Income Tax Act
Income Tax Act Schedule 7
Tax Administration Act
What is a fringe benefit?
Fringe benefits usually refer to non-cash benefits granted to employees, but do not constitute cash payments made. These fringe benefits will be reflected on your tax certificate by source codes starting with the numbers 38 followed by two more numbers.
The word “benefit” may be understood as “an advantage or profit gained from something”. For example, a medical aid may be regarded as a benefit received when one works for an employer. The word “fringe” may be defined as being “on the edge”, “a border” or “not part of the main”. A fringe benefit is to be understood as a benefit that an employee receives, but which does not form part of the employee’s primary remuneration package (i.e. an employee’s salary cash value).
When an employee receives certain fringe benefits, these need to be added to his/her remuneration package and taxed accordingly.
The employer must determine the cash value of the fringe benefit received by the employee and add the cash value to the employee’s remuneration. The employee may be obliged to pay tax on his/her fringe benefits. On an annual basis, the employer must issue the employee with an IRP 5/IT3(a) certificate. The nature and cash value of the fringe benefit must be clearly stated.
The Seventh Schedule deals with the following Fringe Benefits:
• Acquisition of an asset at less then market value
• Right of use of an asset
• Right of use of a motor vehicle
• Meals and refreshments
• Residential Accommodation
• Free or cheap services
• Benefits in respect of interest on debt
• Subsidies in respect debt
• Contributions to benefit funds
• Medical Costs
• Benefits in respect of insurance policies
• Contributions made by employers to retirement funds
• Payment of employee debt
Paragraph 2(f) of the 7th Schedule prescribes that a taxable benefit shall be deemed to have been granted if a loan (other than a loan for purposes of paying any consideration by the employer in respect of a qualifying equity share, the payment of any stamp duties or uncertified securities tax payable in respect of that share or a loan in respect of which a subsidy is payable to the borrower by the employer), has been granted to the employee, whether by the employer, by any other person by arrangement with the employer or any associated institution in relation to the employer.
The value to be placed on the benefit in terms of Paragraph 11 of the 7th Schedule is: The amount of interest that would have been paid on the loan during the tax year if any interest had been paid at the official rate, less the amount of interest (if any) actually incurred by the employee. Where an employer provides loans financed out of his / her own funds to employees, the taxable benefit will be the amount of interest that the employees would have paid in respect of the tax year, if they were obliged to pay interest at the official interest rate.
No value shall be placed on the benefit derived in consequence of:
- The granting of a casual loan or loans if the aggregate of such loans do not exceed the sum of R3 000 at any time. The loans contemplated in this exclusion are short-term loans granted at irregular intervals to employees and not all loans merely because they are less than R3 000. A taxable benefit would arise if the loans were granted on a regular basis to all employees or a certain category of employees notwithstanding the fact that the loan does not exceed R3 000.
- The granting of a loan for the purpose of enabling the employee to further his / her own studies.
- If a financial institution such as a bank provides loans to its employees at the same rate as to the customers of the institution on the same conditions and under the same circumstances, no taxable benefit will accrue if such customer rate is below the official interest rate.
- If a low interest or interest free loan is provided to a director of a company or to a member of a close corporation, no taxable benefit will accrue if such loan is, for example, provided only as a result of the director’s share holding and not in respect of any services rendered. In such a case, the interest on the loan will not be deductible in the hands of the company or close corporation.
Paragraph 10A of the 7th Schedule makes provision for the benefits granted to employees under a certain type of housing scheme, to be deemed to constitute a loan. Under this type of scheme, the employee’s house is acquired by and registered in the name of his / her employer. The employee is in terms of the agreement with the employer either entitled or obliged to acquire the house, either on termination of his / her service or after the expiration of a fixed period, at a price stated in such an agreement. The employee is granted the right to occupy the house and as a consideration in respect of his / her occupation pays a rental to the employer, which is calculated as a given percentage of the cost of the house to the employer. This scheme is in effect identical to the granting by the employer of a low-interest housing loan and is in terms of Paragraph 10A to be treated as such.
Paragraph 10A of the 7th Schedules also provides that where the employee ultimately purchases the house from the employer, which will probably be at a price considerably lower than its then market value, the difference between the market value and the purchase price will not be subject to tax in the hands of the employee, provided that the purchase price is not lower than the market value of the house on the date on which the original agreement was concluded between the employer and the employee.
Paragraph 11(5) of the 7th Schedule provides that where a loan obtained by the employee from the employer is used by the employee to produce income, for example where the employee uses the money to purchase fixed property from which he / she derives rental income, the cash equivalent of the taxable benefit which is included in the employees’ taxable income, will be deemed to be interest actually paid by him / her and will be allowed as a deduction from the income earned.
Accrual of taxable benefit: A portion of the cash equivalent is, for employees’ tax purposes deemed to have accrued to an employee where — interest on the loan becomes payable by the employee at regular intervals during the tax year, on each date during the year on which interest becomes payable; interest on the loan becomes payable at irregular intervals or where interest is not payable, on the last day of each period during the year in respect of which any cash remuneration becomes payable to the employee.
The amount that is subject to employees’ tax is determined by calculating the interest at the official rate for the portion of the year mentioned above, reduced by the amount and interest (if any) actually payable by the employee for the portion in question.
An alternative method for the calculating of the cash equivalent for employees’ tax and normal tax purposes may be used if the Commissioner is satisfied that such method achieves substantially the same result as the prescribed methods.
