The following is knowledge that has been shared from Rhona van Taak on previous Allowance and Benefits Tax Law queries

TAX LAW: ALLOWANCES AND BENEFITS

Adjusting taxable benefit value

In terms of paragraph 3(3) of the Seventh Schedule the employee may refer the matter to SARS if it appears that the determination of the taxable benefit should be adjusted. Paragraph 3(3) of the Seventh Schedule follows:
(3) If the employee concerned is dissatisfied with any determination or proposed determination by his employer of the cash equivalent of the value of any taxable benefit included in the remuneration of the employee for employees tax purposes, the employee or the employer may refer the matter to the Commissioner and the Commissioner may, if it appears to him that the determination or proposed determination should be adjusted, issue a directive to the employer as to the manner in which such determination should be made and the employer shall be obliged to act upon such directive: Provided that nothing in this subparagraph contained shall be construed as preventing the Commissioner from making a re-determination of such cash equivalent under the provisions of subparagraph (2)

In terms of paragraph 3(2) of the Seventh Schedule SARS may make a correction on the determination of the taxable benefit on assessment if such determination made by the employer is incorrect. Paragraph 3(2) of the Seventh Schedule follows:
(2) The Commissioner may, if no determination is made, or if such determination appears to him or her to be incorrect, re-determine such cash equivalent—
(a) and issue the employer with a notice of the assessment in terms of section 96 of the Tax Administration Act for the unpaid amount of employees’ tax that is required to be deducted or withheld from such cash equivalent; or
(b) upon the assessment of the liability for normal tax of the employee to whom such taxable benefit has been granted.

In order to do this, the individual should make an appointment with SARS to discuss this and provide the relevant supporting documents. It is suggested that this appointment be made with a SARS auditor.

Bursaries / Scholarships

The provisions of section 10(1)(q) of the Income Tax Act, which relates to bursaries/scholarships, refer to a bursary granted by an employer to an employee, and does not place any limitation on an employee who is a relative of the employer.

The “no value” provision of the bursary benefit will be applicable until the tax year in which the conditions for the granting of the bursary are not met.
These conditions are normally, repayment if the study was not successfully completed, and/or repayment if the employee has not completed employment for a certain number of years (has to work for employer for a fixed period of time), etc.

The year when the conditions are not met, this bursary will become a taxable fringe benefit which must be added to the remuneration of the employee.
The year when the conditions are met, this bursary transaction will be finalised and no value will be taxable in the hands of the employee.

Furthermore, the “no value” will ONLY apply if –
• The remuneration proxy of the employee DOES NOT exceed R600 000; AND
• The bursary for the year DOES NOT exceed R20 000 in respect of grade R to grade 12 as contemplated in the definition of “school” in Section 1 of the South African Schools Act.

The preamble to section 10(1)(q) provides that the institution must be a recognised educational institution. If it is not one, the bursary exemptions do not apply.

In Rhona van Taak’s opinion, the services provided for children not yet in grade R would not qualify for the bursary exemption.

In principle, if the bursary exemption does apply, this could be structured into the parent’s package with two main provisos:
1. That remuneration that has accrued is not reduced
2. That the reduction to remuneration is applied consistently, and will then potentially impact on contributions to retirement funds, etc.

According to SARS interpretation note, a salary sacrifice is not allowed and the following is clear:
• That remuneration that has accrued is not reduced if it is structured into the employee’s package.

Company cars

The employer must tax the use of a company vehicle according to the provisions prescribed in the Seventh Schedule to the Income Tax Act. To do this the determined value of the vehicle is used and either 3.25% or 3.5% of this value is a monthly taxable benefit. However, if the vehicle relates to an operating lease, then the cost for the employer is the monthly taxable benefit.

In terms of the provisions of paragraph 7 of the Seventh schedule to the Income Tax Act, the employer needs to determine the “determined value of the vehicle”.

The determined value of a vehicle is normally the cost price of the vehicle (refer to paragraph 4.3.3 of SARS Interpretation Note 72.

