EMPLOYEES' TAX

2036. If employer does not pay SARS

March 2012 - Issue 150

Is an employee entitled to Pay-As-You-Earn (PAYE) credits on assessment where his employer has not actually paid over the PAYE to the South African Revenue Service (SARS)?

Employers, at least for the most part, know what their PAYE obligations are towards SARS, including the obligation to issue IRP5 tax certificates on an annual basis. Given the onerous penalty regime under the Fourth Schedule, which includes personal liability for shareholders and directors in certain instances, it is in the best interest for employers to always fully comply with their obligations. It does however happen, especially in cases of small to medium sized employers, that cash flow is heavily affected in a given period due to depressed economic conditions or other factors (some criminal), resulting in SARS not receiving the PAYE deducted from remuneration.

Generally, employees are not privy to whether employers actually pay over the PAYE deducted from their remuneration to SARS and accept that an IRP5 tax certificate issued will suffice as sufficient proof. It may also happen that no IRP5 tax certificate is issued to an employee even where it is shown on a payslip that PAYE has in fact been withheld. On assessment of the individual tax return of the employee SARS may in certain instances refuse to give any credit for the PAYE shown on the IRP5 tax certificate, in effect resulting in double taxation. The question is whether SARS is within its rights not to give a PAYE credit against an employee's normal tax liability on assessment, where the employer failed to actually pay the amount over.

Paragraph 28 of the Fourth Schedule governs the treatment of PAYE and provisional tax to be set off against a taxpayer's normal tax liability. For purposes of this article, paragraph 28(1) of the Fourth Schedule states that:"... There shall be set off against the liability of the taxpayer in respect of any taxes... due by the taxpayer, the amounts of employees' tax deducted or withheld by the taxpayer's employer during any year of assessment ..." (own emphasis).

Paragraph 28(2) of the Fourth Schedule then goes on to state that: " ... The burden of proof that any amount of employees' tax has been deducted or withheld by his employer shall be upon the taxpayer and any employees' tax certificate shall be prima facie evidence that the amount of employees' tax reflected herein has been deducted by the employer" (own emphasis).

Based on the provisions of paragraph 28(2) of the Fourth Schedule it is on the employee, as the taxpayer, to discharge the burden of proof that PAYE has in fact been deducted or withheld by his employer and nothing more. It is submitted that the burden of proof to show that PAYE has been deducted or withheld is distinctly different to the actual payment of the PAYE to SARS. The payment of PAYE by the employer, after it has been deducted or withheld, is not governed by paragraph 28 of the Fourth Schedule, but rather by paragraph 2(1) of the Fourth Schedule. The basis on which paragraph 2 of the Fourth Schedule operates, is firstly to require an employer to deduct or withhold PAYE from remuneration and then to pay the amounts so deducted over to SARS within seven days after month end.

Furthermore, paragraph 13(1) of the Fourth Schedule obliges the employer to issue an IRP5 tax certificate in respect of PAYE deducted or withheld and makes no reference to such taxes actually having been paid to SARS. Under paragraph 28(2) of the Fourth Schedule, the IRP5 tax certificate will serve as prima facie evidence that the PAYE reflected thereon has been withheld or deducted by the employer as required by that provision. However, to fully discharge the burden of proof, something more would be required from the employee. An employee would have to furnish payslips and bank statements to SARS, indicating that he/she has been impoverished by the PAYE withheld. In other words, the receipt of remuneration reflected in the employees' bank account should be a net after tax amount.

Once an employee can discharge the onus of proof that PAYE was in fact deducted or withheld from remuneration, SARS appears to have no further discretion in the matter and must allow the PAYE as a credit against the employee's normal tax liability, irrespective of whether the PAYE was actually paid over to SARS.

Cliffe Dekker Hofmeyr

IT Act: Fourth Schedule, par 2(1), 13(1), 28(1), 28(2)