You’ve been up since 4am in order to catch yet another red-eye flight for a 9am business meeting - 1,400km away - and you’re already onto your third coffee by the time you board the plane. While you’re fairly accustomed to the frequent business trips requiring out of town travel, you’re still somewhat confused by the tax implications of the subsistence allowance your employer gives you for your accommodation and meals for these work trips.
Never fear jetsetter, let’s have a look at the subsistence allowance structures and the tax regulations around them.
What’s The Difference Between a Subsistence Allowance and Subsistence Advance?
Firstly, we need to understand the ways in which your employer can choose to pay you for your travel expenses of accommodation, meals and incidental costs. Incidental costs include beverages, private phone calls, tips and room service.
Subsistence Allowance: This is a fixed amount given to you for the trip and in most cases you needn’t provide proof of your travel expenses to your employer. (This may differ from employer to employer and they’re within their rights to ask you for the receipts.)
Subsistence Advance: This is a fixed amount given to you for the trip and you’ll need to provide proof of your travel. Usually you’re required to pay back any unspent amount.
What Are Deemed Subsistence Allowances?
A second concept we need to introduce is SARS’ deemed costs for subsistence allowances.
SARS has a set deemed rate for meals and incidental costs for local travel, applicable per night the employee spends away from home. They also have a fixed daily amount for business travel outside of South Africa, which varies from country to country. The rates are updated annually and available on the SARS website.
Local: Meals and incidental costs - R397 Incidental costs only - R122
International: Daily amount varies per country. Some popular foreign destination rates are: United Kingdom - GBP102 United States of America - US$155 United Arab Emirates - AED699 People’s Republic of China - US$127
This means that if you receive an advance or allowance for these costs you’re able to deduct either:
the amount actually spent (limited to what you have received), or
the applicable deemed rate set by SARS
If you choose the deemed rate, you don’t need to produce proof of what you have spent. Actual costs, on the other hand, will need to be supported with receipts to qualify as a deduction.
The deemed rate is also called the tax-free rate because if you receive an allowance equal to the deemed rate, you can deduct the deemed rate and the net allowance will be zero and therefore tax-free.
It’s important to note that a loss can’t be created. In other words, if you receive an allowance amount less than the SARS deemed rate, the deduction you claim will be limited to the actual allowance you’ve received.
So that covers your meals and incidental costs, but did you notice that SARS doesn’t have a deemed rate for accommodation? If you receive a subsistence allowance intended to cover accommodation, you’ll need to produce proof that the amount (or portion thereof) was indeed spent on a place to ‘lay your head’ in order to claim the cost against the allowance and reduce the tax payable.
How is a Subsistence Allowance or Advance Taxed?
Simply - you’ll be taxed on any unspent amount of your allowance or advance, i.e. any amount that wasn’t spent while on a business trip and not repaid to your employer. This unspent amount will be included in your taxable income.
The tricky part with this taxation is that it’s not calculated and deducted with your normal income tax in the month you receive the allowance or advance, it’s only assessed once you submit your annual tax return for assessment.
How is a Subsistence Allowance or Advance Reflected on The Annual Tax Return (ITR12)?
Subsistence allowances or advances will be shown on your IRP5 as either a Tax-Free Subsistence Allowance or a Taxable Subsistence Allowance, with different tax implications and source codes.
Tax-Free Subsistence Allowance
A tax-free subsistence allowance simply means that your employer reimbursed you for your travel at the SARS deemed rate and therefore the amount is treated as tax-free and you needn’t submit any supporting documentation. It also means that you can’t make any claims against this allowance on your tax return. On your IRP5 document this allowance will be coded as 3705 for local travel and / or 3716 for foreign trips.
Taxable Subsistence Allowance
If your employer reimbursed you at higher amount than SARS deemed rates for the costs, then it’s a taxable subsistence allowance and will be indicated with the source code 3704 for local trips and / or 3715 for foreign travel. With these codes, you’re able to claim against the allowance for your expenses – provided you have receipts for them – and reduce the tax payable. You’ll need to include these expenses on a section called “Other Deductions” on your tax return with the source code 4017 for local and 4019 for foreign expenses.
Worked Example of a Subsistence Allowance and Deduction
We’ve covered most of the theory with regards to the subsistence allowances, so let’s do a worked example with some calculations so you can see how this plays out in a ‘real-life’ scenario.
Leo is a medical rep for a pharmaceutical company and does an annual trip around the country to visit potential customers. His manager estimates that he’ll spend 10 nights away from home. The company settles the accommodation bills directly with the relevant guesthouses and pays Leo an allowance for meals and incidentals equivalent of R400 per day.
Leo only ended up spending eight nights away from home and didn’t pay the company back any part of the allowance. Since he didn’t need to account for his travel expenditure to his manager, he discarded all his travel invoices and slips.
The calculation of his taxable income is as follows:
Total subsistence allowance received (10 X R400) = R4,000 Deemed tax free portion (8 X R397) = (R3,176) Taxable income = R824
Remember that Leo won’t pay tax on the R4,000 in the month he receives it. Instead, the tax implications will be calculated only when he submits his tax return for assessment.
In his Tax Return, the subsistence allowance of R4,000 will appear on his IRP5 next to source code 3704 (meaning it’s a taxable subsistence allowance). Leo will need to insert the deemed expenditure of R3,176 within the section “Other Deductions” next to source code 4017.
As a result of the difference in amounts, Leo will be taxed on the surplus of R824. This will be added to his other remuneration (i.e. salary plus benefits) for the tax year and will be taxed using the normal tax tables for individuals.
Now if Leo had kept all his slips, and could prove that he had in fact spent R4,000 on travel, then he could’ve deducted his actual expenditure instead of the deemed rate. In this case, he could have claimed the full R4,000 as a deduction, which would’ve balanced, leaving no additional amount to tax.
The worst case scenario would be if Leo was unfamiliar with the way his subsistence allowance was taxed and he’d left the entire deduction out on his tax return. For this, he would’ve had to pay tax on the full R4,000!
It’s clear from this example how important it is to have your Tax Return prepared by a professional to ensure you claim all deductions applicable to you and minimise your tax liability.