Praxima

Case Study: Correct Treatment of Employee Expense Reimbursements in South Africa

South African employers: Are you processing employee expense reimbursements correctly from a tax and payroll perspective?

We recently assisted a South African client in reviewing and correcting how employee reimbursements were being handled. Ensuring accuracy is vital as incorrect treatment can result in PAYE exposure, penalties, and broader compliance risks under the Income Tax Act and SARS requirements.

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What Exactly Is an Employee Expense Reimbursement?

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An employee expense reimbursement occurs when an employer repays an employee for actual, pre-approved, business-related expenses incurred on behalf of the company.

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If the expense is properly substantiated through receipts, invoices, logbooks, or other valid documentation, the reimbursement is not subject to PAYE and is excluded from taxable income in terms of the Income Tax Act, 58 of 1962.

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Conditions for a Non-Taxable Reimbursement

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For an employee reimbursement to qualify as tax-free, the following must be met:

Employer Instruction or Approval
The expense must be incurred at the employer’s request or with prior approval.
Business Purpose
The expense must directly support the employer’s trade and may not have a private element.
Valid Proof of Expense
The employee must provide acceptable supporting documentation.
Exact Amount Reimbursed
The employer will reimburse only the actual amount incurred; estimates or rounded figures are not permitted. Note that the reimbursed amount may be less than the total reflected on the receipt if company policy imposes reimbursement caps.

For example: An employee purchases printer paper for business use using personal funds. After the receipt is submitted, the employer reimburses the exact amount. This qualifies as a non-taxable reimbursement under SARS rules

Allowances vs. Reimbursements

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Allowances are:

Fixed amount paid upfront to cover expected expenses
Taxable and included in remuneration (with possible deductions)
Not based on actual expenditure
Often creates PAYE obligations

Reimbursements are:

Paid after expenses occur
Generally non-taxable if fully substantiated
Must equal the exact amount spent
No PAYE obligation if compliant

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Reimbursements Become Taxable in the Following Scenarios

No documentation or invalid proof: Treated as taxable income
Advances or excess funds not returned: Taxable
Fixed amounts misclassified as “reimbursements”: Taxable
Private or mixed-use expenses: Taxable

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Additional Payroll Considerations

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Even when reimbursements are correctly treated, employers must ensure the correct reporting and tax treatment of other payroll-related items:

Retirement Fund Contributions
Employer contributions to pension/provident funds are taxable fringe benefits.
Medical Aid Contributions
Employer-paid medical aid is a taxable fringe benefit, with employees receiving medical tax credits.

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Compliance Checklist for Employers

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To remain compliant with SARS requirements, employers should ensure:

Valid proof is obtained for all reimbursed expenses
The expense was incurred for a legitimate business purpose
Payroll clearly differentiates between allowances and reimbursements
Fringe benefits (retirement and medical) are reflected under the correct IRP5 codes
Policies are in place for approval, documentation, and record-keeping

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South African employers should be aware of the differences between allowances and reimbursements. Only fully substantiated, employer-approved business expenses qualify as non-taxable reimbursements under SARS rules.

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If an employer has any uncertainty regarding whether the above information applies to their employees, it is advisable to seek independent legal counsel for clarification. Employers may also contact us directly should they wish to discuss the matter further or require additional assistance: angelenes@praxima.com.

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SARS PAYE rules

SA Tax-free reimbursements

Employee reimbursements

South Africa payroll compliance

Angelene Stathakis

Client Services Manager, Praxima