We have received a few questions regarding the application of a long service award in the systems from March 2022.
Information regarding the changes were included in the Payroll Tax Pocket Guide 2022/2023 and release notes for Release 5.8a.
From March 2022, a long service award provided in the form of –
- cash, and/or
- the right of use of an asset, and/or
- acquisition of an asset, and/or
- free or cheap services,
will be exempt if -
- the total value of the award does not exceed R5000 (the excess will be taxable), AND
- the award qualifies as a long service award (defined in the Seventh Schedule to the Income Tax Act), which is an initial unbroken period of service of not less than 15 years or any subsequent unbroken period of service of not less than 10 years. If this condition is not met, the full value is taxable.
Only qualifying long service awards (i.e. if the employee qualifies for the exemption), should be processed against the new IRP5 code 3835 (the exempt and taxable portion).
If the employee does not qualify for the exemption, then it is not a qualifying long service award, and normal IRP5 codes should be used, depending on the type of award:
- 3605 for a cash award (if paid annually),
- 3801 for an acquisition of an asset award,
- 3801 for a right of use of an asset award, and
- 3806 for a free of cheap services award.
Frequently asked questions:
Q: I do not have an IRP5 code 3835 available on my definition screen, to setup the new line. How will I setup this line to be processed correctly?
A: The new IRP5 code 3835 will be included in the midyear software release* for Sage VIP and Sage Business Cloud Payroll Professional. The following articles will provide guidelines how to process the qualifying long service awards on the payroll.
- How do I process a qualifying long service award as cash on the payroll?
- How do I process a qualifying long service award as an asset on the payroll?
* The code will need to be updated on the lines defined on the payroll with the updated code once the software is installed - more information will be available on the software release notes in September 2022.
Q: Company A pays a cash long service award for every 5 years of service. Before March 2022, these awards were taxed in full (only non-cash assets were exempt) and reported against IRP5 code 3605. How should Company A tax this from March 2022 onwards and which IRP5 code should be used?
A: Since cash long service awards were fully taxed before March 2022, the employee did not previously qualify for an exemption. Therefore, if the employee receives a cash award for an initial unbroken period of service of not less than 15 years, the first R5000 will be exempt. The employee will only qualify for the exemption again after the next unbroken period of service of 10 years. For example, if the employee’s last long service cash award, which was paid before March 2022 was for 15 years of service, the next award for 20 years of service will be exempt (limited to R5000) and then the employee will qualify for the exemption again for 30 years of service, 40 years of service, etc. The full value (taxable and exempt) must be reported against IRP5 code 3835.
If the employee receives a cash award for 10 years in service, then the full value will be taxable since it is less than 15 years and will be reported against IRP5 code 3605.
Q: Company B provides vouchers as long service awards for every 5 years of service. Before March 2022 these awards were exempt (limited to R5000) if the conditions of a long service award were met. If the value exceeded R5000, the excess was taxed (SARS regards a voucher as an asset), and reported against IRP5 code 3801. How should Company B tax this from March 2022 onwards and which IRP5 code should be used?
A: Since the employees qualified for the exemption before March 2022, the initial 15 years and subsequent 10 years unbroken period of service requirement must continue to be applied. For example, if the employee’s last exempt long service award (voucher) before March 2022 was for 15 years of service, then the employee will qualify for the exemption again for 25 years of service, 35 years of service, 45 years of service etc., the full value must be reported against IRP5 code 3835 (taxable and exempt). If the long service award (voucher) does not qualify for the exemption, then the full value should be taxed and reported against IRP5 code 3801.