Taxation of housing allowances

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

THE Income Tax Act has a specific section that provides for the amount that should be taxed where an employee receives a housing allowance benefit in terms of an approved housing scheme as part of his or her gross remuneration. Only two thirds of the housing benefit is taxed on the basis that all the requirements of the Income Act are complied with.This is a handsome tax benefit that many of us make use of.Taxpayers can only benefit from the tax relief provided for in the Income Tax Act if the employer has obtained approval for the rules of the housing scheme from the Receiver of Revenue.The basic conditions for approval of a housing scheme are as follows: * The housing scheme must be operated for the sole purpose of providing residential accommodation to an employee or assisting an employee to rent, acquire or improve his or her residence; * The residence must be occupied personally by the employee; and * The granting of the benefit to the employee does not go hand in hand with a salary sacrifice.The employee should therefore not give up remuneration in exchange for participation in the housing scheme.On the basis that employees cannot sacrifice salary in exchange for a housing allowance benefit, employers and employees should ensure that participation in the housing scheme is approved when the employee takes up employment.Subsequent adjustments to the employee’s remuneration package to accommodate participation in the housing scheme could be interpreted as sacrificing salary in exchange to participate in the housing scheme.It is common that employers allow employees to structure their gross remuneration packages to suit the employees’ own circumstances.Some employees may have obligations towards a bond for the house whilst other employees may rent their residential accommodation.What is important is that the employee should participate in the housing scheme from the start of employment and not in a subsequent month to avoid the salary sacrifice principle.Another common practice amongst employers is to allocate a housing allowance amount to all employees irrespective of their personal commitment in respect of their housing.Where an employee has paid off the house bond or has no rental obligation for his or her usual residence, the employee is not entitled to receive the tax benefit provided for in the Income Tax Act.Employers should ensure that they are in possession of proof that the employee is either paying off a bond or has a rental obligation to qualify for participation in the housing scheme.The practice that every employee qualifies for the same housing allowance amount based on the employee’s grading is a give away that the requirements of the Income Tax Act are not complied with.It is highly unlikely that two employees living in different houses will have exactly the same obligation in respect of a bond or rental.Employees can only benefit from the tax relied for participating in a housing scheme if they have an obligation in respect of a bond or rental for their usual place of residence.Approval of the housing scheme is put at risk if the requirements of the Income Tax Act is not complied with which will result in a very unhappy work force if the Receiver of Revenue cancels the approval.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.Only two thirds of the housing benefit is taxed on the basis that all the requirements of the Income Act are complied with.This is a handsome tax benefit that many of us make use of.Taxpayers can only benefit from the tax relief provided for in the Income Tax Act if the employer has obtained approval for the rules of the housing scheme from the Receiver of Revenue.The basic conditions for approval of a housing scheme are as follows: * The housing scheme must be operated for the sole purpose of providing residential accommodation to an employee or assisting an employee to rent, acquire or improve his or her residence; * The residence must be occupied personally by the employee; and * The granting of the benefit to the employee does not go hand in hand with a salary sacrifice.The employee should therefore not give up remuneration in exchange for participation in the housing scheme.On the basis that employees cannot sacrifice salary in exchange for a housing allowance benefit, employers and employees should ensure that participation in the housing scheme is approved when the employee takes up employment.Subsequent adjustments to the employee’s remuneration package to accommodate participation in the housing scheme could be interpreted as sacrificing salary in exchange to participate in the housing scheme.It is common that employers allow employees to structure their gross remuneration packages to suit the employees’ own circumstances.Some employees may have obligations towards a bond for the house whilst other employees may rent their residential accommodation.What is important is that the employee should participate in the housing scheme from the start of employment and not in a subsequent month to avoid the salary sacrifice principle.Another common practice amongst employers is to allocate a housing allowance amount to all employees irrespective of their personal commitment in respect of their housing.Where an employee has paid off the house bond or has no rental obligation for his or her usual residence, the employee is not entitled to receive the tax benefit provided for in the Income Tax Act.Employers should ensure that they are in possession of proof that the employee is either paying off a bond or has a rental obligation to qualify for participation in the housing scheme.The practice that every employee qualifies for the same housing allowance amount based on the employee’s grading is a give away that the requirements of the Income Tax Act are not complied with.It is highly unlikely that two employees living in different houses will have exactly the same obligation in respect of a bond or rental.Employees can only benefit from the tax relied for participating in a housing scheme if they have an obligation in respect of a bond or rental for their usual place of residence.Approval of the housing scheme is put at risk if the requirements of the Income Tax Act is not complied with which will result in a very unhappy work force if the Receiver of Revenue cancels the approval.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.

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