Page 236 - SAIT Compendium 2016 Volume2

IN 14 (3) Income Tax acT: InTeRPReTaTIon noTes IN 14 (3)
3.2 General observations on the nature of allowances, advances and reimbursements
The nature of allowances, advances and reimbursements is frequently misunderstood, as are the reasons for granting recipients such amounts. In this regard:
• Any allowance, advance or reimbursement is a re ection of business-related expenditure or anticipated
business-related expenditure of the employer. A payment to an employee under the disguise of an allowance but actually for services rendered or to be rendered is subject to tax under the normal provisions of ‘gross income’ and is not treated as an allowance under the provisions of section 8 (1) (a). The label of a payment does not necessarily correctly re ect the true nature of the payment.
• The judgment in ITC 1523* con rmed that when the word ‘allowance’ is used in an employee-employer relationship, it means a grant of something additional to ordinary wages. The taxpayer had received a salary and sought to claim a deemed subsistence expenditure deduction against his salary. The court held that he had not received an allowance as he had not received anything extra and was not automatically entitled to the deduction provided for in section 8 (1).
• A typical misconception is that the quantum of an allowance or advance does not have to re ect the anticipated business expense. This misconception is sometimes caused by the incorrect understanding that an allowance can, without reference to the actual expenditure anticipated, be based on the amounts of expenditure which are deemed to have been incurred by the Act under speci ed circumstances and that the employee will automatically be entitled to a tax deduction against that ‘allowance’. The misconception means that employees sometimes receive allowances that are much greater than the true anticipated business expense.
4. The law
For ease of reference, the relevant sections of the Act are quoted in Annexure A.
5. Application of the law
5.1 Inclusion in taxable income – allowances and advances
Section 8 (1)(a) (i) –
• deals with all allowances and advances paid by a ‘principal’ to a ‘recipient’ (for example, travel, subsistence, public
of ce, cell phone and housing allowances); and
• provides that all such allowances and advances must be included in the recipient’s taxable income to the extent that
they are not expended† –
– for travelling on business;‡ or
– for accommodation, meals and incidental costs while such of ce holder or employee is obliged to spend at least
one night away from his or her usual place of residence as a result of business or of cial purposes;§ or – by reason of the duties attendant upon public of ce.
Section 8 (1)(a) (ii) provides that in limited circumstances a reimbursement or advance must not be included in taxable income as otherwise required by section 8 (1)(a) (i) (see 5.2).
5.1.1 The terms ‘principal’ and ‘recipient’
For purposes of section 8 (1)(a) the term ‘principal’ includes –
• the employer of the recipient of an allowance; or
• the authority, company, body or other organisation in relation to which any of ce is held; or
• any ‘associated institution’ as de ned in the Seventh Schedule in relation to that employer, authority, company, body
or organisation.
Within the context of section 8 (1) the term ‘recipient’ means the person who has been paid or granted an allowance, advance or reimbursement by a principal. Having regard to the meaning of the word “principal” in this section, a recipient refers to an employee or an of ce holder.
For example, although an independent contractor may be an employee as de ned under the Fourth Schedule to the Act for employees’ tax purposes, an independent contractor would not be considered to be an employee in the ordinary meaning of the word as implied in section 8 (1).
5.2 Exclusion from taxable income – reimbursements and advances
Section 8 (1)(a) (ii) excludes reimbursements or advances from taxable income if –
• the reimbursement or advance was or must be expended by the recipient on instruction of the principal in the
furtherance of the principal’s trade;
• the recipient must produce proof to the principal that the amounts were wholly and actually expended for this purpose;
• the recipient must account to the principal for the expenditure; and
• the expenditure was or will be incurred to acquire any asset and ownership in that asset vests in the principal. This is consistent with the de nitions in 3.1.2 and 3.1.3.
‘Travel reimbursements’ by an employer to an employee for the actual business kilometres travelled at an employer-agreed rate per kilometre are ‘exceptions’ to this rule. Accordingly, the provisions of section 8 (1)(a) (i) (see 5.1) and section 8 (1) (b) (see 5.4) must still be applied to travel reimbursements when determining the amount, if any, which must be included in the recipient’s taxable income. The inclusion in taxable income will be nil if the amount of the allowable deduction (see 5.4
* 54 SATC 194.
† The amounts expended are taken into account by reducing the inclusion in taxable income. In this Note these reductions are referred to as ‘deductions’
‡ See 5.4 for details of allowable deductions. § See 5.3 for details of allowable deductions.
228 saIT comPendIum oF Tax LegIsLaTIon VoLume 2