TAX LAW: DEDUCTIONS AND EMPLOYERS CONTRIBUTIONS TOWARDS DEDUCTIONS
Donations

Only payments made to a section 18-A-approved organization will be allowed as a deduction from taxable income if such donation is supported by the necessary section 18A receipt issued by the organization to whom the donation is made.

It must be noted that although the payment made by the employee may exceed the allowable deduction of the donation in terms of paragraph 2(4), the full amount of the donation deducted and paid over the organization must be reflected on the IRP5 and not only the allowable portion of the payment made. This is only done if the section 18A requirements are met and the donation is allowed by the payroll against the remuneration of the employee before the determination of employees’ tax.

For tax calculation purposes only the deduction is limited to 5% of the taxable remuneration. The deduction may not exceed 5% of the remuneration after deducting pension-, provident-, and retirement annuity fund contributions. The deduction is only allowed if the employee has provided the employer with a receipt which reflects the details as prescribed in section 18A(2)(a).

The code used for donations on an IRP5 is code 4030.

Home office expenses

Certain home office expenditure could be claimed under section 11(a) of the Act, subject to section 23(b) and (m). For more detail, please refer to SARS’s guidance in Interpretation Note 28 “Deductions of Home Office Expenses Incurred by persons in Employment or Persons Holding an Office”.

Section 23(b) has two provisos, called proviso (a) and proviso (b) to section 23(b). Proviso (b) deals with employment, and it is split into 2 categories. I have quoted the proviso below so that it is easier to reference:
“Provided that –
(a) …
(b) no deduction shall in any event be granted where the taxpayer’s trade constitutes any employment or office unless—
(i) his income from such employment or office is derived mainly from commission or other variable payments which are based on the taxpayer’s work performance and his duties are mainly performed otherwise than in an office which is provided to him by his employer; or
(ii) his duties are mainly performed in such part;”

Proviso (b)(i) and (b)(ii) are separated by “or”. This means that (i) and (ii) are alternatives, they do not both need to be satisfied in order to satisfy the proviso: meeting either one of them will suffice to meet the requirement of “unless” in the introductory words of proviso (b).

Proviso (b)(i) deals with employees who earn mainly (more than 50%) commission, they may claim a home office deduction if their duties are mainly performed outside of an office provided by the employer. This scenario would cater for the likes of, for example, commission-earning travelling salesmen who work out of their car, or commission-earning IT consultants who spend most of their time at their clients. They do not have to render services mainly at the home office.

Proviso (b)(ii) deals with an employee whose duties are performed mainly (more than 50%) in a home office. This category does not need to be mainly commission earners, the test is simply a factual test of whether any employee actually worked more than 50% of the year out of a home office. It can apply to ordinary salary earners. However, the deductions are limited in terms of section 23(m) to rental, repairs and expenses relating to the dwelling house/premises and wear-and-tear allowances.

The test that an employee mainly worked from a home office during a year of assessment, is an objective factual test which the employee must prove on a balance of probabilities. An employment contract requiring the employee to work from home may assist an employee in satisfying the burden of proof, but it would not be conclusive proof that the employee did in fact work from home. A letter from the employer confirming that this was the case for a specific employee may also assist, but factors such as type of job, etc. may also play a part.
This means that the employee who does not earn mainly commission needs to be working from home more than 50% during the year of assessment.

Proviso (a) deals with the general requirements that need to be satisfied in order to qualify for any home office deduction. These are dealt with in the Interpretation Note and so I won’t repeat them here.

The limitation prescribed in section 23(m) of the Income Tax Act, clearly indicate that a deduction will be limited unless the remuneration is MAINLY in the form of commission based on sales or turnover attributed to the individual.

The work “mainly” used in this section means more than 50% of the total income of the individual. Therefore all income must be added together in order to determine if the commission portion of the income exceeds 50% of the total.

Although the above limitation will be applicable, the salary only individual will be allowed to claim certain home office expenses.

SARS has updated their Interpretation Note 28 on 14 May 2021 to explain the salary only employee expenses related to a home office.

The limitation of section 23(m) will be applicable to salary only employees which means that they would only be able to claim rental, wear-and-tear, etc. under section 11.

However, in order to claim the allowable expenses, certain criteria must be met, namely:
• Must be occupied for purpose of trade;
• Must be specifically equipped for purpose of trade;
• Must be regularly and exclusively used by the employee ONLY for purpose of the trade (if spouse or children use the same area, it will disqualify)
• Duties must be mainly (50%+) performed in that space in the private premises

The office claim will then be apportionment by calculating the office space in relation to the total area of the private premises.

On page 13 of the Interpretation Note, an example is provided to give the reader a clear idee of what expenses may be claimed by the salary only employee if all the qualifying criteria (as in bullets above) is met.

Medical Aid late joiner fees
The term “fees paid” in the context of section 6A(2)(a) of the Income Tax Act, is wide enough to include medical aid later joiner penalties and would therefore be treated as a contribution to the Medical Scheme.
Medical tax credit

An employer has an obligation in terms of paragraph 2(4) of the Fourth schedule to the Income Tax Act, to allow the applicable medical tax credits when calculating the PAYE deductible.

