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LABOUR & PUBLIC ENTERPRISES SELECT COMMITTEE
13 November 2001
UNEMPLOYMENT INSURANCE BILL: FINALISATION
Relevant Documents :
Memorandum by the South African Revenue Services (see Appendix)
Unemployment Insurance Bill [B3B-2001]
Unemployment Contributions Bill [B85-01] [email email@example.com for Bill]
Income Tax Act definitions of "employee" and "remuneration"
SARS proposed amendments to the definitions of "employee" and "remuneration" so that they are in line with the Unemployment Contributions Bill and Income Tax Act. The Committee adopted the Bill with these proposed amendments.
Mr. Kettledas, Department of Labour, introduced the SARS representatives: Franz Tomasek, Kosie Louw and Johan De La Rey who discussed their memorandum requesting that the definition of "employer" and "remuneration" be amended to align the Unemployment Insurance Bill with the Unemployment Contributions Bill.
The UI Bill dealt with the administrative side whereas the UC Bill dealt with the collection of contributions. The bulk of the contributions are to be collected by the SARS based on the PAYE system in order to minimise the compliance burden on both business and SARS. The remuneration on which the contribution is calculated is determined with reference to the definition of remuneration for PAYE purposes as in the Income Tax Act. Therefore it is important that the definition be conceptually the same. An added benefit was that no retraining of staff would be required because the concept would remain unchanged.
SARS suggested that the definition of "remuneration" be redefined as:
"â€¦ means remuneration as defined in the Unemployment Insurance Contributions Act 2001." This achieved the objective of aligning it with the definition in the Income Tax Act.
The UI Bill made reference to remuneration as amounts payable by way of a salary. This is problematic and ambiguous as it does not make reference to fringe benefits. SARS has specifically defined these type of benefits in its definition of remuneration in the Income Tax Act.
With regard to the definition of "employee", there were significant differences between the UI Bill and UC Bill. (See document for details).
Ms Botha (DP) questioned why PAYE had to be paid within a specific timeframe yet the same requirement was not required for UIF. Mr. K. Louw replied that the payment of benefits would be on a monthly basis. Information regarding the current status of the "employee" would also have to be made available.
Ms Botha (DP) objected to this view as the UI Bill made no mention that benefits were to be made payable on a monthly basis. Mr. Louw replied that this was to be found in the UC Bill.
The Chair asked if the independent contractor exclusion would apply to "labour broker".
Mr. Louw replied that a labour broker would be excluded on the grounds that it is not a natural person.
The Chair disputed this view on the grounds that certain labour brokers fall within the definition of natural persons.
Ms Botha (DP) asked about persons relying solely on commission as a source of income.
Mr. Kettledas said that persons reliant on commission as the only means of income was an extremely problematic category due to the fluctuations of salaries achieved each month. In many cases, these people were independent contractors and therefore, the Department of Labour had chosen to specifically exclude this class.
Ms Botha (DP) asked how the definition of "employee" as proposed by the SARS chose to exclude persons dependent on commission as a source of income. Mr. Kettledas of the Department of Labour responded by stating that in order to answer this question the factual situation would have to be assessed. For example, one would have to consider whether or not the employee worked for an independent contractor, did he receive a fixed salary, etc.
Ms Botha's (DP) asked if the proposed database did not necessitate a linkage between the SARS and the Department of Labour. Mr. Louw replied that the database would consist of two streams of information, namely (i) money; and (ii) the personal particulars of an employee. This information would be forwarded directly to the UI Commissioner. SARS had no database at present to accommodate this.
Ms Botha (DP) asked if information already received and forwarded to the SARS and UI Commissioner was privy to the general public. Mr. Louw replied by stating that a strict secrecy provision had to be observed.
Ms Botha (DP) enquired about persons earning more than R97,000.00 per annum or directors salaries. Mr. Louw replied by saying that this is currently problematic. The SARS is attempting to adopt formulas to overcome this problem.
The Chair stated that due to time constraints no further questions would be allowed. He requested that members vote on the Bill once a quorum had been achieved.
The Chair adjourned briefly to accommodate the late arrival of some of the Committee members so that a quorum could be reached. The Chair asked members if they required a debate in the House on the issue.
