Page 235 - SAIT Compendium 2016 Volume2

IN 14 (3) Income Tax acT: InTeRPReTaTIon noTes IN 14 (3)
2. Background
In line with the 2002 Budget Review proposal to simplify the system of employment income taxation, the provisions relating to allowances, advances and reimbursements were previously consolidated in section 8 (1). Section 23 (m) was also previously enacted to limit the deductions available to employees and of ce holders.
Since Issue 2 of this Note, substantial amendments have been made to the travel allowance system. These include the removal of the ‘deemed kilometre’ method of calculating the allowable deduction as well as amendments to the employees’ tax withholding requirements on allowances and advances.
The update to this Note includes these amendments and clari es what constitutes business travel and private travel.
3. The nature of allowances, advances and reimbursements
3.1 De nition of the terms ‘allowance’, ‘advance’ and ‘reimbursement’ for the purposes of section 8 (1)
The distinction between an allowance, an advance and a reimbursement for purposes of sections 8 (1) (a), (b) and (c) is set out in 3.1.1 – 3.1.3.
3.1.1 Allowance
An allowance is an amount of money granted by an employer to an employee to incur business- related expenditure on behalf of the employer, without an obligation on the employee to prove or account for the business-related expenditure to the employer. The amount of the allowance is based on the anticipated business-related expenditure.
3.1.2 Advance
An advance is an amount of money granted by an employer to an employee to incur business-related expenses on behalf of the employer, with an obligation on the employee to prove or account for the business-related expenditure to the employer. The amount of the advance is based on the anticipated business-related expenditure. The employer recovers the difference from the employee if the actual expenses incurred are less than the advance granted and vice versa.
Example 1 – Allowance
Facts:
ABC Ltd requires X to travel for business purposes three or four times a month. ABC Ltd anticipates that X will incur R1 000 per month on business-related expenditure whilst travelling and pays an amount of R1 000 per month to cover the expenditure. X is not required to prove or account for actual business-related expenditure to ABC Ltd.
Result:
X receives an allowance of R1 000 per month for purposes of section 8(1).
Example 2 – Advance
Facts:
A works for ABC Ltd. The company has asked A to visit a key client to conduct a client satisfaction survey and, after completing the survey, to entertain the client by way of a business lunch. A is paid an amount of R500 by ABC Ltd to cover the cost of the lunch. A must submit receipts and invoices to the company accountant when returning to the of ce and must return any portion of the advance not spent as instructed. ABC Ltd does not think the lunch will cost more than R500, however if the client orders indulgently ABC Ltd will make good any shortfall. A is able to provide a receipt and an invoice totalling R400 and returns the remaining R100 to the company.
Result:
A receives an advance of R500 for purposes of section 8 (1).
3.1.3 Reimbursement
A reimbursement of business-related expenditure occurs when an employee has incurred and paid for business-related expenses on behalf of an employer without having had the bene t of an allowance or an advance, and is subsequently reimbursed for the exact expenditure by the employer after having proved and accounted for the expenditure to the employer.
Example 3 – Reimbursement
Facts:
A (who works in East London) is required to conduct a two day training session at the company’s Grahamstown branch. On arrival A discovers that the Grahamstown branch does not have all of the equipment required in order to adequately deliver the training. A’s manager asked A to purchase the required items out of A’s own pocket and to submit a claim on returning to East London. A spent R200 on the items and retained the receipts which prove R200 was spent on business-related expenditure. The employer subsequently reimburses A the full R200.
Result:
A receives a reimbursement for purposes of section 8 (1).
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