ISO 9001:2008 CERTIFIED DOMESTIC REVENUE DEPARTMENT PRACTICE NOTE PAYMENT OF ALLOWANCES, GIFTS AND TIPS FROM EMPLOYMENT RACTICE NOTE NO. 12/2013. DATE OF ISSUE 1 st NOVEMBER, 2013. 1
PAYMENT OF ALLOWANCES, GIFTS AND TIPS FROM EMPLOYMENT Practice Note No. 12 /2013 Date of Issue 1 st November, 2013 Contents Pages 1.0 TAX LAW.. 1 2.0 INTERPRETATION. 1 3.0 THE PURPOSE OF THE PRACTICE NOTE.. 1 4.0 HOW THE LAW APPLIES.. 1 4.0 REVOCATION........ 5 1.0 TAX LAW. This Practice Note applies in respect of the taxation of payment of allowances, gifts and tips in conducting employment. 2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise Act means the Income Tax Act, Cap. 332. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as they have in the Act. 3.0 THE PURPOSE OF THIS PRACTICE NOTE. This Practice Note considers:- 3.1 Allowances, gifts and tips as emoluments. 2
3.2 Payment of Allowances. 3.3 Business expenses and allowances. 3.4 Foreign Service allowance. 3.5 Scholarship income. 3.6 Board members sitting allowance. 3.7 Gifts - General. 3.8 Gifts and voluntary payments. 3.9 Gifts in kind. 3.10 Gift for special services. 3.11 Tips. 3.12 Prizes and incentive schemes. 4.0 HOW THE LAW APPLIES. 4.1 Allowances, gifts and tips as emoluments The Act provides to charge to tax payment to an individual of allowances, gifts and tips being gains or profits from employment as follows: Any subsistence, travelling, entertainment or other allowances received in respect of employment or services rendered except subsistence, travelling, entertainment or other allowances that represent solely the reimbursement to the recipient of an amount expended by the recipient wholly and exclusively in the production of his employer s income. Other payments derived by the individual in respect of the employment. 4.2 Payment of Allowances Many business bear directly certain expenses of their employees, and in case of directors and senior employees a fixed expense allowance is often paid in addition to the salary. It is frequently a matter of practice whether such payments and allowances are 3
treated as part of the emoluments of the office or employment. Where an individual s disbursements in the exercise of the employment are borne or reimbursed by the employer, the disbursements are not treated as forming part of the emoluments of the employee, although they may have the effect of saving the employee s expense or providing an amenity. But where the allowance is established to be excessive considering the amount of the actual expense, the excess amount is assessable as forming part of the emoluments, in which case the employee can deduct the portion of the payment qualifying as an expense wholly and exclusively incurred in the production of the employee s income from the employment. 4.3 Business expenses and allowances In calculating an individual s income from an employment deductions are hard to obtain, they are normally limited to:- Qualifying travel expenses e.g. travelling in the performance of duties. Other expenses the employee is obliged to incur and pay as holder of the employment which are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. Special arrangements may be made between an employer and the employee that certain expenses including travelling expenses and allowances for the cost of meals and accommodation will have to be provided by the employee himself when working away from his normal base. If the employee carries out a substantial part of the duties at the permanent business address of the employer, that address is the normal base for the employee s purpose. Otherwise the normal base is the place, such as filming location or studio, at which the employment is conduct Allowances within the terms of the arrangements do not have to be Included in calculating the employee s monthly pay. 4.4 Foreign Service Allowance Where any allowance to any person in the service of the Government is certified by the Treasury to represent compensation for the extra cost of having to live out of the United Republic in order to perform the person s duties, that allowance is not regarded as income for income tax purposes. 4
Foreign service allowances include educational allowances for children of diplomats serving overseas. 4.5 Scholarship income Scholarship includes an exhibition, bursary or any other similar educational endowment. However, where a person who is normally in employment becomes a full-time student for any period there is no legal provision to exempt the salary which the employee continues to receive Income arising from a scholarship held by a person receiving full-time instruction at an educational establishment shall be exempt from income tax. Amount advanced to a student to meet certain unforeseen contingencies which is repayable in case such contingencies do not occur is tax exempt. However, if the contingencies occur and the amount advanced is spent by the student then that amount will be taxable in the hands of the student. 4.6 Board members sitting allowance Sitting allowance payable to a member of a board of directors of a public institution is reimbursement or compensation for the extra costs incurred by the member in order to perform the member s board duties. Such allowance is not taxable. 4.7 Payment of gift A payment may have no direct connection with the employee s remuneration or employment at all, and therefore not be in the nature of an emolument. The fact that there is a link between the payment and the employment, and that the payment would never have been made but for the employment, is not sufficient to render the payment taxable. It will however, be taxable if it is paid to the employee as a reward for or in return for acting as or being an employee. 4.8 Gifts and voluntary payments Gifts and voluntary payments made by an employer or similar interested person with definite reference to an employment held by the recipient and by virtue of his office are taxable. 4.9 Gifts in kind Gifts in kind to employees are not taxable if they cannot be turned into money, unless the employee is a director or highly paid employee when the cost of the gift to the employer will be the value of the gift to the 5
employee. 4.10 Gift for special services 4.11 Tips Gifts for special services will be taxable if they are received in respect of an office or employment notwithstanding that there is no enforceable right to receive the payments, that they are received after the employment has terminated and that they are paid by way of gift. Payments made, however, not in virtue of the office or employment but by way of testimonial or in recognition of the personal qualities of the recipient will not be taxable. Employees in certain trades receive tips which form a substantial part to their income. The payments of tips received from the employer or a third party as a reward for services rendered in the course of the employment are taxable. Payments given as a present in appreciation of the recipients personal qualities, such as faithfulness, and consistency and readiness to oblige, would not be taxable. 4.12 Prizes and incentive schemes Under an incentive scheme, prizes may be awarded by an employer to his employees, for the efficient performance of their work, such as for timekeeping, production, sales, etc. Such payments are taxable on the employees. 5.0 REVOCATION Pursuant to the provisions of Section 130(2) of the Act the Practice Note Number 11/2004 issued on 15 th December, 2004 is hereby revoked. Signed... Commissioner 6