Deductions
1281. Employee deductions
April 2005 – Issue 68

The deductions available for employees are very restricted. The current position is as follows:

· With effect from 1 March 2002, all allowances (including entertainment allowances) of whatever nature are fully taxable to the extent that the amount has not been spent on the instruction of the employer in furtherance of the business of the employer and with the appropriate proof provided to the employer. Actual expenditure reimbursements by employers remain tax exempt if the above rules apply and are followed. This includes entertainment expenditure reimbursements.

· The personal tax free subsistence allowance remains unchanged. Accommodation, meals and incidental costs will be deemed to have been expended if proof of these expenses can be submitted by the employee in his or her tax return. "Incidental costs" is defined to mean any beverages (including alcoholic beverages), private telephone calls, gratuities and room service. The employee must be away from his/her usual place of residence in all cases. The deduction does not apply if the employer has directly borne the expenses in question. If the employer simply reimburses the employee for actual expenditure against documentary proof, then no tax is levied on the employee.

If there is no proof of expenditure, the following amounts are currently deemed to have been actually expended by the recipient to whom an allowance has been granted or paid -

§ where the accommodation to which that allowance relates is in South Africa and that allowance is paid or granted for -

§ incidental costs only, an amount equal to R60 per day, or

§ the cost of both meals and incidental costs, an amount equal to R196 per day, or,

§ where the accommodation to which that allowance relates is outside South Africa, and that allowance is paid or granted to defray the cost of meals and incidental costs, an amount equal to US $190 per day.

The Minister of Finance announced in his recent Budget Speech that provisions to prevent abuse of these tax free allowances are to be introduced.

· The business travelling allowance rules are to be substantially changed in 2005.

The old deemed cost tables were calculated on the basis that the full cost of the vehicle is amortised over 5 years. The new tables have been recalculated with effect from 1 March 2005 to reflect a residual value of 30% of the original cost after 5 years. Furthermore, the tables provide that the cost of the vehicle will be capped at R360 000. No relief will be granted for costs in excess of this amount. The deemed fuel and maintenance costs are also updated. These deemed cost tables can only be used if the individual is in receipt of a travel allowance. Of course it may be far more tax effective to keep records of actual costs instead of using the published tables.

The table below sets out the new rates per kilometre which apply with effect from 1 March 2005 in determining the allowable deduction for business travel where no records of actual costs are kept. Unless a detailed log book is maintained, the first 16 000 km (next year 18 000 km) travelled is deemed to be for private use and only up to the next 16 000 km (next year 14 000 km) for business use. Private use would include travelling between home and work. The upper limit of 32 000 km remains unchanged. A log book is no longer a good idea - it is essential.

Value of the vehicle
(Including VAT)
(R)

Fixed
cost
(R p.a.)

Fuel
cost
(c/km)

Maintenance
cost
(c/km)

0 - 40 000

14 489

34.5

21.6

40 001 - 60 000

19 869

36.2

22.4

60 001 - 80 000

25 068

36.2

22.4

80 001 - 100 000

30 893

40.7

27.8

100 001 - 120 000

35 578

40.7

27.8

120 001 - 140 000

40 732

40.7

27.8

140 001 - 160 000

46 157

45.0

37.7

160 001 - 180 000

51 930

45.0

37.7

180 001 - 200 000

57 332

51.1

41.6

200 001 - 220 000

63 287

51.1

41.6

220 001 - 240 000

68 697

51.1

41.6

240 001 - 260 000

74 287

51.1

41.6

260 001 - 280 000

78 992

53.9

49.8

280 001 - 300 000

83 744

53.9

49.8

300 001 - 320 000

88 854

53.9

49.8

320 001 - 340 000

94 322

53.9

49.8

340 001 - 360 000

99 240

59.8

65.5

Exceeding 360 000

99 240

59.8

65.5

The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year.

Of the actual distance travelled during the tax year, in the absence of a log book, it is deemed that the first 16 000 km are travelled for private purposes and the balance (but not exceeding 16 000 km up to a total of 32 000 km) is travelled for business purposes.

Alternatively:

· Where the distance travelled for business purposes does not exceed 8 000 km per annum, no tax is payable on an allowance paid by an employer to an employee, up to the rate of 238 (was 153) cents per kilometre regardless of the value of the vehicle.

· This alternative is not available if other compensation in the form of an allowance or reimbursement is received from the employer in respect of the vehicle.

The monthly PAYE deduction remains unchanged at 50% of the allowance received. The effect is that the additional tax arising from all these adjustments will be payable on assessment (or earlier in the case of provisional taxpayers).

· In general, with effect from 1 March 2002, deductions against the employment income of employees are limited to -

o Contributions to pension and retirement annuity funds;

o Legal expenses;

o Wear and tear (depreciation) allowances on items used for trade, e.g. computers and books;

o Income continuation insurance premiums;

o Bad debts and doubtful debt allowances;

o Medical expenses and donations to Public Benefit Organisations; and

o The other items referred to above.

It is important to note that an agent or representative whose remuneration is normally derived mainly (i.e. over 50%) in the form of commission based on the sales or turnover attributable to that person, may claim all expenditure incurred in the production of income (and legal costs) and does not suffer the same restrictions as for other employees referred to above.

Horwath Zeller Karro

IT Act:S 8(1);

IT Act:S 23(m)