What you should know about work-related tax deductions

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President Cyril Ramaphosa signed a series of new tax- and finance-focused bills into law on 20 January 2021. Even though they primarily deal with administrative and technical issues, but there are a number of changes that will affect your work-related claims.

Tax-free advances and reimbursements for day trips

If an employee is required to spend at least one night away from his/her usual place of residence for business purposes and receives an allowance or advance to cover his/her accommodation, meals and other incidental costs, the allowance or advance is not taxable to the extent that proof of the actual expenditure is provided or to a fixed daily rate determined by the South African Revenue Service (Sars)

• For the 2021 year of assessment the fixed rate for travel in South Africa is R139 per day to defray incidental costs and R452 per day to defray the cost of meals and incidental costs.

If the employee, however, received an allowance or advance for a day trip (not required to spend one night away from his/her usual place of residence) such allowance or advance was fully taxed in the past. The Income Tax Act (ITA) was amended to provide that an amount paid by the employer in reimbursement of, or as an advance for expenditure incurred by the employee on meals and other incidental costs, will not be taxed if the employee is by reason of his/her duties obliged to spend part of a day away from his or her usual place of work or employment. If the amount paid is more than the prescribed rate by Sars, the excess will, however, still be taxed. It is therefore important to ensure that the terms of your employment contract specifically require you to spend time away from your office in order to not be taxed on daily allowances.

Bursaries are taxed if part of the salary was sacrificed

A bursary received from the employer (either for the employee or for a relative of an employee) should be included in the gross income of the employee. However, section 10(1)(q) of the ITA exempts such bursary if specific requirements are met. This section was amended with effect from 1 Mach 2021 to provide that, if the bursary is granted by way of a salary sacrifice (where part of the salary is basically structured or sacrificed to be a bursary), the exemption does not apply and the amount is fully taxed.

A tax deduction for home-office expenditure

The tax deductions that a salaried employee can claim are severely restricted by section 23(m) of the ITA. However, section 23(b) read with section 23(m) allows for a deduction of home-office expenses (such as water and electricity, interest on a mortgage, rates and taxes) to the extent that it relates to the area covered by the home office. That office should furthermore be specifically equipped for trade purposes and should be regularly and exclusively used for such trade purposes. If the trade is employment and the income derived from such employment is not mainly commission, a further requirement is that such employee’s duties must be mainly (more than 50%) performed in such part.

Previously a salaried employee, who was required to work at an office provided at the premises of the employer, was not able to claim home-office expenses as a tax deduction. However, with the lockdown restrictions, numerous employers require that employees must work from their home offices. Such employees will therefore now be able to claim home-office expenses as a tax deduction in terms of section 23(m) read with section 23(b). This is a benefit and will also result in less taxable income to the taxpayer.

Potential work from home tax deductions during the pandemic

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It is important to note that if such expenses are claimed, the capital gain relating to that part of the building will not qualify for the R2m primary residency exclusion. It is submitted that, with the available R40,000 capital gain annual exclusion, such taxable gain will be minimal in comparison with the tax benefit of the deduction of the home-office expenses.

Withdrawing retirement funds upon emigration

A person is taxed on worldwide income in South Africa if you are a South African resident, for tax purposes. If you are not a South African resident for tax purposes, you will still be taxed in South Africa on income that you receive that is from a South African source.

The tax legislation contains specific rules to determine if a person is a South African resident for tax purposes. A person is a resident of South Africa if he or she is ordinarily resident or becomes a resident by way of physical presence or if a double tax agreement between South Africa and another country deems that person to be South African resident for tax purposes.

How the law change affects SA tax residents working abroad

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Sars published Interpretation Note 3 (Issue 2) in which the concept of being “ordinarily resident” is discussed. To determine if a person is ordinarily resident in South Africa, factors such as where a person would naturally return from his wanderings, the place of business and personal interest of the person and his family, the location of the person’s personal belongings, etc. should be considered. It is important to note that citizenship or financial emigration are merely factors to consider and do not determine residency for tax purposes.

Members of retirement annuity funds and preservation funds are generally not permitted to withdraw lump-sums from such funds before reaching the retirement age (usually the age of 55 years). However, prior to 1 March 2021 lump-sum withdrawals from retirement annuity funds and preservation funds were allowed before reaching the retirement age if the member emigrated from South Africa and such emigration was recognised by the South African Reserve Bank for exchange control purposes (generally known as ‘financial emigration’).

From 1 March 2021, lump-sum withdrawals from retirement annuity funds and preservation funds will be permitted where a fund member ceases to be a resident for tax purposes and remains a non-resident for at least three consecutive tax years. The concept of ‘financial emigration’ for Exchange Control Regulations purposes is therefore being phased out and the tax residency of the member will determine eligibility to withdraw lump sums prior to the age of retirement. Lump-sum withdrawals (prior to attaining the age of retirement) are subject to normal tax in accordance with the retirement lump-sum withdrawal benefit table.