Depreciation of 15% on the reducing balance is allowed only if the vehicles in allocated from one employee to another employee where the 1st employee has used the vehicle for 12 months or more. This depreciation is also only applicable to 12-month periods, which means that if the 1st employee only used the vehicle for 15 months, only 12-month depreciation will be allowed at 15% for the 12 months. The balance will then be the determined value of the vehicle for the 2nd employee.

When the monthly benefit value is determined, then this amount is subject to the deduction of PAYE at either 20% or 80% depending the business use of the vehicle.

When the individual needs to do his income tax annual return, he must use his logbook to claim against the taxable benefit. This claim uses the total kilometers travelled during the year and the business kilometers travelled during the year as well as the value of the vehicle.

Where the employer has deducted PAYE at a 80% rate of the taxable benefit and the business kilometers compared to the total kilometers results in more than 80% of the total kilometers, this individual will get a tax refund from SARS with the submission of his income tax return.

Where the employer has deducted PAYE at a 20% rate of the taxable benefit and the business kilometers compared to the total kilometers results in less than 20% of the total kilometers, this individual will get have a debit due to SARS with the submission of his income tax return.

In terms of the provisions of paragraph 7 of the Seventh Schedule to the Income Act, where an employee has the use of a motor vehicle for a part of a month, the taxable benefit must be determined in the same ration as the number of days the employee had the use of the vehicle to the total number of days in the month.

In other words, if the employee had the use of 4 vehicles during the year at different periods in the year, and any of the period in the month of use for any of the vehicles is not for a full month, a pro-rata calculation must be done.

The value as calculated should be reported either against code 3802 or 3816 (operating lease).

Code 3701 is only used where a travel allowance is paid to an employee for the use of his private vehicle.

The PAYE BRS and the Guide for Employers in respect of Fringe benefits clearly indicate that the use of a company vehicle must be reported under the relevant codes 3802 or 3816.

Please refer to SARS interpretation note 72 explaining the taxability of the use of a motor vehicle and the individuals assessment claim.

Loans to employees

In terms of paragraph 2(f) of the Seventh Schedule to the Income Tax Act, a fringe benefit occurs if an employer grants a loan to an employee at an interest rate at less than the official rate of interest.

The difference between the interest rate paid by the employee and the official rate of interest, will constitute the value of the fringe benefit which must be included in the remuneration of the employee.

There are certain loans which does not have a value and is deemed to be “no value” fringe benefits, such as:
• Short-term debts not exceeding R3000
• Loans granted to acquire immovable property Which does not exceed R450000, provided that it complies with the conditions.

The official rate of interest can be found on the SARS website: https://www.sars.gov.za/AllDocs/LegalDoclib/Rates/LAPD-Pub-IRT-2012-03%20-%20Interest%20Rate%20Table%203.pdf

The code that must be used to report this fringe benefit on the tax certificate is code 3801.

Long services awards
The PAYE BRS is silent as to whether the long service award (code 3835) is regular or periodic in nature just as it is silent on other cash payments such as commission and arbitration awards.
To determine whether to tax it as an annual payment or not one must look at how it was actually paid in practice.
Before an award can be reduced by up to R5,000 for tax calculations, the conditions of long service that specify a minimum of 15 years continuous service for the first award, followed by 10-year continuous periods of service for the following awards, must be met.
My understanding is that the long service award can be paid at any stage, or stages, in the tax year in which the long service conditions are met.
No requirement prescribes that a single award must be made (which would be an annual payment and taxed accordingly). If the employer wants to, the award can be made split into two awards, or quarterly, or even every month for 12 months.
You would tax it according to how it was actually paid.
Lastly, if the long service conditions are met, then the lesser of the value of the awards and R5,000 reduces the award value for tax calculation purposes.
The value reported under code 3835 is the total i.e. combined value of the awards.
The payroll reduces the total value by up to R5,000 as described above, and SARS will reduce it by R5,000 for the income tax calculation.

