INTERPRETATION NOTE 14 (Issue 5) (1 of 3)

INTERPRETATION NOTE 14 (Issue 5)
DATE: 30 March 2021
ACT : INCOME TAX ACT 58 OF 1962
SECTION : SECTION 8(1)(a); 8(1)(b) and 8(1)(c) AND PARAGRAPH 1 OF THE FOURTH SCHEDULE
SUBJECT : ALLOWANCES, ADVANCES AND REIMBURSEMENTS
CONTENTS
Preamble ………………………………………………………………………………………………………………2
1. Purpose………………………………………………………………………………………………………2
2. Background …………………………………………………………………………………………………2
3. The nature of allowances, advances and reimbursements …………………………………. 3
3.1 Definition of the terms “allowance”, “advance” and “reimbursement” for the purposes of section 8(1) ……………………………………………………………………………….. 3
3.1.1 Allowance……………………………………………………………………………………………………3
3.1.2 Advance ……………………………………………………………………………………………………..3
3.1.3 Reimbursement …………………………………………………………………………………………… 4
3.2 General observations on the nature of allowances, advances and reimbursements ………………………………………………………………………………………………………………….4
4. The law……………………………………………………………………………………………………….5
5. Application of the law……………………………………………………………………………………. 5
5.1 Inclusion in taxable income – allowances and advances ……………………………………. 5
5.1.1 The terms “principal” and “recipient” ……………………………………………………………….. 5
5.2 Exclusion from taxable income – reimbursements and advances………………………… 6
5.3 Deductions from subsistence allowances ………………………………………………………… 7
5.3.1 General ………………………………………………………………………………………………………7
5.3.2 Actual method ……………………………………………………………………………………………..8
5.3.3 Deemed method………………………………………………………………………………………….. 9
5.3.4 Examples …………………………………………………………………………………………………. 10
5.4 Deductions from travelling allowances and advances………………………………………. 13
5.4.1 General ……………………………………………………………………………………………………. 13
5.4.2 Kilometres ………………………………………………………………………………………………… 14
5.4.3 Expenditure per kilometre – actual costs ……………………………………………………….. 16
5.4.4 Expenditure per kilometre – deemed rate per kilometre……………………………………. 18
5.4.5 Expenditure incurred on outsourced travel …………………………………………………….. 22
5.5 Deduction under section 11(a)……………………………………………………………………… 22
6. Employees’ tax ………………………………………………………………………………………….. 23
6.1 General ……………………………………………………………………………………………………. 23
6.2 Subsistence allowances ……………………………………………………………………………… 23
6.3 Travel allowance and reimbursive travel claims………………………………………………. 23
6.3.1 Travel allowance ……………………………………………………………………………………….. 23
6.3.2 Reimbursive travel claim……………………………………………………………………………… 25
7. Conclusion ……………………………………………………………………………………………….. 26
Annexure A – The law…………………………………………………………………………………………… 27
Annexure B – Table of rate per kilometre…………………………………………………………………. 30

Preamble
In this Note, unless the context indicates otherwise –
• “Schedule” means a Schedule to the Act;
• “section” means a section of the Act;
• “TA Act” means the Tax Administration Act 28 of 2011;
• “the Act” means the Income Tax Act 58 of 1962; and
• any word or expression bears the meaning ascribed to it in the Act.

All rulings, notices and tables of rates referred to in this Note are available on the SARS website at www.sars.gov.za. Unless indicated otherwise, the latest issues of these documents should be consulted.

1. Purpose
This Note provides clarity on the tax treatment of allowances, advances and reimbursements granted to employees and office holders, and gives guidance on the record-keeping requirements relating to motor vehicles.

2. Background
Since 1 March 2002, the system of employment income taxation was simplified by consolidating the provisions relating to allowances, advances and reimbursements in section 8(1), and enacting section 23(m) to limit the deductions available to employees and office holders.
Recently, amendments have been made to the tax treatment, for income tax and employees’ tax purposes, of reimbursements under the travel allowance system, as well as the rules relating to general reimbursements. In addition, clarity is provided on what the requirements are for a valid logbook, as well as what is required to permit a travel deduction when using alternative transport methods such as taxis. These are explained in the changes to this Note.

