Making sense of your IRP 5 - Part 1

Steven Jones - Moneyweb Tax

All those codes and numbers determine how much tax you will pay. MoneywebTax.co.za looks at what the codes mean.

Filing Season 2008 has opened, youve received your letter from the South African Revenue Service (Sars) inviting you to apply for your income tax return, and your employer has handed you your employees tax certificate (IRP5).

But whereas last year you received a salary, bonus, and car allowance, your IRP5 for 2008 shows that you received a 3601, 3605, and a 3701. What do these codes mean? And how do they ultimately affect what tax you are liable for?

This article covers the more common codes you are likely to encounter.

3601 - Income (PAYE). Normal salary and similar payments are reported under this code. Such amounts are fully taxable, and your employer should have deducted the appropriate employees tax. There are however very few deductions that can be claimed against such income, other than medical expenses, retirement fund contributions, and approved donations.

3603 and 3604 - Pensions. Taxable pensions are reflected under code 3603, while non-taxable pensions (such as war or disability pensions) are reflected under code 3604.

3605 - Annual payment. This code is used for bonuses, ""13th cheques"", and similar payments of a non-recurring nature.

3606 - Commission (PAYE). Many a taxpayer receiving commission has had their employer incorrectly reflect their commission under code 3601, which has prevented them from claiming deductions allowable under Section 11(a) (the general deduction formula) or Section 11(e) (wear and tear on assets used for the purposes of earning income). If you have earned commission and such commission is not reflected under code 3606, contact your employer urgently.

3607 - Overtime. Any overtime payments are reflected under this code.

3615 - Directors remuneration. If you are a director of a private company or member of a close corporation, your remuneration should be reflected under this code. It is essentially the same as code 3601, except that the employees tax consists entirely of PAYE and should not be split between PAYE and SITE.

3616 and 3617 - Independent contractors / labour brokers. If you fall into either one of these categories, your income should be categorised under 3616 (independent contractor) or 3617 (labour broker). Once again, if such income is classified under 3601, contact your client urgently as this error will prevent you from claiming certain business expenses.

3701 - Travel allowance (PAYE). Fixed travel allowances are included under this code. If you earn income other than that classified under 3606, 3616, or 3617, and you receive a travel allowance, such allowance must be classified under code 3701 or your travel deduction will be disallowed.

3702 and 3703 - Reimbursive travel allowances. Travel allowances reimbursed on a "per kilometre" basis are included here. 3702 is for reimbursements exceeding the prescribed rate per kilometre (R2.46 for the 2008 tax year), or where you receive a fixed travel allowance in addition to the reimbursement, or do more than 8 000 business kilometres per annum, and is taxable. You can however submit a claim for business expenditure in the same way as you would for a normal (3701) travel allowance. 3703 is a tax-free reimbursement, and you are therefore unable to submit any claim under such an allowance.

3704 and 3705 - Subsistence allowances (local travel). If you are required to travel out of town for business purposes, your employer may pay you a subsistence allowance to cover certain out-of-pocket expenses. Such allowance must however be over and above your normal remuneration package. For the 2008 tax year, if the subsistence allowance did not exceed R208 per day (meals and incidental costs), R63.50 (incidental costs only), it will be tax-free and disclosed under code 3705. Subsistence allowances in excess of these amounts are taxable and shown under code 3704. You can then submit a claim for subsistence against such allowance.

3715 and 3716 - Subsistence allowances (foreign travel). Subsistence allowances for travel outside of South Africa are tax-free if they do not exceed US$200 per day (disclosed under code 3716), and taxable if this amount is exceeded (code 3715).

3709 - Uniform allowance. If you receive an allowance to defray the cost of uniforms, such allowance is tax-free provided that the uniform in question is a condition of employment and such uniform is clearly distinguishable from everyday clothing.

3710 - Tool allowance. If you are required to purchase your own tools for business use, your employer may grant an allowance for this purpose. The allowance is taxable and you would need to submit a claim for expenditure incurred.

3711 - Computer allowance. If you are required to purchase your own computer for business purposes, an allowance may be granted under this code. It is fully taxable, and you can submit a claim for wear and tear (33% per annum for 3 years) as well as any expenses incurred (paper, printer cartridges, software licences, maintenance, and insurance for the computer).

3712 - Telephone / cellphone allowance. This allowance is fully taxable, but you can claim the cost of business calls, as well as a proportional amount of the monthly rental / subscription.