The NNP and DP both requested a debate. However, the ANC objected. The Chair conceded that a debate would be conducted on 14 November 2001.
The Chair read the motion of desirability which was signed thereafter with the approval of all Committee members. The Chair informed members that the UI Bill would be voted on clause by clause.
Ms Botha (DP) opposed this suggestion on the grounds that they required further discussion on the UI Bill. The Chair noted the objection, but continued with the clause by clause voting:
All clauses in the Bill were approved by Committee members. The following exceptions were raised by the NNP and DP:
- The NNP objected to the contents under "financial implications" as contained in the memorandum of the UI Bill. The NNP asked if this was inclusive of future deficits.
The Chair replied that it only related to current deficits and not anticipated deficits.
- The Chair objected to Clause 20(2)(a) on the grounds that the 14 day period required qualification. He suggested the use of words such as "consecutive" or "continuous".
Mr. Kettledas noted that the definition had been accepted by the State Law Advisors. The Chair accepted this view.
- The DP objected to Clause 49 on the grounds that it failed to make provision for gender representativity.
The Chair asked Ms Botha (DP) if this aspect could be included in the Report to Parliament. This was agreed to.
- The Chair objected to Clause 58(13) on the grounds that it excluded "cash flow statements". He suggested that the words "income and expenditure and balance sheet statements" be substituted with the words "financial statements".
Mr. Kettledas replied that the wording was in alignment with the Public Finance Management Act. Mr. Louw confirmed this.
The Chair concluded by reading the Report to be forwarded to the National Assembly which indicated that the Committee accepted the Bill with the amendments proposed by SARS. It also included the following:
"The Committee wishes to report that it is of the opinion that the following further changes could also have been considered:
- The composition of the Unemployment Insurance Board should be gender-representative.
- The Director-General must submit financial statements, instead of the statement of income and expenditure and the balance sheet of the fund.
- The report of the Director-General must be tabled in Parliament.
- Under the heading "FINANCIAL IMPLICATIONS', the last sentence should be omitted."
The Report was adopted by all members, the meeting was adjourned.
SUBMISSION BY THE SOUTH AFRICAN REVENUE SERVICE TO THE
SELECT COMMITTEE ON LABOUR ON THE UNEMPLOYMENT INSURANCE
This memorandum proposes certain amendments to the Unemployment
Insurance Bill [B3B-2001] ("the UI Bill") to bring it in line with the Unemployment
Contributions Bill ("the Contributions Bill") which will be tabled later this week.
The UI Bill deals with the administrative side of the unemployment insurance system, i.e. the establishment of the Unemployment Insurance Fund and the determination and payment of benefits. The Contributions Bill, on the other hand, deals with the collection of the unemployment insurance contributions from employers.
In terms of the Contributions Bill, SARS will be responsible for the collection of the bulk of the contributions. The UI Commissioner will, however, collect the contributions from employers who are not registered with SARS for PAYE or skills levy purposes, i.e. where all the employees of an employer are under the tax threshold (currently R23 000 per year).
The definitions contained in the UI Bill are not currently in line with those in the Contributions Bill. The main concern in this regard relates to the discrepancies between the definitions of "employee" and "remuneration" contained in the two Bills which affects the two most fundamental issues in these Bills:
· who will be liable to make a contribution (or entitled to claim); and
· the amount on which the contribution (or claim) will be based.
Definition of 'remuneration
The basis for the calculation of the contributions is, to a large extent, based on the PAYE system. This was the basis on which it was agreed that SARS would collect the contributions, as this would minimize the compliance burden on both business and SARS and limit the changes that would be required to SARS's existing systems, forms, etc.
The remuneration on which the contribution will be calculated is, therefore, determined with reference to the definition of 'remuneration' for PAYE purposes. There are, however, certain amounts that will be excluded, such as pensions, amounts paid on termination of service, annuities, etc. The reason for these exclusions is that these amounts do not reflect amounts payable in the normal course of employment and should also not be taken into account for purposes of determination of any benefit payable by the fund in the case of termination of employment. For purposes of determining the contribution, the remuneration will, therefore, subject to these few exclusions, include all amounts paid by the employer to the employee in cash and amounts determined in respect of the values placed on fringe benefits by the Income Tax Act, 1962.
In terms of the Insurance Bill, on the other hand, the benefits are determined on remuneration" which merely means "any amount which is paid or is payable to any person by way of any salary, leave pay, allowance, wage, overtime pay, bonus, fee, emolument or stipend in respect of services rendered". There 5 no reference to any payments in kind, i.e. in the form of fringe benefits. If 'amount" is, however, interpreted by the UI Commissioner to also include payments in kind, there is no method prescribed for the valuation of these benefits, e.g. residential accommodation, low interest loans, etc. as we have for income tax purposes. Furthermore, the full amount of a traveling allowance will, for example, be included in the amount on which the benefit of a person is determined, whereas that person will in terms of the Contribution Bill only have contributed on 50 per cent of the traveling allowance.
Furthermore, employers will, in terms of the Contributions Bill, be required to provide certain employee information, including information on the remuneration. This information will, therefore, be submitted to the U Commissioner based on the definition as contained in the Contributions Bill, i.e. on the PAYE basis. However, when the UI Commissioner needs to determine benefits. it will be calculated on a different definition of "remuneration" and the UI Commissioner will, therefore, have to obtain additional information from the employer. Alternatively, an employer will be required to make the monthly contributions to SARS calculated on one basis, while the information submitted by the employer regarding the remuneration of its employees must be determined on a different basis. From an administrative point of view, this is both illogical and impractical.
It is, therefore, proposed that in order to bring the definitions in line, the definition of ''remuneration" in the UI Bill be substituted by the following definition.
" remuneration means remuneration as defined in the Unemployment insurance Contributions Act, 2001".
This is defined in the Contributions Bill as "remuneration" as defined in Paragraph 1 of the Fourth Schedule to the Income Tax Act, but does include any amount paid or payable to an employee
(i) by way of any pension, superannuation allowance or retiring allowance;
(ii) which constitutes an amount contemplated in paragraphs (a), (cA), (d), (e) or (eA) of the definition of "gross income" in section 1 of the Income Tax Act; or
(iii) by way of commission.
Determination of contribution
In terms of the current unemployment insurance system, only employees who earn below a certain threshold contribute to, and may claim from, the Unemployment Insurance Fund. In terms of the proposed new system, all employees regardless of income must contribute. There will, however, be a cap and employees who earn an annual income above this cap will only contribute on their income up to the amount of that cap, which is proposed to be set at R97 188 per annum.
The contributions must, however, be made on a monthly basis and in order to determine the monthly contribution, the remuneration for that month must, therefore, be grossed up to an annual amount, so as to limit it to the cap and then be converted back to a monthly amount on which the contribution is determined. Due to fluctuations in monthly income this could have the effect that during some months an employee's annual equivalent of the remuneration for that month exceeds the cap, whereas in other months it may be below the annual cap. This could, for example, happen when an employee receives an annual bonus during a month or when an employee is on unpaid maternity leave.
This would then mean that at the end of each year a recalculation will have to be done in order to determine whether the contributions in respect of an employee were correctly determined and paid over by an employer. Specific provisions will also have to be included in the Act to provide that where an employee was only employed for a portion of the year, the cap must be proportionately reduced when the annual redetermination is made. This will inevitably make the system extremely complex to administer.
In order to simplify the system, it is proposed that the contribution rather be determined on a monthly basis and that the cap be fixed at R8 099 (i.e. the monthly equivalent of the annual cap). The effect thereof will be that in some instances employees may contribute slightly less than they would have if an annual recalculation had been done. This will, for example.. be the case where a person's remuneration falls below the cap during some months, but the annual remuneration at the end of the year still exceeded R97 188. Although there may be some loss in contributions, it will ensure administrative simplicity for both employers and SARS.
Definition of "employee"'
It is, furthermore, essential that the definition of "employee" in the UI Bill and the Contributions Bill have to be aligned. It "employee" has two different meanings, it may have the effect that a person is on the one hand liable to contribute, but will not be entitled to claim on the other.
The definition of "employee" for purposes of the Fourth Schedule to the Income Tax Act, 1 962, includes inter alia any person (natural persons, companies and trusts) who receives remuneration. This definition may also include persons who are not employees in the traditional sense, for example, persons who work on a freelance basis. For purposes of the UI Contributions Bill, however, the term "employee" will be limited to include only natural persons, as the unemployment insurance system does not apply in respect of trusts and companies. An "employee" will, therefore, be defined as "a natural person who receives any remuneration or to whom remuneration accrues in respect of services rendered or to be rendered by that person".
