Tax Terminology

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ALLOWANCE

Allowances are paid by an employer to an employee to enable the employee to meet the cost of expenditure incurred on behalf of the employer. This generally forms part of the employee's taxable income.

Generally allowances are fully taxable on a monthly basis. The benefit is realized at the end of the financial year, when the employee deducts the actual expenses from their taxable earnings i.e. claim back the tax that has been paid on the allowances. The deduction must not exceed the amount of the allowance.

ANNUAL EQUIVALENT

Where an employees Tax Period is less than 12 months, the annual equivalent needs to be calculated in order for the employer to work out the SITE and PAYE amounts payable i.e. the employer needs to calculate what the employee would have earned in 12 months had he been with that employer for a 12 month period. and then work out the tax payable on that annualized equivalent. Thereafter you work out the tax payable for the Tax Period. The following steps will lead you through the process.

1) Annualize the earnings. To do this use the following calculation:
YTD Earnings divided by no. of months worked x 12 = Annualized

2) Look up the tax payable on the annualized earnings, under the annual tables

3) Establish the tax payable over the tax period. To do this use the following calculation:
Tax Payable on the Annualized Earnings divided by 12 x no. of months worked = Tax Payable

EXAMPLE

Jane works for Company B from May until the end of September i.e. 5 months. Her monthly Taxable Income is R6 185. Before paying Jane in September, Company B needs to annualize her earnings and if necessary adjust the tax deduction for September.

Calculate the annualized earnings:
R6 185 x 5 = R30 925

R30 925 / 5 x 12 = R74 220

Lookup the Tax payable in the annual tax tables:
The Tax payable on R74 220 is R5 919.60

The tax payable for the tax period where Jane worked for Company B is: 5 919.60 / 12 x 5 = 2 466.50

Tax paid by Jane from May to August is R 2 253.20

The Tax payable in September is therefore:
2 466.50 - R2 253.20 = R213.30

AVERAGE RATE OF TAX

Mathematically, this is the amount of tax that you pay, expressed as a percentage of your total Taxable Income.

For example, if I earn R138 750 in the tax year and I pay R23 225 tax, my average rate of tax is 16.74%.

However, from a tax point of view, the expression 'Average Rate of Tax' has a different meaning. This is where there are certain amounts of income (defined below) that are not added to your other taxable income and taxed at your marginal rate, but are taxed at your average rate of tax. A formula called the 'Rating Formula' is used to determine the tax payable on these amounts.

Average Rate of Tax applied to the following:

· Special remuneration received by proto-team mine workers

· The taxable portion of certain bonuses, gratuities and compensation on termination of service

· Excessive farming profits derived in certain circumstances

· The taxable portion of any lump sum payments from pension, provident or retirement annuity funds

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