The Income tax Act imposes tax on income from employment, business, or investment. In ascertaining the income from employment, the tax law requires the inclusion of all benefits and gains derived from the employment.
Section 4 (2)(a)(ix) of the Income Tax Act Provides that, any allowance or benefit paid in CASH OR GIVEN IN KIND, is taxable if they are derived by the individual from the employment.
In the banking industry, the nature of the work demands that, employees wear specified cloths and hence the banks give special clothing allowance. The provision of clothing allowance in the form of cash by the banks created some uncertainties in the banking industry when it comes to employment tax.
The Revenue Administration Act, permits, under such uncertainties, an application to be made to the Commissioner General (CG) to clarify the treatment of such item. The CG issued a class ruling on 23rd December 2020 upon an application from the Ghana Association of Bankers(GAB), seeking to treat on the average, thirty-five percent (35%) of the clothing allowance of the employees of their members as a reimbursable expense incurred by their staff as an expense that serves the proper business purposes of their employers.
The ruling of the CG paraphrased as CG has allowed up to twenty percent (20%) of the clothing allowance of staff of members of GAB as a reimbursable expense that serves the proper business purpose of the members of GAB but shall not exceed five percent (5%) of the basic salary. The ruling is strictly between employees of members of GAB and GRA up to December 2023.
Some concerns which emanated on the implementation of the ruling has necessitated the expression of this opinion on the tax implications of the class ruling issued by the CG.
2) Taxation of Employment Income
Section 4 read together with sections 8,130, and 133 of Act 896 and some provisions in LI 2244 deals with taxation of employment income. The income of an individual from an employment for a year of assessment is the gains and profits of that individual from the employment for the year or a part of the year. The make-up of the gains and profits mentioned above have been listed in Section 4(2)(a) of Act 896.
Although “clothing allowance” was not mentioned in the Act, reading 4(2)(a)(iii) and (ix) together, makes clothing allowance and any benefits whether in cash or kind received by employees from their employment including gifts are liable to tax.
3) Limitation on Deductions and Domestic Expenditures
A deduction shall not be allowed for the purpose of ascertaining the income of a person from employment with exceptions as stated in section 8(1) and (2) of Act 896.
Section 130(1)(c) states where an individual incurs expenditure in respect of that individual, the expenditure is domestic expenditure to the extent that it is incurred in acquiring clothing for the individual, other than clothing that is not suitable for wearing outside of work.
What is considered as "clothing not suitable for wearing outside of work" is not specifically addressed by Act 896, hence the CG has provided his interpretation of clothing not suitable for wearing outside of work pursuant to section 130(1)(c) in a practice notes as follows:
i. The employer’s logo is clearly embossed on the uniform, dress or clothing (a detachable badge is not sufficient to make it a uniform)
ii. It is customised with the name of the employer written on it.
iii. It is a safety clothing.
iv. It is a ceremonial clothing of the employer (e.g. Friday wear).
v. The employee would readily be recognised as wearing uniform by a person in the street.
The CG has provided examples of clothing not suitable for wearing outside of work in the practice notes.
4) Exempt Employment Income
The gains and profits specified under section 4(2)(b) of Act 896, shall be excluded from the calculations of the assessable income of employees from employment. Section 4(2)(b)(iii) enjoins employers to exclude from the ascertainment of section 4(1) a discharge or reimbursement of an expense incurred by an individual on behalf of the employer of that individual that serves the proper business purposes of the employer.
From the foregoing, the clothing allowance is a taxable allowance unless it satisfies section 4(2)(b)(iii).
Reading section 4(2)(b)(iii) together with section 130(1)(c) can be interpreted as when an employee acquires clothing for work which is not suitable for wear outside of work, then the expenditure on such clothing can be construed to have been incurred to serve the proper business purpose of their employers. This makes such expenditure an allowable expenditure to be excluded from ascertaining the employment income of the employee for the year of assessment.
It is from the above analysis which informed the application by GAB to the CG.
5) Class Ruling and its Tax Effects
A class ruling is a type of public ruling by the CG on how to treat a transaction after he has been furnished with all relevant facts of the transaction by explaining how a relevant provision of the tax law is applied to a specific class (category or group) of participants for a particular transaction as stipulated in section 103 of Act 915.
