The treatment of tips received by employees from customers for services provided has always been difficult to deal with from an employer’s perspective. An employer has a duty in terms of the Income Tax Act, No 58 of 1962 (‘the Act”) to deduct employees’ tax from remuneration as defined in the Fourth Schedule of the Act. It has, however, for a number of years been a debate as to whether tips meet this definition.

South African Revenue Services have issued a Binding Class Ruling: BCR 027 which, given the existence of certain circumstances, provides some clarity to the treatment of tips for employees’ tax purposes.

The ruling deals specifically with the question as to whether tips, received by employees from satisfied customers, that are held by an employer for safekeeping and subsequently paid over to employees, will constitute “remuneration” as defined in the Act.

The applicants for the ruling operated in a high-cash handling environment and wished to implement a tip policy within the organisation as it was felt employees receiving tips during their working hours posed a security risk to the organisation.

The tip policy proposed that employees had no entitlement to tips nor should they have an expectation to receive tips as part of their service performance to the organisation.

Tips received would be declared and handed over to the organisation when received. These would then be stored in a safe and paid over, into the employee’s bank account, at month end together with the employee’s normal salary in full, with no portion being retained by the employer. Tips also would not form part of the calculation of provident fund, medical aid or any other benefit calculations.

The ruling given by SARS is that the transfer of tips from the employer to the employee’s bank accounts would not constitute a payment of “remuneration” as defined and thus would not be subject to employee’s tax.

It is important however to note that tips are “gross income” for tax purposes and should be declared by employees in the course of the submission of their annual returns. The ruling merely releases employers from the obligation to deduct employee’s tax but the employee still has an obligation to declare such income for normal taxation purposes.

John Jones

Audit and Corporate Taxation Partner, Johannesburg