Remuneration proxy

It is easier and quicker to explain if you copy the definition of the ‘remuneration proxy’:
“remuneration proxy”, in relation to a year of assessment, means the remuneration, as defined in paragraph 1 of the Fourth Schedule, derived by an employee from an employer during the year of assessment immediately preceding that year of assessment, other than the cash equivalent of the value of a taxable benefit derived from the occupation of residential accommodation as contemplated in subparagraph (3) of paragraph 9 of the Seventh Schedule in the application of that subparagraph: Provided that—
(a) where during a portion of such preceding year the employee was not in the employment of the employer or of any associated institution in relation to the employer, the remuneration proxy as respects that employee must be deemed to be an amount which bears to the amount of the employee’s remuneration for the portion of such preceding year during which the employee was in such employment the same ratio as the period of 365 days bears to the number of days in such last-mentioned portion;
(b) where during the whole of such preceding year, the employee was not in the employment of the employer or of any associated institution in relation to the employer, the remuneration proxy as respects that employee must be deemed to be an amount which bears to the employee’s remuneration during the first month during which the employee was in the employment of the employer the same ratio as 365 days bears to the number of days during which the employee was in such employment;

I have highlighted the areas of the definition that relate to your questions.
So you must:
1. Exclude the value of the residential accommodation from the remuneration proxy value.
2. Where not employed by you in the previous tax, then use the rem proxy value for the first month of employment in the current tax year, and annualise that amount for the formula calculation
3. Apply the formula specified in Seventh Schedule paragraph 9(3).

Seventh Schedule Paragraph 9(3)

(3) Subject to the provisions of subparagraph (3C) and (4), the rental value to be placed on such accommodation for any year of assessment shall be an amount determined in accordance with the formula
(A — B) x C / 100 x D /12
in which formula—
(i) “A” represents the remuneration proxy as determined in relation to the year of assessment;
(ii) “B” represents an abatement equal to an amount of R83 100: Provided that in any case where—
(aa) the employer is a private company and the employee or his spouse controls the company or is one of the persons controlling the company, whether control is exercised directly as a shareholder in the company or as a shareholder in any other company; or
(bb) the employee, his spouse or minor child has a right of option or pre-emption granted by the employer or by any other person by arrangement with the employer or any associated institution in relation to the employer whereby the employee, his spouse or minor child may become the owner of the accommodation, whether directly or indirectly by virtue of a controlling interest in a company or otherwise,
the said abatement shall be reduced to zero;

(iii) “C” represents a quantity of 17: Provided that where the accommodation consists of a house, flat or apartment consisting of at least four rooms—
(aa) “C” represents a quantity of 18 if—
(A) such accommodation is unfurnished and power or fuel is supplied by the employer; or
(B) such accommodation is furnished but power or fuel is not supplied; or
(bb) “C” represents a quantity of 19 if such accommodation is furnished and power or fuel is supplied by the employer; and
(iv) “D” represents the number of months in relation to a year of assessment during which the employee was entitled to occupation of such accommodation.

Therefore, in terms of the definition of remuneration proxy no deductions can be made, it is therefore “remuneration” as defined in the Fourth Schedule.

Furthermore, it depends on the employment date of the employee:
• If employee was not employed in the previous year, it is this year’s remuneration grossing up in relation to the pay periods in tax year and pay periods worked.
• If the employee was employed for the full previous tax year, it is the remuneration received for that year.
• If the employee was employed for a portion of the previous tax year, it is the remuneration received during that portion which must be gross-up in relation to the full year.

The original response explain the above, see below:

Paraphrasing the definition in section 1 of the Income Tax Act for easier understanding, “remuneration proxy” in relation to the current year of assessment is remuneration as defined by the Fourth Schedule, and must be applied as follows –
1. If the employee was employed by the same employer for the whole of the year of assessment immediately preceding the current year of assessment, it is the employee’s remuneration that was paid in respect of the preceding year of assessment
2. If the employee was employed by the same employer for a portion of the year of assessment immediately preceding the current year of assessment, it is the employee’s remuneration that was paid in respect of the portion of the preceding year of assessment, ‘grossed-up’ to represent the full year’s remuneration
3. If the employee was not employed by the same employer during the year of assessment immediately preceding the current year of assessment, it is the employee’s remuneration that was paid for the first month of employment in the current year of assessment, ‘grossed-up’ to represent the full year’s remuneration.

