6. Principles of Allowances, Advances and Reimbursements
Before being able to apply the requirements of each type of payment correctly, one must understand the legal characteristics of allowances, advances, and reimbursements.
Note that the allowances, advances, and reimbursements that are interpreted below are general in nature and not specific to business travel compensation.
However, travel allowances, travel advances, and travel reimbursements being a subset, must fit into these interpretations.
The SARS interpretations of the three types of payment follow.
6.1 Allowances
SARS Interpretation: “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.”
An allowance is an amount of money:
• granted by an employer to an employee in circumstances where
• the employer is certain that
• the employee will incur business-related expenditures on behalf of the employer, but where
• the employee is not obliged to prove or account for the business expenditure to the employer.
The amount of the allowance is based on the anticipated business-related expenditure.
There are some key concepts to take note of in the above interpretation of allowances:
• The employer grants the allowance (i.e. the employer controls whether it is paid or not), but the employer –
o must be certain that the expense (travel for business purposes) will be incurred.
o must estimate a realistic (“expected”) value for the allowance.
• The allowance compensates the employee for incurring the employer’s business-related expenses.
• The employee need not submit proof of the expense to the employer (but for a travel allowance should/must keep a logbook to claim his business travel expenses from SARS on assessment).
6.2 Advances
SARS Interpretation: “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.”
An advance is an amount of money:
• granted by an employer to an employee in circumstances where
• the employer is certain that
• the employee will incur business-related expenditure on behalf of the employer, and where
• the employee is obliged to prove or account for the business expenditure to the employer.
The amount of the advance is based on the anticipated business-related expenditure.
Where the actual expenses incurred are less than the advance granted, the employer recovers the difference from the employee, and vice versa.
If one compares the analysis of the components of the interpretations of allowances and advances, it can be easily seen that the wording is identical except for the last point where an advance requires proof of the expense when it is incurred.
This difference affects the administration procedures where for advances, the difference between the advance and the actual value of the expense is sorted out between the employer and the employee when the proof is supplied.
However, the ‘substance’ (or the actual meaning) of an advance is that it is an ‘early reimbursement’. The only difference between the two is that an advance is paid to the employee for a business expense before it is incurred, while the reimbursement is paid to the employee after incurring the expense.
Both the advance and the reimbursement must be proved or accounted for to the employer.
6.3 Reimbursements
SARS Interpretation: “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 benefit 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.”
A reimbursement of business-related expenditure occurs when:
• an employee incurred business-related expenses on behalf of an employer out of his own pocket
• and is subsequently reimbursed for the expenditure by the employer
• after having proved and accounted for the expenditure to the employer.
The employer must instruct the employee to incur the expense, and where an asset is purchased, the employer must be the owner of the asset.
In the employment world, reimbursement of business expenditure occurs when an employee pays for business expenses on behalf of the employer and is then reimbursed for the expenditure by the employer after having proved and accounted for the expenditure to the employer.
The following are the general requirements for a valid (legal) reimbursement.
The reimbursement must further the trade of the employer, and there must be:
• Instruction from the employer to incur the expense, and
• Proof of the actual value of the expense (vouchers, invoices, etc.) must be provided to the employer
• If an asset was purchased and reimbursed, then the asset must be owned by the employer.
Points 1 and 2 above apply to travel reimbursements.
Any amount paid to an employee wholly in reimbursement of expenditure incurred by the employee in the course of his employment is excluded from both income and remuneration.
Reimbursements do not have to be reported on tax certificates except for:
• Travel reimbursements (the reporting rules will be discussed in chapter 4)
• Subsistence allowances (which SARS deem to be a reimbursement if paid below the daily expense limits).
6.4 Comments on the Interpretation of Allowances, Advances, and Reimbursements
The dual nature of an advance is made obvious by a comparison of the SARS interpretations –
1. The form (wording) of the interpretation of an advance is the same as that of the interpretation of an allowance with only one difference – proof of the business expenditure is required.
2. The substance (meaning) of the interpretation of an advance is that it is an early payment of a reimbursement.
The only material difference between an advance and a reimbursement is that an advance is paid to the employee before the business expense is incurred, while a reimbursement is paid to the employee after the expense is incurred.
This means that even though the wording of the interpretation of an allowance and an advance is virtually identical, in substance (at the heart of it), an advance is an ‘early’ reimbursement.
The following is a result of what has been discussed:
1. The employer has control over whether, and how, the compensation is paid. However, along with the power of control, goes the responsibility to exercise that power in a fair and legally compliant manner.
2. The aspect that results in an answer of ‘Yes’ across all three columns of the table is that of the ‘Employer’s Expense’. This makes it absolutely clear that the business portion of travel allowances and the actual value of travel advances and travel reimbursements are the employer’s expense and must not be paid for by the employee.
3. The employer must ensure that a realistic amount is estimated for a travel allowance. This also applies to the granting of an advance – the difference being that the advance must be ‘proved’ after the event at which stage it no longer has an estimated value but an ‘actual’ value – allowing any difference to be refunded by the employee to the employer or paid by the employer to the employee. Reimbursements are only paid against proof, which is of course the actual value of the expense. See the section later in this workbook for a discussion on whether the value of a travel allowance must include only the estimated business expenditure, or whether it can be legally increased to provide for a private travel amount portion as anticipated by the ‘inclusion percentages’ of the Fourth Schedule.
4. The interpretation states that proof of the kilometers travelled per business trip is not required for travel allowances. This is true according to the principle of allowances, but not quite true as far as one aspect of travel allowance administration is concerned. Information is necessary to estimate a realistic estimate of the value a travel allowance. After that, proof of the actual travel is not required on a monthly basis until the value must be re-estimated in terms of the employer’s policy (it is a good practice to re-visit the travel allowance value at least once a year – or when the vehicle or job circumstances change). The employee must maintain a logbook (discussed in a section below) and submit it to SARS when requested by SARS to do so. The logbook total and business kilometres travelled are used for the calculation of the allowable business travel expenses claim. This is also a form of ‘proof’.
Note that the travel reimbursement is not a ‘true’ reimbursement because the amount that is reimbursed is not the actual cost of the kilometers travelled. It is a deemed cost because the rate per kilometer that is used to calculate the reimbursement amount is either a deemed cost rate that is determined from the Cost Scale table supplied by SARS for this purpose, or the ‘Prescribed’ rate/km.
This is why this type of travel compensation is called a “Reimbursive Travel Allowance” by SARS – it is a hybrid between an allowance and a reimbursement but leans more towards being a reimbursement.