The cash equivalent of the benefit must be reflected under code 3807 on the IRP 5 certificate.
The following classes of fringe benefits are listed in the income Tax Act:
Travel allowances (s8(1)(b))
Subsistence allowances (s8(1)(c))
Public officer allowances (s8(1)(d))
There are 12 categories of fringe benefits namely:
- Provide the employee with an asset for free or at a lower value compared to its price. So if you provide an employee with an Apple tablet as an example this would then be taxable in the employees hands. Note that payments for bravery or long service awards are tax free up to R5000. Amounts in excess of that is taxable.
- Employee use of Company assets. If an employee uses Company assets for private use then the free use is taxable. The employee should be taxed on the date employees first given right to use the asset.
- Private use of a Company car based on 3.5% of the determined value of the vehicle.
- Free meals, refreshments or meal vouchers; if you supply your employees meals in any canteen, cafeteria or dining room or any special occasion or for extended working hours then this is not taxable.
- Free residential accommodation to employees is taxable. The value is determined by the higher of the cost to the employer or the amount determined when applying the SARS prescribed formula. To calculate the rental value for holiday accommodation to staff it is recommended to use the prevailing rate per day. Rent-free accommodation of employees working away from home is tax free.
- Free or cheap services are also taxable but services to improve performance at work is tax free; e.g. advisory services.
- Low or interest free loans are also taxable. If you make a loan to an employee and either no interest is payable on the loan or interest is payable at a rate lower than the official interest rate, it’s a taxable fringe benefit. A portion of the taxable benefit is deemed to accrue on each date during the year where your employee pays interest on the loan at regular intervals.
- Subsidies provided to employees are also taxable.
- Debt paid on behalf of employees is also taxable in the employees hands.
- Medical aid fringe benefits – however amounts paid to a medical aid on behalf of a person who has retired from your employ by reason of superannuation, ill-health or other infirmity or amounts paid to dependants after the death of the employee
- Medical expenses incurred – if you pay for the medical treatment of an employees dependants after he/she dies.
- Benefits to employees relatives; bursaries paid to children and staff. When the bursary scheme is accordance with the regulations contained in the Seventh Schedule to the Income Tax Act No. 58 of 1962, then no taxable fringe benefit applies.
Use of a motor vehicle for private purposes. The employee is taxed according to his/her private use of the motor vehicle. For tax purposes, the schedule lists several stringent guidelines relevant to: calculating the value of the vehicle, the cost of company mileage, as well as the value to be added to the employee’s salary.
Meals and refreshments. When an employee receives meals at a reduced rate (or for free), a taxable fringe benefit amount must be added to the employee’s remuneration package. The taxable value is determined by calculating the difference between the value paid by the employer for such meals and the amount which the employee pays for such meals. For example, the if employer purchases meal vouchers from a caterer (at R20.00 per meal), but only charges the employee R8 per meal, then the taxable fringe benefit amount will be R12 per meal.
Travel allowances (s8(1)(b))
In order to calculate the net amount, there needs to be distinguished between two types of travel allowances:
a. Fixed Travel Allowance
b. Reimbursive travel allowance
If an employee receives a travel allowance and enjoys the right of use of an employer provided vehicle (par 7 of the Seventh Schedule):
a. The full allowance is included in income (in other words, not the net amount)
b. No deductions are allowed against the allowance
c. The fringe benefit is taxed in terms of paragraph 7 of the Seventh Schedule (see slides relating to right of use of a motor vehicle)
Important to note in section s8(1)(b)(i):
- Private travel includes travelling between his or her place of residence and
- His or her place of employment or business or
- Any other travelling done for his or her private or domestic purposes
Subsistence allowances s 8(1)(c)
A subsistence allowance is typically granted to an employee who is required to travel for business purposes (example: out-of-town audit). The allowance can cover costs relating to accommodation, meals or other incidental costs.
Where that employee is required to be away from his normal place of residence in SA for at least one night for business purposes, a deduction may be claimed against such an allowance.
As in the case of a travel allowance, only the net amount of the allowance is included in taxable income.
The deductions allowed are limited to the amount of the allowance.
Subsistence allowances are excluded from the definition of remuneration therefore no employees’ tax is deducted from a subsistence allowance.
If the employee has not by the last day of the month following the payment of the subsistence allowance, either spent a night away from his usual place of residence or paid back the subsistence allowance to his employer, it will be regarded as remuneration and subject to employees’ tax.
For travel outside South Africa:
If the allowance is granted to cover the cost of meals and incidental costs, then the amount allowable as a deduction is determined in terms of a table providing the different rates based on the country of the accommodation.
Allowances to holders of a public office
s 8(1)(e) defines a holder of public office. The list includes officials in the local, provincial and national spheres of government as well as the CEO or chairman of a non-profit organization.
s 8(1)(d) provides a list of expenditure which, if incurred for the purpose of his/her office, can be offset against an allowance paid to the holder of that public office for such expenditure.
The list includes items such as stationery, postage, secretarial services, travelling and telephone calls. If the person is required to pay for these expenses out of their salaries, a portion of their salaries is deemed to be a subsistence allowance R120 000. (s8(1)(f)). The R120 000 is apportioned if the public office is held for less than a year.
Only the net amount of the allowance will be included in the taxpayer’s income. 50% of a public officer’s allowance is included in remuneration. Disclosure of the entire 100% allowance on the IRP5 return is required.
Author Craig Tonkin