There are tax implications for both the employee and the employer
EMPLOYERS THAT operate in multiple locations may find that their business requirements may warrant the relocation of certain key employees.
To make such relocation an attractive proposition for the employees concerned, many employers offer to cover certain costs relating to (say) selling one’s existing home and purchasing a home in the new location, costs relating directly to the relocation, and certain ‘settling-in’ expenses.
However, whenever the words ‘employee’ and ‘payment’ appear in the same conversation, one can guarantee that SARS will be sniffing around to ensure that the tax treatment of amounts paid in respect of employees who are relocated, is correct.
Any such payments to an employee may therefore have tax implication for the employee (who may have a tax liability on payments received), as well as the employer (who is seeking to deduct any such payments made). The employer also faces potential exposure in terms of employees’ tax responsibilities.
Employees’ tax implications for the employee
Any payments made to an employee in terms of a service agreement would fall within the ‘gross income’ definition contained within Section 1 of the Income Tax Act. Sub-paragraph (c) of this definition specifically includes payments received in respect of services rendered.
In addition, the Fourth Schedule determines the extent to which such payments are subject to employees’ tax, while the Seventh Schedule seeks to place a monetary value on any fringe benefit granted, for the purposes of inclusion in gross income.
However, Section 10 provides that certain receipts are exempt from normal tax. If such receipts have arisen from be-nefits granted under an employer-employee arrangement, they are exempted from the levying of employees’ tax as well. The specific exemption relating to re-location costs is contained in Section 10(1)(nB), which exempts the following expenses from normal tax:
Section 10(1)(nB)
[A]ny benefit or advantage accruing to any employee (as defined in paragraph 1 of the Seventh Schedule) by reason of the fact that his employer (as defined in the said paragraph), has, in consequence of the transfer of the employee from one place of employment to another place of employment or the appointment of the employee as an employee of the employer or the termination of the employee’s employment, borne the expense –
- of transporting such employee, members of his household and the personal goods and possessions of himself and the members of his household from his previous place of residence to his new place of residence; or
- of such costs as the Commissioner may allow which have been incurred by the employee in respect of the sale of his previous residence and in settling in permanent residential accommodation at his new place of residence; or
- of hiring residential accommodation in an hotel or elsewhere for the employee or members of his household during the period ending 183 days after his transfer took effect or after he took up his appointment, as the case may be, if such residential accommodation was occupied temporarily pending the obtaining of permanent residential accommodation;
Specific examples of relocation expenses that would fall within the ambit of this Section include the following:
Costs of relocation
- Reasonable travelling expenses for the employee and his/her immediate family;
- Transport of household goods and personal effects, as well as insurance and temporary storage of these items;
- Temporary accommodation for a specified period whilst seeking permanent residential accommodation;
- Legal and other expenses in selling and purchasing residential property to be occupied by the employee, provided that they were a residential property owner prior to the transfer.
- Such costs would include agent’s selling commission, bond cancellation fees, conveyancing fees, transfer duty, and bond registration legal fees.
All expense claims in respect of such transfer expenses must be substantiated by appropriate documentation, as SARS may request these as part of an audit or review.
Settling-in costs
A settling-in allowance (normally a set amount determined by the employer) is often paid to cover expenses in respect of school uniforms; replacement curtains; motor vehicle registration fees; number plates; telephone installation; municipal connection fees; and minor incidentals.
Any payments made to an employee relocating that are not made as a reimbursement for actual expenses and not supported by vouchers would be subject to taxation in the employee’s hands. It is therefore imperative that supporting documents be submitted together with any claim for settling-in costs.
Income tax implications for the employer
In terms of Section 11(a), any person deriving income from any trade may deduct from such income any expenditure or losses actually incurred in the production of the income, provided that such expenditure and losses are not of a capital nature.
Any current and arrear salaries paid to employees are clearly regarded as being “in the production of the income”, and would therefore qualify for deduction in terms of this Section. As far as fringe benefits are concerned, any costs incurred by an employer to provide such fringe benefits would be deductible, providing that such costs are not of a capital nature.
One of the tests that the courts have applied when determining whether an amount is of a capital nature is whether or not any ‘enduring benefit’ is created by incurring such expenditure.
The nature of relocation costs is such that any benefits in respect thereof tend to be ‘consumed’ immediately upon payment. For example, services such as transportation of the employee, members of their household, and their goods from one location to another are ‘consumed’ as they are used.
While it can be argued that the employer obtains a degree of ‘enduring benefit’ by providing an employee career opportunities as a result of relocation, such benefit cannot be readily quantified.
Since no measurable ‘enduring benefit’ can be obtained from the payment of relocation expenses, such costs must therefore be regarded as being of a re-venue nature. Relocation expenses will therefore qualify for deduction by the employer under Section 11(a).
However, any payments to an employee that may be considered excessive would be disallowed as a deduction in the hands of the employer to the extent that they are considered not to be “for the purposes of trade” (Section 23(g)).
Specific expenses as provided for in Section 10(1)(nB) would be regarded as reasonable (provided that they are at the going market rate on an arms-length basis), and the practice of paying for incidentals up to one month’s salary as a ‘settling-in allowance’ is also considered acceptable in practice.
Steven Jones is a registered SARS tax practitioner, a practicing member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.