3. The nature of allowances, advances and reimbursements

3.1 Definition of the terms “allowance”, “advance” and “reimbursement” for the purposes of section 8(1)
The distinction between an allowance, an advance and a reimbursement for purposes of sections 8(1)(a), (b) and (c) is set out in 3.1.1 – 3.1.3.

3.1.1 Allowance
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.

Example 1 – Allowance

Facts:
ABC Ltd requires X to travel for business purposes three or four times a month. ABC Ltd anticipates that X will incur R1 000 per month on business-related expenditure whilst travelling and pays an amount of R1 000 per month to cover the expenditure. X is not required to prove or account for actual business-related expenditure to ABC Ltd.

Result:
X receives an allowance of R1 000 per month for purposes of section 8(1).

3.1.2 Advance
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.

Example 2 – Advance

Facts:
D works for ABC Ltd. The company has asked D to visit a key client to conduct a client satisfaction survey and, after completing the survey, to entertain the client by way of a business lunch. D is paid an amount of R500 by ABC Ltd to cover the cost of the lunch. D must submit receipts and invoices to the company accountant when returning to the office and must return any portion of the advance not spent as instructed. ABC Ltd does not think the lunch will cost more than R500, however if the client orders indulgently ABC Ltd will make good any shortfall. D is able to provide a receipt and an invoice totalling R400 and returns the remaining R100 to the company.

Result:
D receives an advance of R500 for purposes of section 8(1).

3.1.3 Reimbursement
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.

Example 3 – Reimbursement

Facts:
F (who works in East London) is required to conduct a two-day training session at the company’s Bisho branch. On arrival F discovers that the Bisho branch does not have all of the equipment required in order to adequately deliver the training. F’s manager instructs him to purchase the required items out of his own pocket and to submit a claim on returning to East London. F spends R200 on the items and retains the receipts which prove R200 was spent on business-related expenditure. The employer subsequently reimburses F the full R200.

Result:
F receives a reimbursement for purposes of section 8(1).

3.2 General observations on the nature of allowances, advances and reimbursements
The nature of allowances, advances and reimbursements is frequently misunderstood, as are the reasons for granting recipients such amounts. In this regard:
• Any allowance, advance or reimbursement is a reflection of business-related expenditure or anticipated business-related expenditure of the employer. A payment to an employee under the disguise of an allowance but actually for services rendered or to be rendered is subject to tax under the normal provisions of “gross income” and is not treated as an allowance under section 8(1)(a). The label of a payment does not necessarily correctly reflect the true nature of the payment.
• The judgment in ITC 15231 confirmed that when the word “allowance” is used in an employee-employer relationship, it means a grant of something additional to ordinary wages. The taxpayer had received a salary and sought to claim a deemed subsistence expenditure deduction against his salary. The court held that he had not received an allowance as he had not received anything extra and was not automatically entitled to the deduction provided for in section 8(1).
• A typical misconception is that the quantum of an allowance or advance does not have to reflect the anticipated business expense. This misconception is sometimes caused by the incorrect understanding that an allowance can, without reference to the actual expenditure anticipated, be based on the amounts of expenditure which are deemed to have been incurred by the Act under specified circumstances and that the employee will automatically be entitled to a tax deduction against that “allowance”. The misconception means

1 54 SATC 194.
that employees sometimes receive allowances that are much greater than the true anticipated business expense.

