The benefits of switching to cost to company remuneration structure
Johannesburg, 25 November 2004: The migration from standard remuneration structures to cost to company packages does not only afford the employee tax efficiencies, but has the added benefit of awarding the employee the flexibility to tailor non-cash benefits according to individual requirements.
Ernst & Young partner for Outsourcing Solutions Jaco van der Walt points out that a growing number of companies are switching from standard remuneration packages to cost to company structures in a bid to attract and retain staff of the highest calibre.
The cost to company remuneration structure is a remuneration method that is inclusive of all the benefits enjoyed by the employee in the course of his employment.
In other words, the cost to company structure details the costs that are incurred by the employer in filling a particular position.
Van der Walt, however, notes that employees are generally oblivious of the value of the benefits that come with their employment.
“Cost to company structuring creates a greater employee awareness of the value of their benefits, taking the pressure off salary increases and in turn making it easier to retain staff,” van der Walt explains.
When an employer offers these benefits to the employee, the costs for the organisation tend to be less expensive because of bulk discounts and reduced administration costs.
He adds: “It has been proven through many surveys that employees are often not aware of the cost of their benefits and that should they, on an individual basis, purchase these benefits the costs would be much higher.”
Referring to tax benefits an employee might accrue, van der Walt says recent policy changes have pointed to stricter handling of fringe benefits and the total cost to company is seen as one way of regulating procedures from a tax compliance point of view.
He cautions though, that the employer should follow the conversion process to the letter for the employee to maximise tax efficiencies.
Because the move from standard to cost to company structure constitutes a material change to terms and conditions of service, van der Walt says the onus is vested on the employer to inform and engage the employee on true intention of altering these conditions.
In addition to communicating the necessary changes to the affected employee, van der Walt say all necessary documentation has to be aligned with the new package design to avert a SARS attack.
“An employer cannot, therefore, unilaterally change the terms and conditions of employment without prior consultation with the affected employee.
“A critical factor in a successful salary structure is that such new structure is entered into by mutual consent between employer and employee,” he says.
To maximise tax efficiencies, van der Walt says employers would normally divest the employee of his/her liability to pay any part of the member’s contribution to the provident fund or medical scheme and to shift the liability for the total amount of the employee’s provident or medical aid contribution to the employer.
“Where a true salary sacrifice has taken place, an employees’ salary is reduced by the amount of the salary sacrifice and all benefits calculated based on the salary are similarly reduced,” he says.
As tempting though as a move to cost to company remuneration package can be, van der Walt says the system is equally fraught with pitfalls.
A reduced salary bought about by the shift, implies that contributions to the retirement are reduced.
In addition to bouncing off risk to an employee, the cost to company structure further reduces the statutory contributions to the UIF because of a reduced salary.
He cautions though that the total cost to company remuneration is not a remedy on its own, but is just one factor that should be addressed to ensure an employer would withstand a tax compliance audit from tax authorities.
Regards,
Santosh Verma.