A class ruling is binding on the CG with respect to the application of tax laws mentioned in the ruling to an arrangement of a person in the specified class if:
· Prior to the issuance of the ruling, the applicant makes a full and true disclosure of all aspects of the arrangement relevant to the ruling to the CG and the arrangement proceeds in all material respects as described in the application for the ruling.
· The ruling is headed “class ruling”.
6) Facts of the Application by GAB as provided by the CG in the Class Ruling
The facts of the arrangement in the application by GAB to the CG as stated in the CG’s ruling have been set out below:
· GAB claimed that employees of their members are enjoined to apply their entire clothing allowance towards the purchase of appropriate clothing for the business of banking.
· GAB claimed that their members (Banks) compel their employees to use on the average thirty-five percent (35%) of their clothing allowance towards the purchase of branded T-shirts, and banks’ branded clothes which cannot be used for any other programme outside the office use.
· GAB also claimed that since the staff of its members are enjoined to use these branded clothes as official attire during working hours, the cost incurred by their staff serve the proper business expenditure of their employers hence, the cost incurred is reimbursable expense which must not be subjected to tax.
7) Will the Class Ruling apply to every Employee of Members of GAB?
The question depends on how the facts in every Bank fits the facts presented by GAB to the CG.
The ruling will apply to employees of members of GAB only if all the questions below are answered, yes:
· Is the Bank a member of GAB on whose behalf GAB presented the application?
· Are the Bank’s staff enjoined to apply their entire clothing allowance towards the purchase of appropriate clothing for the business of banking?
· Does the Bank compel its employees to use any percentage of their clothing allowance towards the purchase of branded T-shirts, and banks’ branded clothes which cannot be used for any other programme outside the office use?
· Are the Bank’s staff enjoined to use these branded clothes as official attire during working hours?
To any extent that all four questions cannot be answered as yes, the ruling cannot be applied in whole in the Bank unless certain internal realities are made to conform to the facts presented by GAB.
8) Implications of Implementation of the Class Ruling
The practical difficulties here on how to acquire the clothing are:
· Is the bank’s branded clothing being purchased on the open market?
· Can the employees provide evidence of purchase of the bank’s branded clothing purchased from the market or their employers to the tune of twenty percent (20%) of their clothing allowance caped at five percent (5%) of their basic salary? Unless such evidence is not required by the CG.
And if the argument provides that those bank’s branded clothing is sold by the Banks to its staff, then the following scenario will come to play:
· Twenty percent (20%) as limited by the capping of clothing allowance payable to employees will become income received from sale of clothing under other income and will attract Corporate Income Tax in the hands of the Banks.
· Staff will be issued branded clothing to be worn to office as the products they purchased with up to twenty percent (20%) of their clothing allowance as rightly caped. This will not make economic sense to the staff and will be outrightly rejected by the staff.
And if the argument says that those bank’s branded clothing are supplied at no cost by the Banks to its staff, then section 130(2)(a) of Act 896 “where another person incurs expenditure in making a payment to or providing any other benefit for an individual, the expenditure is domestic expenditure except to the extent that the payment or benefit is included in the calculation of the income of the individual will come to play” and the Banks cannot deduct that amount as a deductible business expenditure unless the whole amount is taxed in the hands of the employees as is currently done.
If the ruling is applied in Banks without aligning current policies on clothing, and clothing allowance to reflect the facts presented by GAB to the CG, it can result in tax liabilities and penalties for exempting the twenty percent (20%) of clothing allowance of employees as caped from tax during future tax audit.
From the forgoing and my understanding of the Acts and the ruling, there are some compliance burden which must be satisfied by members of GAB to enable them to implement the ruling without future repercussions.
Per my knowledge on policies and practice on clothing and clothing allowance in some Banks, employees can wear branded T-shirts, Friday wear and sometimes are compelled to were branded T-shirts during campaigns. These conditions satisfy some of the facts presented by GAB but as to whether staff are compelled to spend any percentage of their clothing allowance on bank’s branded clothing, I am unable to conclude.
I can, therefore, answer my earlier question as, the CG’s class ruling to employees of members of GAB is a generous offer with some degree of compliance burden.
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The author is a Member of ICAG and an Associate Member of the Chartered Institute of Taxation Ghana.