4. The law
The relevant sections of the Act are quoted in Annexure A.

5. Application of the law

5.1 Inclusion in taxable income – allowances and advances
Section 8(1)(a)(i) –
• deals with all allowances and advances paid by a “principal” to a “recipient“ (for example, travel, subsistence, public office, cell phone and housing allowances); and
• provides that all such allowances and advances must be included in the recipient’s taxable income –
to the extent that they are not expended –2 for travelling on business;3 or for accommodation, meals and incidental costs while such office holder or employee is obliged to spend at least one night away from his or her usual place of residence as a result of business or official purposes;4 or
by reason of the duties attendant upon public office; or

unless the allowance or advance, or a portion of the allowance or advance, is exempt from normal tax under section 10.5

2 The amounts expended are taken into account by reducing the inclusion in taxable income. In this Note these reductions are referred to as ‘deductions’.
3 See 5.4 for details of allowable deductions.
4 See 5.3 for details of allowable deductions.
5 Examples include an allowance in respect of foreign service that is exempt under section 10(1)(o)(ii) or the portion of an advance in respect of relocation costs that is exempt under section 10(1)(nB).
6 Section 102(1) of the TA Act.

Taxpayers who claim that amounts should not be included in their taxable income bear the burden of proving that the amount is deductible, may be set off or is exempt.6
Section 8(1)(a)(ii) provides that in limited circumstances a reimbursement or advance must not be included in taxable income as otherwise required by section 8(1)(a)(i) (see 5.2).

5.1.1 The terms “principal” and “recipient”
For purposes of section 8(1)(a) the term “principal” includes –
• the employer of the recipient of an allowance; or
• the authority, company, body or other organisation in relation to which any office is held; or
• any “associated institution” as defined in the Seventh Schedule in relation to that employer, authority, company, body or organisation.

Within the context of section 8(1) the term “recipient” means the person who has been paid or granted an allowance, advance or reimbursement by a principal. Having regard to the meaning of the word “principal” in this section, a recipient refers to an employee or the holder of an office.
Although an independent contractor may be an “employee” as defined in the Fourth Schedule for employees’ tax purposes, an independent contractor would not be considered to be an employee in the ordinary meaning of the word as implied in section 8(1), and is not entitled to any deduction under that section.
A holder of an office may also be independent, such as a member of a board or committee established by law. Any travel or subsistence payment made to such independent office holder is paid for the office held, and deductions may be claimed under section 8(1).

5.2 Exclusion from taxable income – reimbursements and advances
Section 8(1)(a)(ii) excludes reimbursements or advances from taxable income if the –
• reimbursement or advance was or must be expended by the recipient in the furtherance of the principal’s trade;
• recipient must produce proof to the principal that the amounts were wholly and actually expended for this purpose;
• recipient must account to the principal for the expenditure;
• expenditure was or will be incurred to acquire any asset and ownership in that asset vests in the principal; and
• the expenditure was incurred either –
on the instruction of the principle; or
with the permission of the principle, if – the recipient was, whilst on duty, away from the usual place of work or employment for part of a day;
the expenditure was for meals or incidental costs; and
the reimbursement does not exceed an amount as notified in the Gazette.7

7 Currently R139, per Government Notice 173 in Government Gazette 44229 of 5 March 2021. This amount applies from 1 March 2021, but may change in future, so taxpayers should check the SARS website each year to ensure they use the correct rate for the relevant year of assessment.
Any reimbursement that does not meet these requirements, or which exceeds the daily amount specified in the Gazette, is taxable and is included in the recipient’s remuneration subject to the deduction or withholding of employees’ tax.

Example 4 – Day meal reimbursement

Facts:
A, B and C are employees of FGH Sales (Pty) Ltd. Their usual place of employment is at the premises of the employer in Cape Town. A, B and C undertake a day trip to visit potential clients in Paarl. With their employer’s permission, they purchase lunch while they are away on the day business trip. A purchases lunch for R120, B purchases lunch for R150 and C purchases lunch for R180. All three present their receipts to the employer and claim a reimbursement. A and C claim reimbursement of the full amount that they expended, whilst B only claims reimbursement of R139. The employer reimburses them the amount that they claimed.

Result:
The reimbursements paid to A and B are within the limit of R139, and so are not taxable.
R139 of the reimbursement paid to C is not taxable. The excess of R41 (R180 actually reimbursed – R139 tax free limit) is taxable, and is remuneration subject to the deduction of employees’ tax.

