Last week, taxing tips of waiters and other employees, who receive gratuities from customers for good service, was a hot topic on Twitter and other social media platforms, following the publishing of a clarification of the payment of tax on tips by SARS.  Legal views confirm that employers cannot deduct PAYE, the Skills Development Levy (SDL), and UIF from employee income generated from tips, but it also means that the tip income of employees cannot be used as a basis for pension and medical aid benefits.

Business Report wrote that “Waitrons can keep their hard earned tips for themselves and don’t have to worry about the tax man…  According to the last week’s ruling, the transfer of tips handed over to an employer by an employee for ‘safekeeping’ did not constitute a payment of remuneration”.  This view is based on the Group Tips Policy, by which staff pass on their tips to their employers for safe-keeping whilst they are working.  Legal firm Cliffe Dekker Hofmeyr is quoted as saying that the Group Tips Policy sees tips “…as gratuitous payments to which the employees have no entitlement or an expectation of receipt as part of the performance of their duties”, and therefore should not be taxed.

Far more complex is an article by lawyer Stephan Spamer at ENS and candidate attorney Jonathan Sacks, writing on Moneyweb.co.za.    They write that the increased usage of credit cards by customers for safety reasons has led to a large percentage of tips being added to credit card payments, going to the employer instead of the employee.  The employer then has to transfer the tips to the employees.  According to the Fourth Schedule to the Income Tax Act, 58 of 1962, ‘gross income’ includes ‘any amount received or accrued in respect of services rendered or to be rendered, including a voluntary award, as well as any amount received or accrued in respect of or by virtue of any employment’.  The lawyers argue that a ‘causal relationship’between payment received and the service provided must exist for that income to be defined as ‘gross income’.  On the basis of this relationship, the writers argue that the tip payment is part of gross income, and is therefore taxable, especially if the expectation at the time of appointment of the employee was to receive tips.  The article becomes confusing when the writers argue that the definition of ‘remuneration’, including ‘all payments and amounts payable, in cash or otherwise, whether or not for services rendered and includes salary and wages, leave pay, bonuses, gratuities, commissions, over time pay and other amounts paid for services rendered as well as allowances and advances’, is similar to that of ‘gross income, but that it does not mean that the employer must deduct the valid taxes and deductions.  They argue that it is not the employer paying the tip – in essence it is the customer paying it via the employer, who just holds the tip on the employees’ behalf, and therefore as this cannot be viewed as remuneration, no taxes and fees have to be deducted from the monies paid to employees.  Employees can, however, request in writing that the employer deduct PAYE to reduced their tax liability.  Given their conclusion that no tax is payable on tips by employees, the writers argue that no SDL and UIF is deductible either. 

Given the complexity and legality of this SARS Tip Tax ruling, we quote an extract of an article on Moneyweb, written by Cliffe Dekker Hofmeyr Employment Law Director Gillian Lumb and associate Pranisha Maharaj: :“The Binding Class Ruling: BCR 027 recently issued by Sars, declared that the transfer of tips (that were handed over to the employer by the employees for safekeeping in terms of the employer’s proposed Group Tips Policy) from the employer’s bank accounts into the employees’ bank accounts does not constitute a payment of remuneration by the employer as contemplated in paragraph 2(1) of the Fourth Schedule of the Income Tax Act. Essentially, this paragraph of the Act provides that an employer who pays or becomes liable to pay any remuneration to any employee must deduct or withhold employee’s tax from such payment. Binding Class Rulings are intended to promote clarity on the interpretation and application of the tax laws to a class of persons who apply for a ruling in respect of a proposed transaction to which it is a party. Accordingly, tips will not form part of the calculation of any benefit calculations for the employees’ remuneration packages, for example pension or medical aid.  The ruling is in line with the Sectoral Determination 14: Hospitality Sector, South Africa  which defines “remuneration” as ‘any payment in money or in kind, or both in money and in kind excluding any gratuity or gift received from a customer for service rendered”.

The new Tip Tax directive by SARS has been back-dated to August 2010, and covers the five year period from that date.  This raises the following questions:

*   Can employees that had PAYE, SDL and UIF deducted between August 2010 and July 2011 receive their tax and other deductions back, from the employer and/or SARS?

*   Can employers deduct the tip income that went through their credit card machines, and was therefore deposited into the business bank account, from their taxable income for the calculation of VAT and income tax?

Interestingly, yet not surprising, the hotel association FEDHASA has not officially published a guideline about this Tip Tax amendment for their hotel and restaurant members!   On Twitter, the FEDHASA Cape Director for the Restaurant sector, Rey Franco, wrote that tips received via credit card are taxable, and that only cash tips received by waiters directly are not taxable.  We believe that, in the light of the above, he is incorrect.

Chris von Ulmenstein, Whale Cottage Portfolio: www.whalecottage.com Twitter: @WhaleCottage