A huge assessment because of an incorrect tax certificate (IRP5) is not only frustrating, but it can also mean that taxpayers are deprived of the opportunity to claim relevant and allowed deductible expenses.

Tax commentators believe the most common error on IRP5s is the use of incorrect source codes. Only the employer can correct that kind of mistake by correcting and reissuing the employee’s certificate.

Piet Nel, Head of the Tax Faculty at the South African Institute of Tax Professionals (SAIT), says most employees neglect to check their tax certificates. He says the codes are available on the SARS website.

Mistakes are most often made with the source codes for exemption of foreign remuneration and travel reimbursements.

Daylan Staude, Tax Lecturer at the University of Fort Hare, says from 1 March 2020 the R1 million tax exemption amendment to foreign income kicks in. To qualify for the exemption the taxpayer must be considered a resident of South Africa. “Many taxpayers perceive that they are non-resident because they work outside South Africa. This is in fact not correct and their residency status must be determined in one of three ways: the double taxation agreement, the ordinary residence test or the physical presence test.”

He notes the importance of meeting the requirement of being outside the country for a continuous period of 60 days and more than 183 days in aggregate during the 12-month period.

Nikki Kennedy, Head of NK Accounting Services and SAIT Regional Representative, says the employer will need to indicate the portion of remuneration relating to foreign services, as opposed to local services.

She says taxpayers will also need a secondment letter from their employer to confirm that they were outside the country for work purposes and received remuneration for that period outside of South Africa. “If the employer uses one source code (local income) for all the remuneration (local and foreign), instead of splitting out the foreign income under the correct foreign income source code, it makes it very difficult for the employee to be able to receive the exemption for the foreign income, if the employee would be qualifying for this.”

NomadIQs Managing Partner Barendine Duvenhage says if employers are confident that tax resident employees will qualify for the foreign earned employment income exemption, they may elect not to withhold pay-as-you-earn (PAYE). “However, should the employee not qualify, the employer will still be liable for penalties on late payment of PAYE.”

She says employers are likely to apportion income between foreign and local sourced and reflect it as such on the IRP5 certificate, but they will withhold PAYE from the entire amount. “The employee then has to claim a refund from SARS. Typically, SARS will ask for a letter from the employer confirming that the individual rendered services abroad, a schedule of days travelled, as well as copies of the taxpayer’s passport supporting such travel.”

She says provided the employer used the correct codes in apportioning the income and the taxpayer has all the supporting documents available, SARS will refund the PAYE. “However, it does sometimes require persistence and perseverance.”

Kennedy says employers should take extra care to ensure that the IRP5 information being submitted to the South African Revenue Service (SARS) is correct.

Employees will need to have detailed knowledge to pick up a mistake. Checking some of the income source codes and deduction source codes might not be easy. She suggests using the SARS tax calculator before submitting the tax return to pick up major issues which may require some intervention.