Are salary advances taxable?
43984, 12 Sep. 2014
There’s a lot of confusion regarding salary advances.
Some of the confusion is around whether or not salary advances are taxable.
The good news is today we’re setting the record straight so you can avoid 200% penalties and interest.
Here’s your answer…
Yes, salary advances are taxable
The definition of remuneration in Paragraph 1 of the Fourth Schedule of the Income Tax Act 58 of 1962 makes it clear that salary advances are taxable and are subject to employees’ tax.
Paragraph 1 defines remuneration as “any amount of income which is paid or is payable to any person”, and “whether or not in respect of services rendered”.
The salary advance your employee gets becomes taxable in the pay period that you pay it to him. It doesn’t matter that the payment isn’t connected to services he’s already rendered.
Here’s an example that shows how to tax a salary advance
ABC (Pty) Ltd appoints Mr Stevens as a sales agent.
In terms of his employment contract, Mr Stevens will earn a commission of 6% on the gross sales which he generates. However, to assist Mr Stevens, the company agrees to give him an advance on his commission of R6 000 per month for three months. The advance will be set off against any commission he earns in months four to six of his current employment
This means, Mr Stevens will be taxed on the monthly advance of R6 000 as and when he receives it. However, when the commission accrues in the future, he won’t be taxed on such future commission as it’ll be set off against the advance already received.
Here’s the bottom line: Salary advances are taxable and you must apply the correct tax treatment to them if you want to avoid 200% penalties and interest.
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