No good deed goes unpunished by SARS

South African businesses can face unexpected and costly SARS tax liabilities, penalties, and compliance risks related to employee benefits, contractor arrangements, and international hiring.

Many businesses may have expenses which seem like sensible, practical business decisions designed to support employees and keep a business running.

This could be a solar subsidy for employees working from home to shield the business from power interruptions or a generator installed for key personnel to keep operations running through load-shedding.

It could even be something seemingly small, like a daily sandwich for a driver on the road collecting important business documents.

However, while these costs may feel reasonable, Tax Consulting SA’s Team Lead of Tax Technical, Bronwin Richards, warned that “no good deed goes unpunished”.

“For most business owners, the focus is on winning customers, developing and selling products or services, growing revenue and building a great team. That is where they want to spend their energy.”

“But the employment landscape now demands technically sound legal acumen. It has become far more complex than simply hiring people, paying salaries and deducting PAYE.”

Richards stressed that businesses increasingly need specialist advice before making decisions, not after the South African Revenue Service (SARS) starts asking questions.

This applies whether they are, for example, structuring remuneration packages, implementing employee incentive schemes, engaging contractors or expanding internationally.

“Employment tax structures are intricate, and getting them wrong risks audits, penalties and reputational harm, and not cheap to fix retrospectively.”

When it comes to employee benefits, Richards noted that during COVID, at the height of loadshedding, some companies purchased generators for key personnel to keep operations running.

“Those who obtained formal tax opinions and legal advice on the benefit before rolling it out were better off than those who assumed a practical business decision was automatically tax neutral.”

The answer about when this benefit becomes taxable often relies on a distinction that is not intuitive to a business owner.

It depends on whether the benefit exists mainly for the employer’s convenience – to keep the business running – or mainly for the employee’s benefit – a perk.

That distinction, rather than the good intentions behind the gesture, usually determines the tax outcome. Before introducing any employee benefit, these questions should be answered up front:

• Does SARS view it as a business necessity or as a taxable employee benefit?
• Should PAYE be withheld on it?
• Does the employee carry an income tax liability as a result?
• Can the employer claim a deduction for it?

“The answers are rarely obvious, and getting them wrong after the fact is far more expensive than getting advice before rollout,” Richards said.

Contractors and cross-border employment

Richards explained that a common misconception is that calling someone an “independent contractor” automatically takes them outside payroll. “It does not.”

South African tax legislation contains detailed tests for whether an individual is genuinely independent or should be treated as an employee for tax purposes.

The label in the contract carries little weight if the substance of the relationship says otherwise. The same applies to Personal Service Providers, a category SARS defines specifically and watches closely.

It does so to prevent individuals and businesses from artificially misclassifying themselves as independent contractors to avoid standard employee taxes and access deductions they should not have.

Richards cautioned that the consequences of getting this classification wrong extend beyond just fixing it going forward.

If SARS successfully reclassifies a contractor as an employee, the business can face retrospective PAYE liabilities, penalties, and interest, which may extend over several years.

This can turn what looked like a cost-saving arrangement into a significant unbudgeted liability for the business, she warned.

Something else businesses need to navigate carefully is cross–border employment, as it can bring additional tax complexity.

“As businesses increasingly recruit internationally, employment compliance extends beyond South Africa’s borders, and the obligations differ depending on which direction the hiring runs.”

“A foreign company employing staff in South Africa must navigate local labour legislation, payroll requirements, PAYE obligations and SARS reporting, even where it has no established South African entity.”

Going the other way, a South African company employing staff elsewhere in Africa or internationally faces a different payroll, tax and employment framework in each jurisdiction it enters.

This can be difficult to navigate because these countries all have their own rules, which rarely mirror South Africa’s own, Richards said. This is typically where an Employer of Record (EOR) solution is most useful.

EOR allows a business to legally employ staff in a foreign jurisdiction without establishing a local entity there, while ensuring that payroll, tax, and statutory obligations in that country are properly managed.