Individual tax deduction for amounts previously included in gross income

A person may receive remuneration benefits such as maternity leave or retention bonuses by virtue of their employment contact. However, due to unforeseen circumstances the contractual obligations may not end up being fulfilled. The result is that the individual may be required to repay a portion of the benefit received back to the employer. These circumstances may commonly arise for matters such as maternity benefits or retention bonuses.

Prior to 2008, there was no provision in the Income Tax Act to claim a deduction for the amount that was previously taxed by the employer and required to be repaid in a subsequent tax year. Thus Section 11(nA) had been introduced to overcome this inequality. Despite the provision being in existence for a number of years, SARS has only recently published an Interpretation Note No. 88 to provide guidance on the application of this provision.

Please refer to the example below that illustrates the principles of Section 11(nA):

Example:

In the 2015 year of assessment, Mr Lee (under the age of 65 years) received a retention bonus to the value of R 55 000 in Year 1 from his employer. Mr Lee’s total income (before any deductions) for the 2016 year of assessment was R580 000. The employer withheld employees’ tax of R148 023. In Year 2, Mr Lee was unable to meet the contractual obligation for the retention bonus he had received and thus was required to repay the bonus to his employer.

Solution:

In the 2016 year of assessment, Mr Lee’s tax liability on assessment will be determined as follows:

It is important that the person claiming the deduction keeps all the information or documents to support the tax deduction. These include:

1. Letter from the employer confirming that the amount was included in the person’s gross income, the nature of the repayment, as well as the total employee’s tax that was withheld and the amount(s) to be refunded; and

2. Bank statements and payslips to confirm the amounts that have been refunded.

In conclusion, amounts received by or accrued to a person, for services rendered or to be rendered may subsequently have to be repaid by the person as a result of failing to meet their contractual obligations. It is essential for the individual that is in this position to understand that they are entitled to claim the deduction for tax purposes related to the repayment and to keep the necessary documents to support the deduction. The effect of the tax deduction is that it may reduce the person’s taxable income in the year of repayment or perhaps create or increase an assessed loss. A person who intends to claim this tax deduction may wish to consider consulting with a Tax Professional for the correct disclosure and treatment in their personal tax return.

Trusha Kanjee

Tax Compliance Supervisor, Johannesburg