“Travel reimbursements” by an employer to an employee for the actual business kilometres travelled at an employer-agreed rate per kilometre are “exceptions” to this rule. Accordingly, the provisions of section 8(1)(a)(i) (see 5.1) and section 8(1)(b) (see 5.4) must still be applied to travel reimbursements when determining the amount, if any, which must be included in the recipient’s taxable income. The inclusion in taxable income will be nil if the amount of the allowable deduction (see 5.4 for further detail) is equal to the amount of the reimbursement, but if the amount of the allowable deduction is less than the amount of the reimbursement, then a net inclusion in taxable income will be required (see Example 12).

5.3 Deductions from subsistence allowances

5.3.1 General
A recipient may only deduct subsistence-related expenses from the subsistence allowance granted by the principal if the recipient is obliged to spend at least one night away from his or her usual place of residence in the Republic by reason of the duties of his or her office or employment.
A recipient who meets these requirements is allowed to deduct the amount actually expended on accommodation, meals and other incidentals during that period. Section 8(1)(c) specifies two methods to calculate the amount which is deemed to have been actually expended on accommodation, meals and other incidentals, namely, an actual method or a deemed method (see 5.3.2 and 5.3.3).
By reason of the duties of his or her office or employment
The reason the recipient is away from home must be related to the recipient’s office or employment.

Example 5 – By reason of office or employment

Facts:
At the request of his employer, H attended a two-day conference in a wine-making region. The conference started on a Thursday. H’s employer paid the accommodation for Thursday night and gave him a subsistence allowance for two days. Instead of driving home after the conference H decided, at his own expense, to extend his stay and spend the weekend exploring the area for potential wedding locations and tasting local wines.

Result:
H will be entitled to deduct the subsistence-related expenses for the period related to the conference from the allowance received from his employer. As the reason for spending the additional time away from home is personal and not work-related, H will not be entitled to deduct the subsistence-related expenses related to the period after the conference from the allowance.

Obliged to spend at least one night away from his or her usual place of residence in the Republic
The word “night” is not defined in the Act. The Concise Oxford English Dictionary8 defines “night” as “the time between sunset and sunrise”. The Collins English Dictionary9 defines the word as “the period of darkness each 24 hours between sunset and sunrise”.
8 Edited by Catherine Soanes, Angus Stevenson. 11th Edition Revised. New York: Oxford University Press, 2006.
9 3rd Edition. Glasgow: Harper Collins, 1991.
10 That is, the amount of the deduction may never exceed the amount of the allowance.
Therefore, in order to qualify to deduct subsistence expenses under section 8(1)(a)(i)(bb), the recipient of a subsistence allowance must be away from his or her usual place of residence in the Republic for at least one full period from sunset of one day to sunrise of the next.

5.3.2 Actual method
Under the actual method the amount the recipient is deemed to have actually expended is equal to –
• the amount he or she proves to the Commissioner was actually incurred;
• for accommodation, meals and other incidentals;
• excluding any amount of expenditure borne by the employer (otherwise than by way of the allowance or advance); but
• limited to the amount of the allowance or advance granted to meet these expenses.10

In order to be able to prove the amount of expenditure the recipient will need to obtain and retain supporting documentation (for example, invoices and receipts) for the expenditure incurred. The supporting documentation must be kept for five years from the date when the income tax return, which included the claim for the deduction, was received by SARS. The documentation is not submitted with the income tax return but the recipient must be able to produce such documentation upon request by SARS.
An employer will be considered to have borne the expenditure if –
• the employer pays the expense directly; or
• the recipient pays the expense but is subsequently reimbursed by the employer.

