On 24 January 2018, the South African Revenue Service (SARS) issued Binding Private Ruling 291 (BPR 291), which deals with the taxation of subsistence allowances paid by an employer to its employees under certain circumstances. BPR 291 specifically related to the interpretation of s8(1)(a)(i)(bb) read with s8(1)(c) of the Income Tax Act, No 58 of 1962 (Act).
Description of the proposed transaction
The applicant in BPR 291 is a South African resident employer (Applicant). In terms of the Applicant’s subsistence and travel policy (Policy), employees who are required to spend at least one night away from their usual places of residence on local travel for business purposes receive an amount from the Applicant in respect of meals and incidental subsistence expenditure. The amount paid to them is equal to 80% per night of the prescribed maximum daily amount determined and gazetted (by SARS in the Government Gazette) in respect of meals and incidental costs under s8(1)(c)(ii) of the Act. The Applicant arranges and pays for the accommodation separately and in some cases the price of accommodation includes meals while in other cases it does not. The Applicant pays 80% of the gazetted amount, regardless of whether or not the price of accommodation includes a meal.
The legislative framework
Before discussing what SARS ruled in BPR 291, it is useful to consider the contents of the relevant legislative provisions.
In terms of s8(1)(a)(i)(bb) of the Act, where an amount has been paid or granted to a person by his principal as an allowance or advance during a year of assessment, that amount must be included in the person’s taxable income, excluding the following: Any portion actually expended by the recipient on any accommodation, meals and other incidental costs, as contemplated in s8(1)(c), while such recipient is obliged because of the duties of his office or employment to spend at least one night away from his usual place of residence in South Africa.
Section 8(1)(c)(i) states that for the purposes of s8(1)(a)(i)(bb), the recipient will be deemed to have actually expended the amount of the expenses incurred by him in respect of accommodation, meals or incidental costs that he can prove. This amount is limited to the amount paid or granted to him to cover those expenses.
Section 8(1)(c)(ii) states that for the purposes of s8(1)(a)(i)(bb), a recipient shall be deemed to have actually expended for each day or part of a day while he is absent from his usual place of residence, such amount as SARS may determine by way of notice in the Government Gazette, in respect of meals and other incidental costs, or incidental costs only. The recipient’s expenditure is limited to the amount paid or granted to meet those expenses. The proviso to s8(1)(c)(ii) states that the section does not apply to the extent that the employer has borne the expenses in respect of which the allowance was granted or where the recipient has proved to SARS any amount of actual expenditure in respect of meals or incidental costs for that day or part of that day, as contemplated in s8(1)(c)(i).
Based on the abovementioned facts and legal provisions, SARS ruled as follows:
- An amount paid by way of an allowance in terms of the Policy which is less than the gazetted amount contemplated in s8(1)(c)(ii) will fall within the deeming provisions of s8(1)(c)(ii) only when the Applicant has not borne any of the expenses in respect of which the allowance is paid.
- If the Applicant bears any of the expenses in respect of which the allowance is paid, the maximum amount deemed to be expended under s8(1)(c)(ii) will be the gazetted amount, reduced by the amount of expenses borne by the Applicant. For example, in determining the maximum amount that will be deemed to be expended under s8(1)(c)(ii), the gazetted amount must be reduced by the breakfast charge when the accommodation paid for by the Applicant charges breakfast separately.
- The Applicant must retain documentary proof in the form of invoices of the expenditure incurred by the Applicant in order to establish the reduced deemed amounts as contemplated in s8(1)(c)(ii).
- BPR 291 does not apply to employees who have accepted permanent assignments for extended periods, due to the nature of the business of the Applicant, such as employees at the Applicant’s offsite facilities and also does not apply to subsistence allowances paid in respect of travel outside South Africa.
BPR 291 appears to provide some guidance regarding the application of the provisions in s8 of the Act. It also seems to suggest that there might be some leeway for employers in structuring the subsistence allowances that they provide to their employees within the context of s8, although it is important to note that BPR 291 is only binding on the employer and employees referred to therein.