Remuneration proxy increase with retirement benefits

When the retirement reform amendments were introduced on 1 March 2016, as you know the employer-paid contribution to a retirement fund resulted in a fringe benefit equal to the value of the employer-paid contribution.
The bigger the value of the employer contribution, the bigger the value of this taxable fringe benefit, therefore potentially more PAYE.
I remember that at the time there certain categories of employers (municipalities come to mind) came to light that prior to 1 March 2016, were contributing exorbitantly large amounts to the retirement fund in an attempt to give their employees some sort of a tax advantage under the old tax rules.
The new tax rules leveled the playing field and resulted in the balance of remuneration being increased considerably in these cases.
At the same, the rules for the deduction available to the employee were also changed, in some cases resulting in a larger deduction and therefore potentially less PAYE.
The result of this was that more PAYE was withheld for some employees of certain employers, and this was described as an unavoidable consequence of the retirement reforms, but the bottom line was that the employee was being taxed correctly on the benefit to the employee.
I also remember reading or being told at the time that an analysis of the balance of remuneration (looking at retirement fund contributions in isolation from other income and deductions) showed that by far the majority of employees were either tax neutral, or better off, in Mar 2016 compared to Feb 2016.
There is certainly no intention to change the legislation.

Retirement fund contributions paid by employer

In terms of paragraph 2(l) of the Seventh Schedule to the Income Tax Act, 1962, a taxable benefit incurs when an employer had contributed towards a retirement fund on behalf of an employee.

In terms of paragraph 12D(2) of the said Schedule prescribed that the value of the taxable benefit where it consist SOLELY of defined contribution components, is the value of the amount contributed by the employer.

Paragraph 12D(3) prescribed that where it consist of components OTHER THAN ONLY defined contribution components, the cash equivalent of the benefit is determined in accordance with the formula: X = (A x B) – C.
As this formula takes the fund member category factor as well as the retirement funding income into consideration, it means that the result (taxable benefit) may be less than the amount actually paid by the employer to the fund.

The following IRP5 certificate codes will be applicable when an employer contribute towards a pension fund on behalf of an employee:
• Code 4774 = actual contribution paid by the employer
• Code 3825 = taxable benefit determined in terms of paragraph 12D(2) or (3) whichever is applicable
• Code 4003 = value of code 3817 plus the contributions made by the employee
The taxable benefit is deemed to be paid by the employee and should therefore be included in code 4003.

If it consists of components OTHER than defined contribution components, then you must use the prescribed formula to determine the taxable benefit portion which will change the value of code 3825 and 4003.

Severance benefits
References in this response to sections are to sections of the Income Tax Act, 1962 (the Act).
A “severance benefit” as defined in section 1(1) arises, once the general definition thereof has been met, in one of three instances:
• The person is at least 55 years old;
• The relinquishment, termination, loss, repudiation, cancellation or variation of employment has resulted from the person being permanently incapable of continuing with his or her employment due to, amongst others, sickness or incapacity; or
• The termination or loss of employment is due to the person’s employer having ceased or intending to cease carrying on a trade for which the person was employed, or due to the person having been made redundant by the employer, unless, where the person’s employer is a company, that person holds more than 5% of the shares or members’ interest in that company.
Note that the exclusion in reference to a person who holds more than 5% of the shares or members’ interest in that company, will only apply in respect of the provisions of paragraph (c) above. In other words, in the case of a person who is made redundant or whose termination or loss of employment was due to his or her employer ceasing trade, the lump sum received by or accrued to that person will not be regarded as a severance benefit as defined if the person (whether a director or any other employee) holds more than 5% of the shares or members’ interest in that employer company. The exclusion will, however, not apply in respect of the provisions of paragraphs (a) and (b) above, regardless of that person’s shareholding or members’ interest in the employer company.
In cases where the exclusion in paragraph (c) applies, the lump sum received by or accrued to the person in respect of the termination or loss of office or employment will not be a severance benefit as defined. However, the amount will still fall to be included in the person’s “gross income” under paragraph (d)(i) of that definition in section 1(1). Accordingly, this amount is “remuneration” as defined in paragraph 1 of the Fourth Schedule to the Act (the Fourth Schedule) and will be subject to normal rates of tax applicable to natural persons. Paragraph 9(3)(a) of the Fourth Schedule further requires an employer to obtain a directive from SARS with respect to this lump sum in order to determine the employees’ tax to be deducted or withheld therefrom.
A severance benefit, although payable as a lump sum, is not a “lump sum benefit” as defined in section 1(1), since it is not paid by the person’s retirement fund under the Second Schedule to the Act. As such, the “Guide on the calculation of the tax payable on lump sum benefits” will not apply to the lump sum paid to the employee. Kindly refer to paragraphs 11 and 12.5 of the “Guide for Employers in respect of Employees’ Tax (2021 Tax Year)” for additional guidance in this regard.

