Costs related to working from home
Disaster Relief tax legislation provided relief in various areas of our tax and related legislation. No specific relief was provided in respect of allowances or expenditure for work-from-home arrangements due to the pandemic. In other words, there are no special COVID specific provisions that relate to any costs associated with working from home (e.g. acquiring computer equipment or office furniture to set up a home office). Therefore, the existing tax provisions need to apply to these types of expenses and situations.
In respect of home office expenditure, there are two options for structuring any benefits provided to employees:
1. Employer-provided assets
If an employer provides an employee with an asset to use for private or domestic purposes, a taxable benefit arises. The amount or value of the benefit is calculated by deducting any consideration paid by the employee to the employer, as well as any costs incurred by the employee in respect of the repair or maintenance of the asset, from the value of the private or domestic use.
No value is placed on the private or domestic use of a telephone or computer equipment which the employee uses mainly for the purposes of the employer's business. The word ‘mainly’ has been interpreted by the courts to mean more than 50%. If more than 50% of the total use of the asset is for business purposes, no value is placed on the private or domestic use of that asset and it is therefore not taxable. The use of the asset will be assessed by SARS on a case-bycase basis. It is therefore important that the correct safeguards and procedures are put in place to ensure items are mainly used for business purposes.
2. Privately-owned assets
Employees who incur business-related expenses if they use a privately-owned laptop for business purposes may be compensated by the employer by means of a reimbursement or an allowance.
A reimbursement of business-related expenditure occurs when an employee has incurred and paid for these 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 it. If expenditure is incurred as instructed by the employer, proof of expenditure is provided and the ownership of the asset vests in the employer, the reimbursement will be excluded from taxable income under section 8(1)(a)(ii) of the Income Tax Act 58 of 1962 (‘Act’).
Again, from a practical perspective, systems should be in place to ensure that reimbursement of actual expenditure takes place and that the expense is incurred by the employee. If this is not the case, there may be a taxable benefit. An example of this is where the employee purchases a monitor and keyboard for home office use and provides proof of purchase to the employer. The employer then reimburses the employee and both agree that the employer owns the items and the employee will return the equipment to the employer on resignation or cessation of use.
An employer may provide an employee with an allowance to incur business-related expenditure such as home data use. An allowance must be included in the taxable income of the employee under section 8(1)(a)(i) of the Act, unless the employee is able to prove exact businessrelated use. For example, if an allowance of R1000 is provided by the employer to the employee for home data use, this amount will be included in the taxable income of the employee. The alternative is to structure this allowance as reimbursive as set out above. In this case, the employee must incur the cost of a WiFi contract and reclaim the cost incurred from the employer, providing adequate proof. The actual expenditure incurred will then be repaid to the employee.
Some employers pay a predetermined reimbursement to employees based on expected business usage or expense on a regular basis. This is not a reimbursement in the true sense and will be viewed as an allowance, as payments are not linked to actual expenditure incurred and proven.
As everyone tightens their belts in anticipation of the 2020 festive season, employers may consider providing gifts in kind to employees, where bonuses or the customary 13th cheques are not feasible.
Currently, gifts are taxed under paragraph 2(a) of the Seventh Schedule of the Act as an asset, commodity, goods or property of any nature provided by the employer to the employee at no cost or a cost which is less than the market value of that item. South Africa has no de minimis or minimum floor value below which employer-provided gifts are tax free. As such, all small token gifts, such as gift vouchers (aside from certain exceptions related to on-site meal vouchers, meals supplied by the employer for parties etc and whilst entertaining clients) are taxable.
PwC has made a submission to treasury asking that a minimum tax-free threshold for employer gifts is introduced similar to other countries in the world. At this stage, however, these gifts will still be taxable, regardless of their value.
Some employers have opted to provide special leave arrangements in the wake of COVID-19 and the accompanying disruption. In some cases, employees were requested to take formal annual leave to help alleviate the contingent liability on company’s balance sheet. This leave would be considered paid and fully taxable as with any ordinary leave.
In other instances, unpaid leave was advised. Unpaid leave is not prescribed by law, but may be granted at the option of the employer. Unpaid leave is time off during which no basic salary is paid, but your position is retained. In some instances, the employee will opt to freeze contributions to their pension or provident fund, but other benefits such as group life insurance and medical aid may not be frozen and will be covered by the employer and reclaimed from the employee. This may be a taxable fringe benefit depending on how it is structured. If unpaid leave is granted, the value of the reduction in pay is calculated based on the average number of working days per period.
For example, in the case of a monthly paid employee who works 5 days a week, their salary would be divided by 21.67 to calculate the amount that would be deducted for every day of unpaid leave. The factor of 21.67 is calculated as follows:
21.67 = 52 weeks x 5 days per week/12 months
It is important to note that these calculations are usually performed on an annual basis. The fact that an employee has taken unpaid leave (regardless of the type) has no effect on their tax period. This means that the tax period continues until the end of the tax year, unless the employee resigns before then. At the end of the tax period, when the final employees’ tax calculation is performed, the employee will likely have paid too much employees’ tax due to the unpaid leave absence and this may reflect, on assessment, as a credit due to them by SARS.
As both UIF and SDL are calculated on an employee’s remuneration, these amounts are commensurately reduced where remuneration is reduced under unpaid leave.
In these exceptional times the employer should ensure that any temporary changes in benefits, allowances or pay are correctly planned for and that accurate tax treatment is applied to avoid potential future issues in the event of a SARS audit.
This article first appeared on pwc.co.za.
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