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Are you entitled to claim input tax on your employee's long-service award?

by , 06 February 2013
Are you entitled to claim input tax on your employee's long-service award?Last month, an inspirational employee who refused to let his Down's Syndrome get in the way of his work was honoured for ten years of service at a McDonald's restaurant in England, reports the Harlow Star. That's great news and something many companies do to reward their employees for their loyalty. If your company does this, here's what you need to know about claiming input tax on employee awards.

Before you give an employee a gift or an award for long service, you'd better be careful, warns practicaltaxhandbook.co.za.
While the rule with input tax deductions is that you're entitled to deduct input tax if it relates to 'the carrying on of your enterprise,' there are certain deductions that are denied to you from the outset – regardless of whether there's a connection with your enterprise or not, explains Dee Bezuidenhout in The Practical Vat Handbook.
There are four common company gift and awards you can't deduct input tax on
These include:
  • Entertainment – like a company Christmas party or dinner out to celebrate signing a big contract.
  • Subscriptions to social and sporting clubs.
  • Sending flowers to a sick employee or staff funeral.
  • Birthday gifts or gifts to good customers or suppliers to thank them for their loyalty.
Other items denied input tax claims include:
  • Cars; and
  • tax-exempt supplies (for example, paying your employee's life insurance, medical aid, or children's education)
But that's not all you need to know about tax issues relating to employee gifts and awards…
Don't forget to declare the award on the employee's IRP5 certificate.
If you reward your employee with a gift that is allowed an input tax deduction, remember to include it on your employee's IRP5 certificate if the award is worth more than R5,000.
'The first R5,000 of an asset/gift is tax-free. Every rand above that is taxed, at the marginal tax rate (i.e. whatever tax bracket you fall into, depending on your salary),' explains practicaltaxhandbook.co.za.
If, for example, you give an employee a gold watch to award his long service that's valued at R35,000, your employee will have to pay tax on R30,000 of the gift.
And that includes cash gifts too! These are seen as remuneration and will become part of your employee's taxable income.
So before you reward your employee for long service, make sure you know what the tax implications for doing so will be.

For more information on input tax claims and deductions, get your hands on the Practical Vat Loose Leaf Service. In the Practical Vat Loose Leaf Service we've got a dedicated chapter on input tax. In it you'll discover:
  • When and how to claim your input tax
  • Two things you must do to guarantee your input tax claim
  • 7 items you can claim input tax on
  • 9 more items you CAN claim input tax on, but didn't
  • know about
  • 5 exceptions to the rule against entertainment expenses  
  • Motor vehicles you can and can't claim input tax on
Get the Practical Vat Loose Leaf Service here...

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