TAXATION THEORY AND

PRACTICE

UNIT 3: TAXATION OF EMOLUMENTS

COURSE CODE : ACT 205
LECTURE NUMBER 3
LEARNING OUTCOMES
At the end of this unit, you will be able to:

1. Distinguish between employment and self

employment and its implications.

2. Apply the basic laws and practice regarding

computation of tax liability.

3. Apply the treatment of allowable expenses and

deductions.

4. Record the calculation of statutory deductions

Who is an Employed Individual?
Contract of Service vs. Contract for Services
 Taxation of Emoluments:
 Employed Individuals: Emoluments
 The word emoluments refers to the salary and other
benefits an individual receives as a result of being
employed.

 All salary and benefits earned and received:

 Salaries/wages
 Sums paid for expenses
 Accommodations/entertainment provisions/payments
 Lump sum payments made in lieu of …

N.B. Remember that there are allowances that are excluded

from emoluments.
 Taxation of Emoluments:
Connected Persons
 A person’s family or household includes
his/her spouse, children and their spouses,
his/her parents, servants, dependents and
guests. Corporate connected persons are
those who are controlled by the same legal
person.

 An individual may not avoid paying taxes on

any emolument due to him, by arranging for
it to be paid to a connected person.
 Taxation of Emoluments:
 Statutory Income
 This is gross taxable emoluments less enumerated deductions.
The usual enumerated deductions are: NIS, pension contributions
up to a certain limit and Employees Share Ownership Plan (ESOP).

 Sales Agents on Salary Plus Commission

 The total commission earned is added to the salesperson’s salary
and is taxable.
 There is a measure of relief which can be clamed on the expenses
incurred in earning the gross emoluments of sales agents whose
commissions forms at least 50% of their gross emoluments.
 Taxation of Emoluments:
 Gifts from Employers
 Where an employee receives money from an employer (or something
having monetary worth) it is generally subject to tax whether
described as a gift or bonus.
 It is immaterial that the payment is voluntary or gratuitous (reward
for service).
 A payment which is a “testimonial” is not taxable (special occasion).

 Gratuities (Tips): Hotel Employees

 Tips are always liable to income tax.
 There was an Approved Gratuity Scheme, however, from 2013, hotel
employees are taxed on the same basis as employees in any other
industry. The scheme no longer applies.
 Taxation of Emoluments:
 Taxable Benefits and Proviso Adjustments
 All benefits must be included in the employee’s salary to arrive at
his/her taxable gross salary.

 Meal Allowances
 Lunch vouchers issued to employees that are quantifiable to a
specific employee are taxable.
 If the company has a canteen, or a subsidized lunch programme and
the amount are not quantifiable and traceable to a particular
employee then this amount is not taxable.
 Meal allowance given to employees for work done outside of normal
working hours (overtime) is not taxable.
 Taxation of Emoluments:

 Uniform and Laundry Allowance

 Tax free uniform and laundry allowance may be claimed only by

certain specified categories of workers. E.g. JCF, JDF, JFB, medical
officers, judges, security guards etc.

 The tax-exempt amount are $5,739 for uniform and $3,395 for
Laundry.
 Taxation of Emoluments:
Illustration; calculate the taxation on the below benefit
(exempt employee):
• An employee receives uniform allowance of $28,500
annually. Calculate the amount on which tax will be
charged.
Details Amount $
Cost of uniform allowance to 28,500
employer
Exempt amount (5,739)
Excess amount (benefit to 22,761
employee)
Tax Amount 22,761 * 25% = 5,690.25
 Taxation of Emoluments:
Illustration; calculate the taxation on the below benefit
(Non-exempt employee):
• An employee receives uniform allowance of $28,500
annually. Calculate the amount on which tax will be
charged.

Details Amount $
Cost of uniform allowance to 28,500
employer
Exempt amount 0
Excess amount (benefit to 28,500
employee)
Tax Amount 28,500 * 25% = 7,125.00
 Taxation of Emoluments:
Exempt employee Laundry Allowance
An employee receives laundry allowance of $18,000
annually. Calculate the:
a) Amount on which tax will be charged.
b) Tax amount that should be paid
c) Amount the employee will receive
Details Amount $
Cost of laundry allowance to 18,000
employer
Exempt amount (3,395)
Excess amount (benefit to 14,605
employee)
Tax Amount 14,605 * 25% = 3,651.25
 Taxation of Emoluments:
 Travelling: Motor Vehicle Benefit
 Designated travelling officers will benefit from tax exempt travelling
allowance.
 There are two options (a) the employee uses his own motor vehicle
(b) the employer provides a motor vehicle.
 The Commissioner sets the amount of travelling allowances.
 Taxation of Emoluments:
 Travelling:
Benefit Motor Vehicle
Taxable vs Non-taxable:

• Proven travelling officer (non-taxable)

• Non-travelling officer (taxable)
CASE:
Mr. Payne was a pilot, employed full time by an airline. He also owned a farm
on which he worked part-time and lived with his family. To get to the airport
from the farm he travelled by bus, car and in cases of emergency, by plane. He
made claim to the airline for the travelling expenses to be treated as allowable
deductions for tax purposes. Expenses incurred in getting to and from work
were usually not allowed. This claim was denied by the Commissioner of
Inland Revenue...The court stated that for the travelling expenses to be
allowed as a deduction for income tax purposes, they have to be incurred
as a result of the nature of the job…travelling from home to work and vice
versa does not result in a tax benefit being received.
 Taxation of Emoluments:
 Travelling:
Benefit Motor Vehicle
 Taxation of Emoluments:
 Housing Accommodation
 For Income tax purposes the employee is liable to tax on this
benefit.
 Rent paid to unconnected persons (directly to independent
landlord).
 Rent paid to connected person.
 Employer owns the accommodation (Housing/rental benefit)-
Non-monetary.
 Taxation of Emoluments:
 Housing Accommodation
An employee earns an annual salary of $2,000,000 and also receives an annual
rent allowance of $750,000. Ignoring all other statutory deductions.
a) What is the tax liability?
b) What is the net amount the employee will receive?

Details Amount $
Basic Pay 2,000,000
Rent Allowance 750,000
Total Emolument 2,750,000
Income tax liability 2,750,000 * 25% = 687,500
Net cash amount received 2,750,000 – 687,500 = 2,062,500
 Taxation of Emoluments:
 Housing Accommodation
An employee earns an annual salary of $2,000,000 and also lives in a house own
by his employer and receives a rental benefit of $750,000. Ignoring all other
statutory deductions.
a) What is the tax liability?
b) What is the net amount the employee will receive?
Details Amount $
Basic Pay 2,000,000
Rent benefit 750,000
Total Emolument 2,750,000
Income tax liability 2,750,000 * 25% = 687,500
Net cash amount received 2,000,000 – 687,500 = 1,312,500
 Taxation of Emoluments:
Employee’s expenses in carrying out the employment:
 Telephone Service

 Payments made by the employer for the maintenance of a telephone

to be used for purposes related to the employment are not taxable on

the employee.

 Use of Credit Cards

 Where a credit card is provided as part of the package of
remuneration of an employee, the amount brought into the charge to
tax is the cost to discharge the credit card liability which will include
interest and service charges (if any).
 Taxation of Emoluments:
Employee’s expenses in carrying out the employment:
 Business Entertainment

 The general guideline is that expenses incurred for reasonable

business entertainment will be allowed as an expense to the

employer, not the employee.

 Expenses related to employment

 If the employee needs to incur the expense to do the job it will be
allowable although each case would be decided on its merits.
Questions & Answers

THE END