Many businesses are struggling to make ends meet. Unfortunately, in these circumstances, employers may be unable to pay salaries but nevertheless still issue IRP5 certificates indicating the salary to which the employee became entitled (despite the fact that it may not have been actually paid). This is often not well received by the employee when the time comes for that employee to file his/her tax return – why should he/she be paying tax on money not received?
Without getting too technical, the fact that salary was not actually received does not, in most cases, negate the requirement for the employee to pay tax on such amount. If salary accrued to the employee (i.e. the employee became unconditionally entitled thereto), it forms part of the employee’s gross income and falls subject to tax irrespective of whether it has been received. Unfair? It may seem that way but a solution lies in section 23(m) read with section 11(i) of the Income Tax Act, No. 58 of 1962.
Section 23(m) is the section that limits tax deductions for salaried employees to only a few types of expenses. The section does not, however, prevent a salaried person to claim a bad debt deduction in terms of section 11(i) of the Act. Therefore, if an employee is forced to write off salary income due to him/her but not paid, the employee should be allowed a deduction equal to the amount written off. Depending on the facts of the case, doing so will likely result in a refund by SARS of the employees’ tax withheld by the employer (the fact that the employer may also not have paid the PAYE is irrelevant in most cases). This may serve to alleviate the cashflow problems experienced by employees in these circumstances. Be mindful though that if the employer eventually pays the salary, that will be a taxable recovery of a debt previously written off as bad.