In Tax, a Rose by Any Other Name—Isn’t a Rose
29 October 2010
Posted by: Author: Steven Jones
In Tax, a Rose by Any Other Name—Isn’t a Rose
Don’t confuse these tax terms…
What’s the difference between an allowance, an advance, and a reimbursement? To many people these are different terms for the same thing, but to SARS, the category that a payment falls into is critical when it comes to the taxation thereof.
Thankfully SARS has recognised that certain tax concepts have become complicated for the ordinary taxpayer, and has issued Interpretation Notes covering a number of the grey areas.In the case of allowances, advances, and reimbursements, Interpretation Note 14 sets out how SARS understands these three terms—and,most importantly, how each one will be taxed.
However, it is important to note that, from the employer's perspective, any allowance or advance granted, or reimbursement made, must reflect actual or anticipated business expenditure to be incurred by the employer.It therefore stands to reason that such allowance must be reasonable in relation to such expenditure.
Any amount that is considered to be "excessive” would be subject to the deduction of employees' tax, and if the employer fails to make such deduction, the applicable interest and penalties may be incurred by the employer.
Furthermore, the payment of an allowance or advance, as well as the reimbursement of business expenditure, is to be an amount over and above the employee's normal earnings, as confirmed in ITC 1523 (54 SATC 194).As far as the tax position of the employee is concerned, the following are applicable:
According to the Interpretation Note, an allowance is an amount of money granted to an employee by the employer, where the expectation is that the employee will be required to incur certain business-related expenditure during the course of their employment.Such allowances are usually a fixed monthly amount, and are stipulated in the employment contract.
In this particular case, the employee is not required to account to the employer for the amount spent. For example, an employee receiving a travel allowance would not submit vouchers for fuel, maintenance, etc. to the employer,since the allowance is intended to cover these costs.Such employee would also (usually) have relative freedom in their choice of vehicle.All the employer is concerned about is that the employee undertakes the business travel stipulated in their employment contract.
Each allowance is taxed upfront, with most allowances being fully subjected to PAYE each month (or whenever paid). In the case of travel allowances, 80% of the allowance is taken into account for determining the monthly PAYE.Taxpayers would then submit claims against such allowances when completing their income tax return.
An advance differs from an allowance in that in the case of an advance, the employee is required to account to the employer for amounts spent (usually by means of a reconciliation which includes the submission of expense vouchers).Any unspent amount of the advance also usually needs to be repaid to the employer.An example would be where an employee is sent overseas on business, and the employer provides the employee with an advance to defray certain expenses that are likely to be incurred.
Advances are normally tax-free in the hands of the employee,provided that they are:
1. used for business purposes relating to the business of the employer;
2. any unexpended portion of such advance is repaid to the employer; and
3. the advance is utilised for its intended purpose within a reasonable time.
In the latter case, what constitutes a "reasonable time” is open to interpretation, but certain allowances (such as subsistence allowances) are required to be used by the end of the month following the month in which the advance is granted.Certain exceptions will be permitted, for example where an employer books an overseas business trip some months in advance, purchases foreign exchange, travellers' cheques, etc.in order to take advantage of favourable exchange rates.However, the requirement to use the allowance by the end of the month following the month in which the advance is granted applies from the time the allowance is physically paid to the employee.
A reimbursement takes place when an employee has used their private funds to incur business expenses on behalf of the employer, for which the employer later reimburses the employee.An example would be where the employee undertakes a business trip on behalf of the employer, and uses his/her personal credit card to cover the cost of airfares, car hire, hotel accommodation, meals, etc. Such reimbursements are tax free in the employee's hands,provided that:
1. the expense has been incurred upon instruction of the employer(note that such instruction can be either a specific instruction or a "standing” instruction as per an employment contract or internal policy);
2. the expense is incurred in the furtherance of the employer's business;
3. the employee is required to provide proof of such expenditure to the employer; and
4. where the expense involves the acquisition of an asset ,ownership in such asset must vest in the employer.
The employee is not required to account for any reimbursements received from an employer on their income tax return (except for reimbursements for business travel based on a per-kilometre basis, which must be disclosed on the IRP5 certificate),and the employee will not be permitted to submit any claim against reimbursements received.
Source: By Steven Jones (Tax breaks)