A severance benefit is defined in section 1 of the Income Tax Act as any amount (other than a lump sum benefit or an amount contemplated in paragraph (d)(ii) or (iii) of the definition of ‘gross income’) received by or accrued to a person by way of a lump sum from or by arrangement with the person’s employer in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of the person’s office or employment or of the person’s appointment to any office or employment, if such person has attained the age of 55 years.
If the retirement package complies with the severance benefit definition above, the employer should apply for a tax directive at SARS to ensure that the retirement lump sum package is correctly taxed.
Due to the fact that the employee will not comply with the no-value provisions of paragraph 12A(5) of the Seventh Schedule, the contribution that the employer pay towards to the retirement fund will be fully taxable in terms of the provisions in paragraph 12A of the said Schedule and need to be recorded on the IRP5 under the relevant code for this taxable benefit.
12A (5) No value shall be placed in terms of this paragraph on the taxable benefit derived from an employer by—
(a) a person who by reason of superannuation, ill-health or other infirmity retired from the employ of such employer

In terms of the definition of “normal retirement age” in section 1 of the Income Tax Act, “normal retirement age” means –
(a) in the case of a member of a pension fund or provident fund, the date on which the member becomes entitled to retire from employment for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body;
(b) in the case of a member of a retirement annuity fund, a pension preservation fund or a provident preservation fund, the date on which the member attains 55 years of age; or
(c) in the case of a member of any fund contemplated in this definition, the date on which that member becomes permanently incapable of carrying on his or her occupation due to sickness, accident, injury or incapacity through infirmity of mind or body

Subsistence allowance

In terms of section 8(1)(c) of the Income Tax Act, a subsistence allowance which does not exceed the Daily rates as published by SARS in respect of meals and incidental costs relating to outside the RSA will be deemed to be expended and will not be included in his taxable income.

However, if the recipient received an allowance for accommodation, the allowance will be included in his taxable income and the actual expenses needs to be claim for assessment purposes.

No limitation on the number of days is placed on a subsistence allowance.

In order to qualify for a subsistence allowance under section 8(1)(a)(i)(bb) of the Income Tax Act, the employee must be away from his usual place of residence in the Republic for at least one full period from sunset to sunrise of the next day.

A few years ago, the SARS guide to employers in respect of employees’ tax had a limitation of 60 days, however, since then this limitation has been removed by SARS.

Please refer to SARS Interpretation Note 14 for more details.

Transfer costs

The expenses borne by the employer in respect of purchasing a bed, dining room table, crockery and cutlery for the employee do not qualify as “settling-in” costs for purposes of paragraph (ii) of the exemption in section 10(1)(nB) of the Income Tax Act, 1962 (the Act).

The following expenditure, incurred by the employee and reimbursed by the employer, is envisaged as qualifying costs for purposes of section 10(1)(nB)(ii) of the Act:
• 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 for bond cancellation on previous residence;
• Agent’s commission paid on sale of previous residence;
• New school uniforms;
• Replacement of curtains;
• Motor vehicle registration fees; and
• Telephone, water and electricity connections.

The expenditure borne by the employer in respect of purchasing a bed, dining room table, crockery and cutlery for the employee will give rise to a taxable benefit that will not qualify for exemption under section 10(1)(nB) of the Act. The nature of the taxable benefit will further depend on the specific facts and circumstances of each case.

