In the previous article (Allowances and fringe benefits: Part 1) we discussed the difference between a travel allowance and the right of use of a motor vehicle and attempted to illustrate the pros and cons of each. We then found that each case should be evaluated separately since there are various factors that need to be considered to obtain the best possible tax benefit. In this article we will look at subsistence and other allowances that an employee may receive and also consider the tax benefits and drawbacks applicable to each.
A subsistence allowance is normally paid to an employee when the employee undertakes a business trip and has to incur certain expenses, e.g. for accommodation, transport, meals or other incidentals, and the employer wishes to reimburse the employee.
The question arises whether the employee is taxed on the amounts paid/reimbursed to him/her, even if the expenses were incurred solely in the execution of the employee’s duties.
The short answer, in most cases, is yes. However, the South African Revenue Service (SARS) permits certain deductions and exemptions, which provide relief to the employee. Therefore it is important that every employee is aware of the deductions and exemptions available to him/her.
Section 8(1)(a)(i) of the Income Tax Act No 58, 1962 determines that all allowances or advances must be included in the taxable income of the receiver, excluding amounts actually spent on accommodation and/or meals and other incidentals when, in the course of executing his/her duties, the employee is obliged to spend at least one night away from his/her normal place of residence.
Section 8(1)(a)(i) of the Act touches on two scenarios.
Firstly, in a case where the employer provides an allowance per night to the employee, the allowance is taxed on the amount actually paid/granted to the employee minus the actual expense incurred by him/her. For example, if Julius receives an allowance of R4 500 for three nights’ accommodation and spends only R3 000 on the accommodation, only R1 500 (R4 500 – R3 000) is included in his taxable income.
Secondly, it sometimes occurs that an employer pays an advance to an employee and requests the employee to hand in, on return from the trip, proof of expenditure together with the remainder of the advance. The taxable portion of the advance is then the amount of the advance minus the amount actually spent on accommodation minus the amount returned to the employer.
In both instances it is important to provide proof of the expenses incurred. It is also important to note that the allowance should not create losses. Should the costs incurred exceed the allowance, no deduction will be allowed for the amount by which the allowance is exceeded.
Meals and other incidental expenditure
Where the employer pays the employee an allowance or advance in respect of meals and other incidental expenses, the allowance or advance is also included in the employee’s income but the employee is entitled to claim one of the following deductions:
The amount actually spent on meals and/or other incidentals; or
The amount determined by the Commissioner of SARS for each day or part of a day the employee spends away from his/her normal place of residence. (Note that the employee should spend at least one night away from home in order to qualify.)
The employee may choose the most beneficial option, provided the expenses do not exceed the allowance/advance.
In practice SARS permits the subsistence allowance to be included as a non-taxable allowance on the employee’s IRP5. Thus the deduction is allowed in most instances. It should be noted, however, that especially when an allowance is paid for accommodation, the provisions of Section 8(1)(a)(i) as set out above must be complied with.
Where a salaried person receives another allowance (e.g. an entertainment or cell phone allowance) the allowance is included in his/her taxable income and the expenses incurred (even the expenses incurred for business purposes) may not be deducted for tax purposes.
This, of course, creates a problem for some salaried persons who, by nature of their daily duties, have to incur business expenses that are not deductible against the relevant allowance received.
However, a “deduction” for these expenses may well be accomplished since, although SARS does not permit expenses incurred as other allowances to be deducted, the refunding of business expenses incurred by an employee is not included in the definition of other allowances.
Certain conditions apply, though. The expenses must be incurred on instruction of the employer for the purposes of the employer’s business, and proof of such expenditure must be submitted to the employer.
This means that an employee who is required by his/her employer to entertain clients from time to time, can incur this expense and claim it from the employer without any amount being included in the employee’s taxable income.
It is clear, therefore, that there are cases where the expenses incurred by an employee for business purposes, are indeed tax deductible, although it would be taxable if it were in the form of an allowance. Employers should therefore take into account the tax implications before deciding to include the provision of allowances in employee contracts.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.