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Deposit paid by employer for employee’s new residential accommodation: is it taxable?

Wednesday, 06 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: With reference to section 10(1)(nB), will the following expenditure paid by the employer on behalf of the employee being relocated qualify for exemption?

1.       Deposit payable on the new rental contract in new location.

2.       Penalty fee payable on the old rental contract. Legislation refers to a situation with real ownership with a bond but is silent on rental contracts.

A: In order for such costs to qualify for the exemption, they would have to fall within the ambit of sec 10(1)(nB) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’), which states the following:

‘any benefit or advantage accruing to any employee (as defined in paragraph 1 of the Seventh Schedule) by reason of the fact that his employer (as defined in the said paragraph), has, in consequence of the transfer of the employee from one place of employment to another place of employment or the appointment of the employee as an employee of the employer or the termination of the employee’s employment, borne the expense—

(i)                    of transporting such employee, members of his household and the personal goods and possessions of himself and the members of his household from his previous place of residence to his new place of residence; or

(ii)                  of such costs as the Commissioner may allow which have been incurred by the employee in respect of the sale of his previous residence and in settling in permanent residential accommodation at his new place of residence ...’

(iii)                 of hiring residential accommodation in an hotel or elsewhere for the employee or members of his household during the period ending 183 days after his transfer took effect or after he took up his appointment, as the case may be, if such residential accommodation was occupied temporarily pending the obtaining of permanent residential accommodation.’

The penalty fee payable on the old rental contract can only fall within the provisions of sec 10(1)(nB)(ii), as it was not incurred for purposes of subparagraph (i) (transportation of the employee, members of his/her household and their possessions) or subparagraph (iii) (hiring of residential accommodation before obtaining ‘permanent residential accommodation’).

In sec 10(1)(nB)(ii), the legislature specifically referred to ‘... in respect of the sale of his previous residence ...’ If one ascribes an ordinary meaning to the word ‘sale’, it would imply that the residence should have been owned by the taxpayer and therefore not hired by him/her. This is even more evident when one considers the wording of the Guide for Employers in respect of Employees Tax (2015 Tax Year) which states the following:

‘The following items are exempt from tax if the employer reimburses the employee for the actual expenditure incurred:

               Bond registration and legal fees paid in respect of a new residence that has been purchased;

               Transfer duty paid in respect of the new residence;

               Cancellation fees paid of the cancellation of bond on the previous residence; and

               Agent’s commission on sale of previous residence.’

From the guide’s wording (the four bullet points above) one can see that expenditure incurred by the employee to obtain ownership in respect of the new residence (bullet point 1 and 2 above) or to dispose of his/her ownership in the old residence (bullet point 3 and 4 above), would qualify for the exemption.

The deposit paid on the new rental contract may qualify for the exemption if it qualifies as an ‘expense’. Given the fact that the deposits are normally refundable, it is unclear whether the deposit would qualify as an expense. You would therefore have to consider the terms of the lease contract to determine if the deposit would qualify as an expense, in which case the deposit on the new residence may qualify for the sec 10(1)(nB)(ii) exemption.


As stated above, it would appear as if the penalty paid on the old rental contract would not fall within the provisions of sec 10(1)(nB)(ii). The deposit might qualify for the exemption in terms of sec 10(1)(nB)(ii), provided that it qualifies as an ‘expense’. The taxpayer would however still be allowed to claim the other relocation expenses provided for in sec 10(1)(nB) of the Act.

Should the employee intend to buy a residence in his new location, then you may make use of the provisions of sec 10(1)(nB)(iii), but this would only be available if the property is only temporarily being hired in anticipation of buying a permanent residence and may not be used for the first six months of hiring accommodation (where there is no intention to buy a residence ).

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.



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