Deductions on amounts already taxed

It often happens that a person may receive remuneration and other similar amounts (for services rendered or to be rendered, or by virtue of employment or the holding of any office), which subsequently have to be refunded, often because of contractual obligations not having been fulfilled, or due to an overpayment which was previously subject to tax. These amounts can include, for example, paid maternity or sick leave benefits, or retention bonuses, which are often refunded by the person in a subsequent year of assessment. The amounts refunded may qualify for an income tax deduction in the hands of the person under section 11(nA) of the Income Tax Act.

Section 11(nA) will apply where:

• any amount (including any voluntary award);
• received or accrued;
• in respect of services rendered or to be rendered;
• or by virtue of any employment or holding of any office;
• as was included in the taxable income of that person;

• is refunded by that person.

Section 11(nA) permits a person to claim, as a deduction, any amount refunded by them in the year of assessment that the amount is refunded, but only if that amount was previously included in their taxable income. The amount that would have been used to determine that person’s taxable income on receipt thereof would have been the gross remuneration and not the net amount received from the employer (namely, the amount after-tax). The deduction will be limited to the amount that has been refunded (be it the gross or net amount or even a partial refund) under terms laid down in the contract between, for example, the employer and the employee.

The deduction allowed under section 11(nA) is limited to amounts previously included in taxable income. If, for example, an amount of R100 000 (in the form of a sign-on bonus) was included in taxable income, but an employee is required to refund that amount and R12 000 interest charged by the employer, the amount of R12 000 will not qualify for deduction under section 11(nA). The deduction would thus be limited to R100 000. The deduction can only be claimed in the year in which it is actually refunded. It can create or increase an assessed loss, and will not be ring-fenced.

Documentation required to prove that an amount was refunded

To claim a deduction under section 11(nA), satisfactory proof must be provided to show that the amount was previously included in taxable income and subsequently refunded. All relevant information and documentation are required in the event that SARS conducts a compliance verification or audit. SARS will also take into consideration documentation such as bank statements and payslips when assessing whether an amount was refunded. The onus of proving that an amount was included in taxable income and then refunded lies with the claimant.

A person who wishes to claim the deduction on assessment must record the amount in the applicable field on the ITR12 (which is the annual income tax return for individuals) dealing with deductions.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)