the company, but not earn any “Remuneration” and will not be rendering any services to the company in terms of their employment contract.
In terms of the Income Tax Act an “Employee” is defined as:
A natural person who receives remuneration or to whom remuneration accrues;
A person (including a company) who receives remuneration or to whom remuneration accrues by reason of services rendered by such person to or on behalf of a labour broker;
A labour broker;
A person or class or category of persons whom the Minister of Finance by notice in the Government Gazette declares to be an employee;
A personal service provider;
A director of a private company.
Therefore in terms of the Income Tax Act, if the employee does not earn remuneration, the employee is not deemed to be an employee. However the employment status of this employee has not changed and the employee is still employed in terms of the BCEA irrespective of whether remuneration is earned. The employer must not get confused between the Income Tax treatment of this employee and the status of the employee.
This now results in peculiar scenarios:
Strictly speaking an employee is not entitled to annual leave accumulating while on temporary disability and only earning income from an income protection policy. Section 20(2) of the BCEA states that an employee is entitled to 1 day annual leave for every 17 days “… on which the employee worked or was entitled to be paid”. The employee neither worked, nor earns any remuneration for this period and therefore does not accumulate leave.
In contrast to the above, the employee will still be entitled to his/her sick and family responsibility leave as these sections in the BCEA specifically refer to the employment of the employee. As employment has not ended, the employee will still be entitled to his/her entire sick and family responsibility leave in the current cycle. Note must be made that sick and family responsibility leave cannot be taken concurrently with the temporary disability period.
When the annuity amount for temporary disability is paid over to the employee on the payroll, the annuity amount should be captured against code 3602 and should not be taxed. Even though the employee is strictly speaking not an employee as defined by the Income Tax Act, the employee is still “Employed”. Therefore, the employee will still be issued with a tax certificate, and the IRP5 will include all periods, when on disability and when in “Normal Employment”.
The above could very well result in the employee being refunded PAYE paid on earnings from a prior period in the tax year when not on disability, or not paying tax on income that would ordinarily be taxed on his/her return to work. This is caused by the fact that the employee did not earn any taxable earnings in the period that he/she was on disability, but the period that he/she was on disability still accumulated towards his/her total periods worked. The taxable earnings for this employee is thus spread over the total number of months.
When receiving income for temporary disability from an income protection policy, the employee is no longer “employed” as defined by the Unemployment Insurance Contributions Act and should therefore not contribute to UIF.
The employee should however still be included in UI19. The following codes should be used
o Code 8280 (Employment Status code) = 10 (Illness leave)
o Code 8290 (Reason Code for Non-Contribution) = 06 (No income paid for the period)
Pay Solutions have been in operation for over 10 years, having started small our customer base has expanded over the years requiring more staff to look after clients needs ensuring our service remains exceptional. We strive to deliver a timeous and hassle-free service. Please contact us to find out how we can help your company take the hassle and frustration out of Payroll and HR administration.