Tax Talk

Allowances and PAYE In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

SOME employees receive a range of allowances as part of their remuneration package from their employers. Some employers deduct employees’ tax (“PAYE”) on these allowances in full and others do not deduct PAYE on these allowances at all.What is the right thing to do? All allowances cannot be treated on the same basis for tax purposes.A clear distinction must be made between the treatment of housing allowances and other allowances received by an employee for purposes of his work.Section 16A provides for the basis of calculating the taxable portion of the housing allowance which is included in the employee’s taxable income on which PAYE must be calculated, deducted and paid over to the Receiver of Revenue.Section 14(1) of the Income Tax Act provides for the tax treatment of other allowances.It provides that only so much of the travel or entertainment allowance that has not been expended for purpose granted can be included the income of a taxpayer.This requires the Receiver of Revenue to exercise his mind and consider the evidence presented by the taxpayer in respect of expenditure incurred to travel or entertain for purposes of his work and to include in the income of the taxpayer that part of the allowance that has not been appropriately expended.Clearly the full allowance received by the employee does not fall into income when granted if the employee is required to travel or entertain for business purposes and there is an expectation that expenses will be incurred for this purpose.On this basis the travel or entertainment allowance should not be subject to PAYE in full when granted.If the allowance is subjected to PAYE in full when granted, the question arises whether there should be an allowance at all because the expectation is that the employee will not have any legitimate business expenditure.The Receiver of Revenue has issued Income Practice Note 3 of 2001 to give guidance on this issue.The practice note makes it very clear that there is no requirement that PAYE must be withheld on the full allowance provided the allowance is not abnormally high in relation to the employee’s total remuneration package and the employee is required, in terms of his employment contract, to incur these expenses to carry out his work.Employees must understand that where the allowance is not subject to tax at all and the allowance has not been expended for the purpose granted, the amount not utilised for the purpose granted will give rise to a tax liability on assessment.On the basis that we have a self-assessment system, you will determine the amount of tax due.The tax must be paid over on June 30 each year when you are required to file your income tax return and pay any taxes owing.The practice note makes it clear that the employee must be expected to travel or entertain for purposes of work in terms of his employment agreement in order to qualify for a deduction of the expenditure.It therefore makes no sense to pay an office bound employee (for example your receptionist) a travel allowance as it is unlikely that she will be expected to do business travel for purposes of carrying out her job.It is probably the right time to review your employment agreements to ensure that there is requirement to travel or entertain for business purposes in the agreement where these allowances are paid to employees to ensure there is no argument that the Receiver of Revenue can put forward when payroll audits are conducted.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.Some employers deduct employees’ tax (“PAYE”) on these allowances in full and others do not deduct PAYE on these allowances at all.What is the right thing to do? All allowances cannot be treated on the same basis for tax purposes.A clear distinction must be made between the treatment of housing allowances and other allowances received by an employee for purposes of his work.Section 16A provides for the basis of calculating the taxable portion of the housing allowance which is included in the employee’s taxable income on which PAYE must be calculated, deducted and paid over to the Receiver of Revenue.Section 14(1) of the Income Tax Act provides for the tax treatment of other allowances.It provides that only so much of the travel or entertainment allowance that has not been expended for purpose granted can be included the income of a taxpayer.This requires the Receiver of Revenue to exercise his mind and consider the evidence presented by the taxpayer in respect of expenditure incurred to travel or entertain for purposes of his work and to include in the income of the taxpayer that part of the allowance that has not been appropriately expended.Clearly the full allowance received by the employee does not fall into income when granted if the employee is required to travel or entertain for business purposes and there is an expectation that expenses will be incurred for this purpose.On this basis the travel or entertainment allowance should not be subject to PAYE in full when granted.If the allowance is subjected to PAYE in full when granted, the question arises whether there should be an allowance at all because the expectation is that the employee will not have any legitimate business expenditure.The Receiver of Revenue has issued Income Practice Note 3 of 2001 to give guidance on this issue.The practice note makes it very clear that there is no requirement that PAYE must be withheld on the full allowance provided the allowance is not abnormally high in relation to the employee’s total remuneration package and the employee is required, in terms of his employment contract, to incur these expenses to carry out his work.Employees must understand that where the allowance is not subject to tax at all and the allowance has not been expended for the purpose granted, the amount not utilised for the purpose granted will give rise to a tax liability on assessment.On the basis that we have a self-assessment system, you will determine the amount of tax due.The tax must be paid over on June 30 each year when you are required to file your income tax return and pay any taxes owing.The practice note makes it clear that the employee must be expected to travel or entertain for purposes of work in terms of his employment agreement in order to qualify for a deduction of the expenditure.It therefore makes no sense to pay an office bound employee (for example your receptionist) a travel allowance as it is unlikely that she will be expected to do business travel for purposes of carrying out her job.It is probably the right time to review your employment agreements to ensure that there is requirement to travel or entertain for business purposes in the agreement where these allowances are paid to employees to ensure there is no argument that the Receiver of Revenue can put forward when payroll audits are conducted.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.