Remuneration Structuring – End of the Road?

The essence of remuneration structuring (also known as salary structuring) is configuring amounts payable to an employee for services rendered. The primary objective was to reduce the tax liability of an employee without additional costs being incurred by the employer. Achieving this objective involved two components: the tax treatment of income from employment falling in the domain of SARS and legislation; and the basis of remuneration, formulated by the employer.


Structuring a remuneration package revolved around a mix of fringe benefits, allowances and company contributions with favourable tax outcomes.

Fringe Benefits

When the Minister of Finance, Barend du Plessis introduced fringe benefits tax in 1985 through the Seventh Schedule to the Income Tax Act (the Act), the intention was to promote fairness and halt the erosion of the tax base. With hindsight, this was wishful thinking as the Seventh Schedule afforded employers ample opportunities to exploit fringe benefits in reducing the tax liability of employees. It arose from the tax value of a fringe benefit being less than the cost incurred by the employer. Employers filled remuneration packages with a colourful assortment of perks such as residential accommodation, use of company cars, annual long service awards, club subscriptions and a home telephone benefit.


Another remuneration structuring tool available to employers was to grant the allowances scattered in several sections of the Act1 often to the exclusion of position and business requirements. Depending on the allowance, the tax treatment was an exemption (e.g. uniform allowance), partially taxed during the year (e.g. travel allowance) or fully taxable (e.g. computer allowance).

Company Contributions

Historically the Act prohibited employees from deducting contributions to provident funds and medical aid schemes. Employers qualified for a deduction of these contributions. Remuneration structuring facilitated a shift from contributions by an employee and employer (contributory fund) to the employer being liable for the full contribution (non-contributory fund).


The employer, usually assisted by tax and legal advisers, formulated the basis of remuneration and ‘sold’ the benefits to employees. The basis of remuneration was a salary sacrifice or a total cost package with variations in practice.

• Salary Sacrifice
The employee accepted a reduction in their basic salary in exchange for a benefit paid by the employer on their behalf or directly to them.

• Total Cost Package
A total cost package is a method used by an employer to remunerate an employee based on a package, being the guaranteed sum of money the employer will spend on that position. The guaranteed sum is allocated by the employee to earnings, benefits, allowances and company contributions, subject to various regulations. 

Employees embraced both of these methods as it used fringe benefits, allowances and company contributions to deliver three irresistible gains. First, he/she gained from a reduction in employees’ tax through tax friendly fringe benefits and allowances together with deductible contributions. This led to a higher after tax position and cash flow. Second, upon assessment, the employee could deduct business expenditure against taxable allowances and receive a refund of the tax paid during the year. Finally, the employee made lifestyle and recreational decisions on the basis of a fringe benefit or allowance. Popular examples included holiday accommodation at the hotel selected by the company and using a travel allowance to justify purchasing an expensive vehicle. In some organisations, employees were hoodwinked into believing that structuring their packages was a one way ticket to financial rewards.They were unaware of the inbuilt mechanisms that transferred benefit risks to them and safeguarded the employer from additional costs. 


Remuneration structuring had a promising future until the fiscus responded with insurmountable roadblocks: 

• Compliance

In the 1999 Budget Speech, the Minister of Finance, Trevor Manuel stated that, “Tax compliance is not optional, it is law, and as we have demonstrated in the past 12 months we intend showing no mercy to those who take it upon themselves to break the law. Our objective is to cultivate a culture of compliance. “ Many organisations learnt an expensive lesson in compliance when SARS audits exposed their sloppy sacrifice schemes and total cost packages together with their abuse of fringe benefits and allowances. The benefits of remuneration structuring were swallowed up by them settling the under deduction of employees’ tax (often without recovery from employees) plus penalties and interest. It also damaged the credibility of HR with the finance department – SARS audits targeted the Finance Director even though HR installed the remuneration and benefit arrangements.

• Clampdown on fringe benefits and allowances

To quote from another Budget Speech in 1997, “It was never the intention that fringe benefits should be used to structure salary packages in such a way that they create a bias towards remuneration”. Fringe benefits from the provision of occasional services to residential accommodation were withdrawn or systematically revised to reflect the cost to the employer or market rates. The tax treatment of travel allowances and company cars was substantially increased by over 70% in the past decade. Today 60% of a travel allowance is subject to employees’ tax (February 1996: 35%) and the ‘private-use’ value for the first company car is 2.5% (February 1996: 1.2%)

• Simplifying the taxation of employment income

During the 2003 tax year, the introduction of section 23(m) of the Act limited the deductions against employment income available to a salaried employee (excluding qualifying commission earners). This section effectively killed the cell phone, computer, home office and entertainment allowances by rendering them fully taxable without any deduction of the related business expenditure.

• Tax deduction for contributions to a medical aid scheme

The latest round of tax changes from March 2006 provide every taxpayer that contributes to a medical aid scheme, a tax deduction up to a maximum amount. From a tax position, structuring a non-contributory arrangement for medical aid contributions is redundant.


According to Seth Godin, in his book, Free Prize Inside, companies are good at hard work that involves management of projects and having their people being concerned about their role in the process. He argues that to be an innovator, you must take on difficult work – ‘the stuff that takes guts or insight’. A remuneration structuring project is hard work. Maintaining it in the changing business and tax environment is even harder. The decision about whether remuneration structuring has reached the end of the road in your organisation and a willingness to venture beyond it is difficult work. Are you ready to pave the wide open spaces with new roads in the way employees are remunerated for their services?

1 Examples Section 11(u) (deleted), Section 8(1(a) and Section 10(1)(nA)
2 Seth Godin Free Prize Inside, Penguin Group, 2004. pp54-55


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