DIRECTORS & PAYE

As from March 2002 director’s remuneration became part of the PAYE net and directors had to pay tax on a monthly basis – just like all other employees in a company.

This provision applies to Directors of private companies and Members and/or officials of Close Corporations (i.e. CC’s) who perform any functions within the CC, which are similar to those functions performed by Directors of companies.

The way it works

Director’s remuneration can, in many cases, only be determined at the end of the company’s financial year end when the final accounts are drawn up. This is why SARS experienced huge problems in trying to implement PAYE on director’s earnings in previous years.

Under the new system, the amount of PAYE is determined on a notional amount, which is based on the director’s remuneration for the previous year of assessment. Where the amount of the remuneration for the previous year of assessment has not been determined yet, the notional amount will be based on the remuneration paid or payable to the director the year preceding that last year of assessment, increased by an amount of 20 percent (or such other percentage as the Minister of Finance may from time to time determine by notice in the Government Gazette).

Where the notional amount for that preceding year has not been determined or cannot be determined, SARS may determine the amount of the notional remuneration on behalf of the director. A monthly notional amount is determined with reference to a formula provided in the Fourth Schedule. In essence, the formula provides that remuneration for the previous year (adjusted if necessary) is divided by the number of months the director was employed by the company in the previous year.

PAYE is calculated on the greater of ‘‘current taxable earnings” and “deemed earnings”. Where, however more than 75% of the director’s earnings are fixed, actual earnings will be used for the calculation of PAYE.

Relief measures

SARS does have the power to vary the incidences of PAYE on director’s remuneration in cases of hardship, illness or other circumstances. This might be applicable where the notional amount exceeds the monthly remuneration actually paid to the director. Furthermore, in instances where the company is paying the PAYE to SARS on behalf of the director, the company will have the right to recover the amount from the director at an appropriate time.