The IRP5 codes relating to medical contributions, are as follow:
• Code 4005 = employee contributions as well as deemed contributions made by the employer (code 3810)
• Code 4474 = employer contributions made for an employee which will result in a fringe benefit
• Code 4493 = employer contributions made for an retired employee which will NOT result in a fringe benefit (no value)
• Code 3810 = medical contribution fringe benefit
• Code 4116 = medical tax credit(MTC) – (depending on number of dependants on the medical scheme)
• Code 4120 = additional medical tax expenses if employee is 65 years and older
• Code 4025 – medical contributions allowed as a deduction for PAYE purposes

Assuming that the employer is not paying any portion to the medical scheme, the applicable codes for this employee, will then be 4005, 4116, 4120 and 4025

In terms of paragraph 2(4), the employer must calculate the additional medical tax expenses, as follows:
33,3% of the fees paid by the person to a registered medical scheme (or similar qualifying foreign fund) as exceeds three times the amount of the MTC to which that person is entitled

This calculation will then be added to code 4025 and 4120

If the employer is also contributing, it will mean that codes 4474/4493, 3810 (if applicable) will also be reported.

Section 6A of the Income Tax Act does not limit the medical tax credit ‘rebate’ to the medical contributions made by the taxpayer. However, the income tax brochure (IT-BR009) states that the ‘medical tax credit’ is not refundable and cannot exceed the tax liability.

In terms of Section 6A of the Income Tax Act, the taxpayer only qualifies for medical tax credit if the contributions is made to a MEDICAL SCHEME registered under the Medical Schemes Act. Therefore, in order to determine if it qualifies, you need to check whether the scheme is registered in terms of the Medical Schemes Act.

The Income Tax Act does not limit the medical tax credit to the medical contributions made by the taxpayer. This means that even if the taxpayer paid a total contribution of R10 per month (R120 per annum), the full medical tax credit of R242 per month for the taxpayer only should be allowed against his normal tax liability. This medical tax credit rebate is limited in terms of section 6A to the normal tax liability. This means that if it exceeds his normal tax liability, the rebate will only be allowed to such an extent that no normal tax is payable (i.e. zero tax result).

If an employee is employed for a part of a month, he is eligible for the MTC value for the full month.
The value of the MTC that is actually applied against employees’ tax for the year must be reported against the new code 4116.

In other words, in respect of a ‘short’ month (i.e. the employee was not employed for the full month):
• For monthly PAYE calculations, the full value of the MTC is allowed to reduce PAYE in the ‘short’ month.
• The full value of the MTC for that month is accumulated for tax certificate reporting.

Theoretically, but very unlikely, the employee could double-dip on two MTC credits in one month.
The scenario would be that the employee resigns from employer A at the end of the first week of a certain month, and is employed by employer B from the third week of the same month. The employee would then be in a ‘short’ month scenario at both employer A and B for the same month, and would benefit twice from the MTC in that month.

This would mean that the combined two tax certificates for the employee would reflect 13 months of MTC for the year.

Then there is another scenario: Where the MTC value exceeds the PAYE value for a certain month.

The PAYE will then be zero, and any unused MTC (due to not sufficient PAYE in a specific month being available to deduct it against) may be off-set against PAYE in future months in the same tax year.

Tax paid on behalf of employee (Tax on tax benefit) or PAYE not recovered from employee
Employer paying PAYE and not recover it from employee.
Where the employer elects to not recover the PAYE under-deducted from the employee, a fringe benefit incurred to the employee, namely “payment of employee’s debt” in terms of the provisions of the Seventh Schedule to the Income Tax Act.

This means that the PAYE paid on behalf of the employee, will result in additional PAYE on the fringe benefit amount, and so forth. The rule is that PAYE on this “tax-on-tax” benefit must be calculated up to ten times rolling balance.
For example: PAYE amount resulted in fringe benefit is originally R10000 and the PAYE on this benefit is R2500 – the total benefit now amounts to R12500. Tax must then be calculated on this total benefit again less the PAYE (R10000) already taken into account up to ten-times.

In order to simplify this tax-on-tax benefit calculation, the following method should be use when grossing-up a benefit to account for the “tax on tax” paid by the employer:

In order to simplify this tax-on-tax benefit calculation, the following method should be use when grossing-up a benefit to account for the “tax on tax” paid by the employer:

Formula: (Taxable amount X 100) ÷ (100 — employee’s marginal tax rate) = Taxable amount plus tax-on-tax benefit.
• The TAXABLE AMOUNT represents the value of the remuneration in respect of which the employer wishes to regularise the PAYE
• The full TAXABLE AMOUNT plus tax-on-tax benefit represents remuneration
• The difference between the full TAXABLE AMOUNT plus tax-on-tax benefit and the TAXABLE AMOUNT represents the tax attributable to the tax-on-tax benefit (e.g. payment of employees debt).
NOTE: Where the gross-up of the taxable remuneration results in an increase in the tax rate (marginal tax rate) from one tax bracket to the next, the marginal tax rate in the above formula must be increased by 1%, for example, marginal rate equals 18%, increase by 1% to 19%.

The tax on tax benefit falls within the provisions of the Seventh Schedule describing “Payment of an employee debt” and must be reported on the tax certificate under the code applicable to “Payment of employee debt”.