Please note: from 1 March 2017, Deemed Remuneration should no longer be used. This is because paragraph 11C of the Fourth Schedule of the Income Tax Act, which deals with Deemed Remuneration, has been repealed with effect from 1 March 2017.
Directors’ remuneration is subject to PAYE, which is payable monthly; however, directors’ remuneration is often only finally determined towards the end of the tax year or even in the following tax year. This creates a challenge in determining the amount of PAYE to withhold each month. In other cases, directors may receive nominal monthly remuneration and a large bonus at the end of the tax year, resulting in the majority of their tax liability being owed at that stage.
The concept of deemed remuneration, determined by means of a formula, was introduced by SARS to overcome these issues with collecting monthly PAYE for directors. This applies to all directors, including members of CCs, except if one of the following scenarios exists:
- The director’s remuneration in respect of the previous tax year has been finalised and more than 75% consists of fixed monthly payments
- The director is newly appointed in the current year and wasn’t an employee of the company in the previous tax year
- A person ceases to be a director but remains an employee
Calculation of Deemed Remuneration
The monthly deemed remuneration for the current year is determined by dividing the previous tax year’s remuneration by the number of completed months for which it was earned. For example, if a director earned R500 000 over 10 months in the previous tax year, this year’s monthly deemed remuneration would be R50 000 (500 000 / 10 = 50 000).
If the deemed remuneration for the current year cannot be determined as indicated above, you should use the previous year’s deemed remuneration, increased by 20%. If the previous year’s amount is not available, you will need to contact SARS to determine the amount.
The Effect on Payroll
As with normal employees, the director will always be taxed on actual remuneration received each month. The tax on the actual remuneration is compared to that which is calculated on the deemed amount and, if the latter is higher, the company pays the difference over to SARS.
The director must repay the company for the amount paid on his / her behalf, but it does not give rise to a taxable fringe benefit as in the case of an interest free loan. Furthermore, the director is not entitled to have this tax amount, or any portion thereof, reflected on their IRP5 for the year until such time as it has been repaid.
Please see the following related articles for more information on the concepts of PAYE and fringe benefits: