Significant tax advantages are possible for commission earners
Remuneration is a very wide term and includes practically all types of income
If you are a commission earner and meet certain requirements, you are allowed far greater tax benefits than a normal salaried taxpayer. The general rule is that if you earn commission income you are entitled to significantly reduce your tax payable if your commission income is 50% or more of total remuneration received.
Remuneration is a very wide term and includes practically all types of income that you can receive from your employer. For example, a medical scheme benefit, most allowances and a bonus would all be included in your remuneration from your employer. All these types of income must, therefore, be added together to determine what percentage commission income is of total remuneration.
In the event that your commission income is more than 50% of your total remuneration, you are not restricted to deduct only certain types of expenses (as are individuals with normal salaried income). A commission earner who qualifies for the additional tax benefit can deduct, from their income, expenses that they have incurred in relation to earning that commission income.
Typical examples of the type of expenses that may be deducted include cellphone, internet, wear and tear on a laptop, travel and entertainment.
The practical impact of being able to deduct these expenses is best illustrated by means of an example:
Example 1 - Normal salaried income (deductions limited)
• Salary: R300,000
• Tax payable (including primary rebate): R48,265
Example 2 - Commission earner (deductions not limited)
• Salary (in form of commission): R300,000
• Less cellphone expense: R5,000
• Less travel: R20,000
• Less entertainment: R3,000
• Less internet: R2,000
• Taxable income: R270,000
• Tax payable (including primary rebate): R40,465
The taxpayer in Example 2 has paid R7,800 less tax than the taxpayer in Example 1. This illustrates the benefit of being a commission earner who is not restricted to normal individual taxpayer deductions.
Income from two employers
You may find yourself in a situation where you have income from two separate employers. Income from Employer A may be a normal salary but income from Employer B may be in the form of commission income. Remuneration from each unconnected employer must be considered separately. In other words, if you receive R200,000 as normal salaried income from Employer A, but you also receive R100,000 commission income from Employer B, you may still deduct business-related expenses incurred in relation to your employment with Employer B.
To be eligible to deduct the types of expenses discussed in the examples, you need to keep proper documentary proof and submit it to the SA Revenue Service (Sars). For example, for the entertainment expense this would include petrol slips for the travel expense and restaurant invoices (with the name of the client and nature of business derived from these meetings). These documents must be kept for at least five years after submission of your tax return.
To access the tax benefits available to you as a commission earner, you must reflect the business-related expenses on your ITR12 when you file your annual tax return. In essence, you will be showing Sars that you have overpaid your tax during the year and that you are entitled to a reduction in your tax liability as a result of the deduction of business-related expenses.
Alternatively, your employer may apply for a tax directive. This means that you, as a commission earner, request from Sars that the tax you pay is at a fixed monthly rate lower than you would normally pay. In other words, you know that your overall tax liability will be reduced as a result of deducting business-related expenses when you file your tax return, so instead of reducing your tax liability on submission of your tax return you request Sars to reduce your monthly tax payable (PAYE).
A tax directive can also assist to have the same tax rate paid each month when it might otherwise vary (you may have some months in which your commission income is low and others in which it is high).
If you choose this option, be sure to state your business expenses on your annual tax return with the supporting documents. If you don't do this, you will more than likely owe Sars money when submitting your return as you would have been under-taxed throughout the year. These documents must also be kept for a period of at least five years.
Choosing to pay tax at a reduced monthly rate by means of a tax directive, or at the normal monthly rate, depends on whether you wish to reduce your tax paid monthly or rather reduce your tax liability when you submit your tax return. The latter may, depending on your personal circumstances, result in a refund from Sars.
Baines is a tax consultant at Mazars and the author of How to Get a SARS Refund