Travel allowance: Portion of package

There is no official percentage of the package prescribed as acceptable for a travel allowance.

However, in general where the total percentage exceeds 25%, SARS would normally conduct an audit and the employee must have proof available in order to satisfy that he travels extensively for business purposes.

Furthermore, the travel allowance must at least be of such a value that it covers the business travel costs. This means that if you give the employee a R10000 travel allowance but the total business costs (total business costs ÷ total km travelled x business km travelled) is less than the travel allowance, such employee might find that he has a debit when his final tax assessment is processed.

Travel allowance: with fuel paid by employer or petrol card paid by employer

The combination of a travel allowance with a petrol card (where the company pays the petrol card) is treated as a travel allowance (code 3701) in the payroll.

Employees who receive a travel allowance and additional to this allowance is provided with a petrol or garage card (account paid by the employer) by their employer, have to be treated as follows for payroll purposes:
• The amount expended on these cards is included in the employee’s travel allowance (code 3701 on the IRP5) and the appropriate portion thereof (80% or 20%) is subject to the deduction of PAYE, SDL, and UIF.
• The amount expended on these cards is a company expenses. Care must be taken that this expenses in not duplicated on the financial records of the company, for example, as part of the total salary expenses and as part of the fuel expenses of the company.

The reason why these expenses relating to the use of the cards are included in the travel allowance of the employee is due to the fact that the employee’s travel includes a private travel portion and in order to ensure that the correct business claim is made and that the employee is correctly taxed on any private portion.

For more information regarding this please refer to the SARS Interpretation Note 14 as well as the BGR 23.

Travel reimbursement

SARS has issued an Interpretation note (no. 14 – issue 3) which provides clarity on the tax treatment of allowances, advances and reimbursements. Paragraph 5.2 specifically indicated that reimbursements and advances must be excluded from taxable income with the exception of “travel reimbursements” where an employer reimburses an employee for the actual business kilometers travelled at an employer-agreed rate per kilometer.

If the rate at which the employer reimburses the employee for travel expenses does not exceed the rate as published in the Gazette, there is not PAYE deductible from such reimbursement and the reimbursement will be deemed to be expended on assessment in terms of section 8.

The rate at which the employer reimbursed an employee for travel expenses should be determined in terms of the employer’s policy.

The rate published by the Minister in the Gazette is the rate that should be used to compare the actual reimbursement rate for purposes of determining whether the reimbursement is subject to the deduction of PAYE.

The published rate is not a rate which force the employer to pay an reimbursement by using this published rate. The accrual reimbursement rate is determined in terms of company policy.

Paragraph 5.4 of the interpretation note specifically deals with deductions from travel allowances and advances and it is stated that in the context of travel, an allowance or advance includes both a travel allowance and a travel reimbursement.

A recipient who receives a travel allowance and a travel reimbursement must add the amount of the travel reimbursement to the amount of the allowance and calculate the allowable deduction for the number of business kilometers travelled.

A recipient who only receives a travel reimbursement must still go through the process of determining the allowable deduction because, depending on the facts, the rate at which the recipient was actually reimbursed may exceed the allowable deduction. The allowable deduction is determined by applying the actual cost, deemed rate per kilometre method or the specified rate per kilometre (see 5.4.3 and 5.4.4).

The amount of the allowable deduction which may be deducted from the travel allowance, advance or reimbursement has two components, namely, the business kilometres travelled (see 5.4.2) and the expenditure per kilometre.

Expenditure per kilometre may be determined using actual costs (see 5.4.3) or according to the deemed rate per kilometre as determined by the Minister of Finance by notice in the Gazette (see 5.4.4).

With effect from 1 March 2010 the deemed kilometre method was deleted from the Act. Taxpayers wishing to claim the cost of business travel must base their claim on the actual business kilometres travelled and are required to prove the business kilometres travelled to the satisfaction of the Commissioner.

Should the employee not maintain a logbook and/or declare the business kilometres travelled for the year in his income tax return, a tax debit will be due by the employee to SARS with the processing of his income tax return as this amount will become fully taxable and no claim is allowed against this amount.