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What are relocation expenses and how do they affect your company's tax?

by , 07 January 2014
Not sure what relocation expenses are? If so, read on to find out exactly what they are and the tax consequences they carry.

If your company has branches in other provinces or even in other countries, you need to know about relocation expenses.

This is important as there may come a time where you have to relocate one or more of your employees.

Besides the fact that relocating an employee can cost you a fortune, there are also tax consequences you have to think about.

Here's what you need to know about relocation expenses

So what exactly are relocation expenses?

These are expenses you'll incur when you move an employee to another location whether it's to another city, province or country.

Here are nine costs that form part of relocation expenses

According to the Practical Tax Loose Leaf Service, the following expenses form part of relocation:

  1. Moving expenses. This includes the cost of transporting your employee, his household, personal possessions and assistance for an employee's spouse to find a job;
  2. Hiring professional movers;
  3. Costs for boxes and packing material for an employee's personal belongings;
  4. Expenses for travelling from the old location to the new one;
  5. All costs you incur when you buy and sell a home;
  6. Fees to break the lease if an employee's renting;
  7. Temporary storage costs until an employee finds a permanent home;
  8. Shipping an employee's car; and
  9. Paying for temporary accommodation in a hotel, guesthouse or anywhere else for the employee and his family. This is for a maximum of 183 days after the date of his appointment.

Let's have a look at the tax implications for employees. Then we'll look at them for your company.

Relocation expenses: What are the tax implications for your employees?

All payments you make to an employee have tax consequences. And, one of the first questions SARS asks is: 'Would this person have received such a payment ifthey weren't employed by you?'

This is because SARS is always on the lookout for tax avoidance schemes.

When it comes to relocation costs, the answer to this question is almost always 'no'.

So what are the tax implications for the employee if you cover these costs?

Firstly, any payments you make to an employee in terms of a service agreement fall under the 'gross income'. This includes payments received for services rendered. It's also the monetary value of any 'fringe benefit'.

Basically, paying relocation costs for an employee qualifies as a fringe benefit. But, you don't work out tax on gross income. You determine it on taxable income.

Keep in mind that if your employee pays for the relocation costs himself and you reimburse him, the costs are tax-free.

Tax implications for your company when relocating an employee

The Practical Tax Loose Leaf Service explains that the salary you pay your employee is a cost you incur in the production of the income. So it qualifies for a deduction. This also includes costs for fringe benefits, as long as they're not of a capital nature.

Some companies can't pay relocation costs until the new employee's on their payroll.

If this is the case with your company, your employee must keep all receipts and correspondence that'll help the process when they're finally on your payroll.

One of the tests the courts use when they check if an amount is of a capital nature is if any 'enduring benefit' comes from the expense.

So, if there's a benefit for an employee for longer than 183 days after the date of appointment because of the expenditure, the court will see the relocation expenses as of capital nature and there'll be no tax advantage.

Now that you know what relocation expenses are and the tax implications make sure you comply to avoid SARS penalties.

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