THE SO-CALLED RELOCATION ALLOWANCE: REPEALED
Since 1 March 2016 the relocation allowance, as we used to know it, was abolished by the Commissioner of SARS. The old allowance entitled the employee to an allowance equal to one month’s tax-free salary, to cover for the relocation expenditure. Also, it was not required that the invoices of the relocation expenses be kept.
THE CURRENT LAW
Section 10(1)(nB) of the Income Tax Act 58 of 1962 (The ITA), provides that, when an employee is:
- appointed; or
- transferred; or
- dismissed –
- and that employee needs to change residence at the insistence of his/her employer,
- whilst the employer bears the cost thereof, that there are certain amounts that qualify to be exempt from tax in the hands of the employee.
What does this mean?
Unpacking the above section, the qualifying instances when this benefit may occur may be summarised as follows:
Firstly, with regards to “appointed”:
When an employee is appointed by his/her new employer whom, for example headhunted the particular employee – the employer may offer to pay for the employee’s relocation cost.
Secondly, regarding “transferred”:
When an employer, for instance, opens a new branch in a different city as to where the current office is located and transfers some of the employees to the new office – the employer may avail the relocation cost benefit to those employees.
This is quite a strange phenomenon in this context. However, being dismissed might open the door to the benefit of relocation cost in the instance where a company (the employer) needs to restructure its business. It might be established by such an employer by way of granting a relocation cost payment to an employee who is being retrenched, as an assistance mechanism in addition to the employee’s retrenchment package. The latter will most probably only surface in extreme cases where the employer and employee had a long and good relationship.
The crux of this section
Whether an employer pays for the cost of relocation of an employee being newly appointed or an existing employee being transferred or dismissed (in the positive sense, where the dismissal is not because of, i.e. misconduct by the employee) the benefit must have been on the insistence of the employer. If so, the amount paid to the employee will be exempt from tax for the employee. Furthermore, this payment is a once-off benefit offered by an employer to an employee, which should be seen as a privilege.
A vital factor of this benefit is that the aim of a relocation offer is to attempt to “maintain” the employee’s financial position regarding his/her place of residence and related circumstances, rather than a benefit resulting in assisting the employee being in a better position than before (for example, an employer’s contribution to an employee’s monthly medical aid premium).
A positive change
The change of rules is more beneficial than the previous relocation allowance, since the limitation of “an amount equal to one month’s salary” falls away. This means that an employer may provide an employee with an amount more than the particular employee’s salary. But – in return – all invoices must be kept in order to prove that the reimbursement amount is equal to the actual relocation cost, creating an administrative requirement to the benefit.
Bear in mind that, should you be transferred to a new office, but you need not move from your current home to a new one elsewhere – such transfer does not fall within this benefit’s scope.
The 3 categories of tax-free expenses:
- Travel expenses
This includes the transportation of the employee, the members of his/her household and their personal goods and possessions from the previous place of residence to their new home.
- Expenses relating to the selling of an employee’s previous home and “settling-in costs”
The following are included:
Firstly, regarding the employee’s new place of residence:
- bond registration and legal fees paid in relation to a new residence purchased by the employee;
- transfer duty paid in respect of such new residence.
Secondly, regarding the employee’s previous place of residence:
- cancellation fees that had to be paid for the bond cancellation of a previous residence;
- agent’s commission on the sale of the previous residence.
Thirdly, the settling-in costs includes:
- new school uniforms;
- replacement of curtains;
- motor vehicle registration fees;
- telephone connection cost;
- cost of water and electricity connection.
These costs refer to the temporary renting cost of residential property, for up to 183 days after the transfer or appointment date of the employee.
NON- QUALIFYING EXPENSES: THE TAXABLE BENEFITS
Should an employer reimburse an employee for the following costs incurred, it will constitute as a taxable benefit and will be subject to the deduction of employee’s tax:
- The reimbursement of an employee’s loss on the sale of the employee’s previous home and/or;
- Architectural fees for the design or alteration of the new home of the employee.
DIFFERENT TAX CODES APPLY
|Tax Exempt Expenditure||Taxable benefits|
|The amounts of the actual expenses incurred must reflect on the IRP5/IT3(a), under the code 3714.||These amounts must be reflected under code 3713 on the IRP5 certificate.|
IN SUMMARY: THE ESSENCE OF RELOCATION BENEFITS
|There must be both an employer and an employee.|
|The relocation must be offered by the employer. Therefore, it is important to remember that this benefit is not a compulsory obligation which employers must comply with.|
|The relocation/transfer must be to a different town/city/country and not merely to a different branch which is nearby.|
|The benefit must be equal to the exact expenses incurred by the employee.|
|All the documentary proof (i.e. invoices) relating to the incurred expenses, must be kept.|
IN THE END
If your employer reimburses you for expenditures in order to move to your new place of residence, that “income” you’ve received will be tax-free in your hands (the employee). Remember, employers hold the deciding wand regarding this benefit and it cannot be insisted for by an employee. Lastly, it is crucial to keep all the records regarding all the expenses paid for the relocation, in order to be able to provide SARS with evidence that the employer paid the total thereof as a benefit exempt from tax.
For more information, please contact Chantél van der Merwe at email@example.com
Source: SARS’s Guide for Employers: In respect of Employee’s Tax (2018). Section 10(1)(nB) of the Income Tax Act 58 of 1962.