5.3.3 Deemed method
Under the deemed method the amount the recipient is deemed to have actually expended is equal to –
• an amount determined by the Commissioner for the relevant year of assessment by notice in the Government Gazette;11
• for meals and other incidental costs, or incidental costs only;
• for each day or part of a day in the period during which the recipient is absent from his or her usual place of residence;
• excluding any amount of expenditure borne by the employer (otherwise than by way of the allowance or advance) for which the allowance was paid or granted for that day or part of that day;12
• excluding any amount proven by the recipient to SARS as actual expenditure and claimed as a deduction for meals or incidental costs equal to the actual costs for that day or part of that day; and
• limited to the amount of the allowance or advance granted to meet these expenses.12

11 The relevant notices are available on the SARS website.
12 The deemed subsistence amounts will be reduced by the amount the employer has borne.
13 Not forgetting that a prerequisite to any deduction is the requirement that he or she spends at least one night away from his or her usual place of residence – see 5.3.1 .
The amount stipulated in the Government Gazette is a daily amount. Accordingly, in calculating the amount of deemed expenditure based on the points listed above, the recipient must multiply the daily amount by the number of days or part of a day that he or she is away on business.13 Taxpayers must review the effective date of the particular notice to ensure they apply the correct amounts to the relevant year of assessment.
The Gazetted amounts are for meals and other incidentals for local and foreign travel, or incidentals only for local travel, and do not cover accommodation for either local or foreign travel. As a result to the extent a recipient receives an allowance or an advance for accommodation, the recipient must apply the actual method to determine the amount that will be allowed to be deducted from that allowance, or relevant portion of the allowance, for accommodation. There is no “meals only” deemed expenditure amount. Accordingly a recipient, who receives such an allowance, would also have to apply the actual method to calculate the allowable deduction (see 5.3.2).

In practice, accommodation service providers often levy a single charge for bed and breakfast. In these circumstances, the cost of breakfast may be regarded as part of the cost of accommodation (see Example 8).14
14 Refer also to Binding General Ruling 22: “Subsistence Allowance – Amounts Deemed to be Expended for Business Purposes”.
15 Edited by Catherine Soanes, Angus Stevenson. 11th Edition Revised. New York: Oxford University Press, 2006.
16 3rd Edition. Glasgow: Harper Collins, 1991.
Day
The word “day”, which is not defined in the Act, is defined in the Concise Oxford English Dictionary15 to mean –
“a twenty-four-hour period as a unit of time, reckoned from one midnight to the next and corresponding to a rotation of the earth on its axis; the time between sunrise and sunset”.
In the Collins English Dictionary,16 the word is defined to mean –
“1. the period of time, the calendar day, of 24 hours duration reckoned from one midnight to the next. 2. the period of light between sunrise and sunset, as distinguished from the night”.
It is clear from the context of section 8(1)(c)(ii) that the word “day” must be given the wider meaning of the full period of 24 hours from one midnight to the next.
A “part” means a constituent portion or division of a whole, which is distinct from that whole.17 A part of a day could be an hour, a half-hour or even a minute. The deemed expenditure is not apportioned if the recipient is only away for part of the day.

5.3.4 Examples
The examples below are for the 2022 year of assessment and the amounts are based on the rates for meals and incidental costs for that year. These rates are normally adjusted annually. The rates that are applicable to prior years of assessment are available on the SARS website. Because these rates normally change annually, taxpayers should review the effective date of the particular notice setting out the rates, to ensure that the correct rates are applied to the relevant years of assessment.

Example 6 – Subsistence allowance and amounts included in taxable income

Facts:
During the 2022 year of assessment Y attended a business seminar in Cape Town on behalf of his employer. Y was away from his usual place of residence in Johannesburg for five nights and six days. Y’s employer granted him an allowance of R7 000 for accommodation and R3 000 for meals and incidental costs. Y was not required to refund any excess if the actual expenditure was less than the allowances he received and, similarly, his employer would not reimburse him should the actual expenditure have exceeded the allowances granted to him.
Y did not keep any supporting documentation and he was unable to prove any of the expenditure incurred on accommodation, meals or incidental costs.