The UI Bill, on the other hand, defines an "employee" to mean any person who works for another person and who receives any remuneration or to whom any remuneration accrues, but excludes an independent contractor.
This definition will, to a large extent, be in line with the definition in the Contributions Bill, provided that the same definition of "remuneration" is used in both Bills.
The only other issue with regard to the "employee" relates to the exclusion of independent contractors in the UI Bill, which is not specifically mentioned in the Contributions Bill. In terms of the Contributions Bill an independent contractor will be excluded by implication, as the definition of "remuneration" specifically excludes any amount paid or payable in respect of services rendered in the course of any trade carried on by a person independently. A person is deemed not to carry on a trade independently if
· that person is subject to the control or supervision of the person to whom the services are rendered as to the manner in which the duties are performed or as to the hours of work; or
· if the amounts paid or payable for services rendered are payable at regular daily, weekly, monthly or other intervals.
Where a person, therefore, works fixed hours or receives regular payments, that person will be regarded as an employee for purposes of the Fourth Schedule and will therefore, also he liable to make the U contributions. It appears from draft legislation currently before Parliament, which amends the Basic Conditions of Employment Act. 1995, that there are certain rebuttable presumptions which will be included in that Act to determine whether or not a person is an independent contractor. These presumptions include the following:
· where the manner in which the person works is subject to the control or direction of another person;
· where the person's hours of work are subject to the control of direction of another person;
· where, in the case of a person who works for an organization, the person forms part of that organization;
· where the person has worked for that person for an average of at least 40 hours per month over the last three months;
· where that person is economically dependant on the person for whom he or she works or provides services;
· where the person is provided with his or her tools of trade or work equipment by another person; or
· where the person only works or supplies services to one person.
It, therefore, seems that there is a wider scope of presumption for a person not to be regarded as an independent contractor for purposes of the labour laws. The issue of the independent contractor will, therefore, not pose too great a problem for the unemployment insurance system, as a person who is not regarded as an independent contractor for purposes of the Contributions Bill will, in all likelihood also not be regarded as an independent contractor for purposes of the UI Bill.
In the light of the above it is, therefore, proposed that ~ be defined in the UI Bill as follows:
"'employee' means any natural person who receives remuneration or to whom remuneration accrues in respect of services rendered by that person, but excluding any independent contractor."
Definition of 'employer'
The discrepancy between the definitions of "employer" in the UI Bill and the Contributions Bill will not have any serious effects, as the functions of the employer for the contributions purposes and for purposes of the claims are not fundamentally linked. The employer has certain basic duties, including to withhold the contributions from the remuneration payable to the employee and to pay the amount over to SARS or the UI Commissioner, as the case may be, and to also provide certain information. The definition of "employer" in the Contributions Bill is also based on the definition for PAYE purposes. The reason why this definition is fairly wide, is that employers have various duties and responsibilities in terms of the Income Tax Act, 1962, and if the employer is for some reason not able to comply with any provision of the Act, e.g. where the employer is not a resident of the Republic, that employer needs to appoint a representative employer to fulfill the duties on its behalf.
The UI Bill on the other hand deals primarily with the benefits, which may be claimed by employees and does not to a large extent deal with employers. There are provisions in the UI Bill in terms of which the UI Commissioner can obtain information from employers, but it is not clear what other responsibilities the employers have towards the UI Commissioner in terms of that Bill. The difference between the definitions contained in the UI Bill and the Contributions Bill is, therefore, not a fundamental problem, as it does not in any way affect the contributions and the responsibilities of employers in terms of the Contributions Bill.
In the light of the above, it is proposed that the definitions of "remuneration" and 'employee" contained in the UI Bill be amended as follows:
"'remuneration' means remuneration as defined in the Unemployment Insurance Contributions Act, 2001"
"'employee' means any natural person who receives remuneration or to whom remuneration accrues in respect of services rendered or to be rendered by that person, but excluding any independent contractor"
The Contributions Bill and Explanatory Memorandum are attached hereto for your information.