Income Tax Deductions for Employees South Africa
Employee Deductions in South Africa, June, 2004
The deductions available for employees are very restricted. The current position is as follows:
- With effect from 1 March 2002, all allowances (including entertainment allowances) of whatever nature are fully taxable to the extent that the amount has not been spent on the instruction of the employer in furtherance of the business of the employer and with the appropriate proof provided to the employer. Actual expenditure reimbursements by employers remain tax exempt if the above rules apply and are followed. This includes entertainment expenditure reimbursements.
- The personal tax free subsistence allowance remains unchanged. Accommodation, meals and incidental costs will be deemed to have been expended if proof of these expenses can be submitted by the employee in his or her tax return. “Incidental costs” is defined to mean any beverages (including alcoholic beverages), private telephone calls, gratuities and room service.
- The employee must be away from his/her usual place of residence in all cases. The deduction also does not apply if the employer has directly borne the expense in question. If the employer simply reimburses the employee for actual expenditure against documentary proof, then no tax is levied on the employee.
If there is no proof of expenditure, the following amounts will be deemed to have been actually expended by the recipient to whom an allowance has been granted or paid
where the accommodation to which that allowance relates is in South Africa and that allowance is paid or granted for
incidental costs only, an amount equal to R60 per day; or
the cost of both meals and incidental costs, an amount equal to R196 per day; or
where the accommodation to which that allowance relates is outside South Africa, and that allowance is paid or granted to defray the cost of meals and incidental costs, an amount equal to US$190 per day.
- The business travelling allowance rules in respect of motor vehicles currently remain unchanged. Fifty percent of such allowances are subject to PAYE. On assessment, the full allowance is taxable and actual or deemed expenditure can be claimed up to the amount of allowance received.
- The Minister has announced that, in his opinion, the current motor vehicle allowance tables and rules are unreasonably favourable to taxpayers who are effectively being allowed to deduct expenses relating to private travelling. The deemed expense schedule, the private kilometre usage, the 50% PAYE rule, the recoupment of theoretical depreciation on sale of the vehicle, etc. are all to be reviewed. Depending on the changes, certain taxpayers could find their tax liabilities sharply increased when the new “rules” are finalised.
In general, with effect from 1 March 2002, deductions against the employment income of employees are now limited to –
- contributions to pension and retirement annuity funds;
- legal expenses;
- wear and tear (depreciation) allowances on items used for trade, e.g. computers and books;
- income continuation insurance premiums;
- bad debts and doubtful debt allowances;
- medical expenses and donations to Public Benefit Organisations;
- the other items referred to above.
It is important to note that an agent or representative whose remuneration is normally derived mainly (i.e. over 50%) in the form of commission based on the sales or turnover attributable to that person, may claim all expenditure incurred in the production of income (and legal costs) and does not suffer the same restrictions as for other employees referred to above.
For home study expenses to be deductible for tax purposes, the relevant portion of the premises (in respect of which the expenses are claimed) must be specially equipped for purposes of the persons trade and must be regularly and exclusively used for the purpose of trade. If the taxpayer is an employee or holder of an office, a deduction will only be allowed if either
the income of the taxpayer from such employment or office is derived mainly (i.e. over 50%) from commission or other variable payments which are based on the taxpayers work performance and his duties are mainly performed otherwise than in an office which is provided to him by his employer, or
his duties are mainly performed in such portion of the premises.
The practical requirements of SARS are difficult but not impossible to fulfil. In particular, the requirement to use an office at home should, wherever possible, be included in your written employment contract.
The capital gains tax (CGT) implications when a portion of your primary residence is used for business purposes must also be considered.
Where an employer pays for the cost of a telephone at the home of the employee, this benefit will be taxable. Only the reimbursement of the cost of actual business calls (suitably recorded) will be tax free.