Result:
The full allowance of R7 000 for accommodation must be included in Y’s taxable income as he is unable to apply the actual method (see 5.3.2) and the deemed method (see 5.3.3) is not available for accommodation.
In relation to the allowance of R3 000 for meals and incidental costs, Y will be able to apply the deemed method to determine the amount that can be deducted from the allowance. An amount of R2 712 (R452 per day as per the relevant Government Gazette × six days) is deemed to have been spent on meals and incidental costs. The balance of R288 (R3 000 − R2 712) must be included in Y’s taxable income.

Example 7 – Calculating the subsistence deduction if the employee’s expenditure exceeds the allowance granted

Facts:
M was granted an allowance of R5 000 for accommodation and R2 000 for meals and incidental costs during the 2022 year of assessment in order to conduct business-related activities on behalf of her principal. M was away from her usual place of residence for five nights and six days. Mspent R5 500 on accommodation and retained the supporting documentation. M was unable to prove any costs for meals or incidentals.

Result:
The actual method may be applied to determine the deduction available for accommodation. The deduction is limited to R5 000 (as this amount is the allowance that was granted for accommodation) even though M expended R5 500. Accordingly, the taxable portion of the allowance that must be included in taxable income is Rnil (R5 000 − R5 000). The additional R500 accommodation costs (R5 500 − R5 000) may not be deducted from the meals and incidental subsistence allowance of R2 000.
Under the deemed method, M is deemed to have incurred R2 712 (R452 per day as per the relevant Government Gazette × six days) for meals and incidental costs for business purposes. The deduction that may be claimed is, however, limited to the amount of the allowance that was paid, that is, R2 000. Accordingly, there is no amount which must be included in M’s taxable income.

Example 8 – Reducing the deemed subsistence expenses if the employer bears a portion of the cost

Facts:
During the 2022 year of assessment B was required to travel within South Africa for business purposes. B spent five nights away from home and returned home on the sixth day. B’s employer paid the hotel accommodation costs and breakfast costs. Guests at the hotel were not obliged to eat breakfast at the hotel but on the days they did, the hotel would add the cost of the breakfast ordered to their hotel bill. B settled the hotel bill (accommodation cost of R4 250 and breakfast of R429) using his personal credit card and was subsequently reimbursed by his employer.
The employer also paid B an allowance of R500 per day to enable him to pay for other meals and incidental costs. B received a total allowance of R3 000.
B did not keep any supporting documentation for his expenditure on meals and incidental costs, apart from the cost of breakfast.

Result:
The reimbursement of R4 679 (R4 250 + R429) is not included in B’s taxable income.
The total amount deemed to have been actually expended on meals and incidental costs is R2 712 (R452 per day as per the relevant Government Gazette × six days) less the breakfast expenditure of R429 borne by the employer by way of a reimbursement, that is, R2 283.
Accordingly, the taxable portion of the allowance which must be included in B’s taxable income is R717 (R3 000 − R2 283).

Example 9 – Bed and breakfast accommodation with a single charge for bed and breakfast

Facts:
During the 2022 year of assessment D was required to travel within South Africa for business purposes. D spent five nights away from home and returned home on the sixth day. D’s employer paid for the hotel accommodation. The hotel provides bed and breakfast accommodation and levies a single inclusive charge irrespective of whether or not guests eat breakfast. D settled the hotel bill totalling R4 800 using his personal credit card and was subsequently reimbursed by his employer.
The employer also paid D an allowance of R500 per day to pay for other meals and incidental costs. D received a total allowance of R3 000 and did not keep any supporting documentation for expenditure on meals and incidental costs.

Result:
The reimbursement of R4 800 is not included in D’s taxable income.
The total amount deemed to have been actually expended on meals and incidental costs is R2 712 (R452 per day as per the relevant Government Gazette × six days). The Gazetted amount does not need to be reduced for the cost of breakfast because, with bed and breakfast accommodation, the full charge levied by the service provider is considered to be a cost of accommodation.
Accordingly, the taxable portion of the allowance which must be included in taxable income is R288 (R3 000 − R2 712).