Source: SARS Guide “LAPD-IT-G21-Guide-on-the-Taxation-of-Foreigners-Working-in-South-Africa”
The purpose of this guide is to inform foreigners working in South Africa and their employers about their income tax commitments as well as to provide an overview of the South African tax system. This article, Part Four, will discuss the tax implications of the most common benefits received by foreigners.
The tax implications of four common benefits received by foreigners are discussed below. Additional benefits will be discussed in the next article.
(a) Residential accommodation
Residential accommodation provided in South Africa to an employee is taxable in the hands of the employee for the duration of his or her employment in South Africa. The rental value of residential accommodation supplied by the employer is the greater of:
• the total costs borne by the employer for the accommodation, less any amount paid by the employee (if rented by the employer); or
• an amount calculated in terms of a formula, which is based on a percentage of the employee’s remuneration and the nature of the accommodation provided, less any amount paid by such employee. No value is placed on the accommodation (in other words, no tax implications arise) provided by the employer to the employee while the employee is away from his or her usual place of residence outside South Africa:
• for a period not exceeding two years from the date of arrival of that employee in South Africa, for the purposes of performing the duties of his or her employment; or
• if the accommodation is provided to that employee during the year of assessment and that employee is physically present in South Africa for a period of less than 90 days in that year.
The above exclusions do not apply:
• if the employee was present in South Africa for longer than 90 days during the year of assessment immediately preceding the date of arrival referred to above; or
• to the extent that the cash equivalent of the value of the taxable benefit derived from the occupation of the residential accommodation exceeds an amount equal to R25 000 per month during which the benefit is granted. Thus, if the rental value is less than R25 000, no value is placed on the accommodation provided. To the extent that the rental value is greater than R25 000, the excess is taxable.
Once an employer has determined the rental value of the accommodation under the formula, and the employer is of the view that, due to the situation, nature, or condition of the accommodation, or for any other reason, the rental value determined under the formula is more than the actual rental value of the accommodation, the employer may apply to SARS for a tax directive. SARS may reduce the rental value to an amount that is fair and reasonable if satisfied that this is the case. This reduction may only be considered if one or more of the following factors relating to the accommodation, which could influence the rental value of the accommodation, are present:
• Situation—this relates to where the accommodation is located; for example, the property is situated in a remote area such as a small mining town with no or limited choice of accommodation for employees and a lack of opportunity available to employees to own their own property.
• Nature—this refers to the type of accommodation; for example, the accommodation is a hostel or is constructed from prefabricated panels.
• Condition—this relates to the state of the accommodation; for example, the accommodation is in a state of disrepair.
• Other factors—this includes any relevant factor that would satisfy SARS that the rental value determined under the formula is higher than the actual rental value; for example, the employee is obliged due to the nature of his or her duties to stay near or on the employer’s business premises (such as proto team members or security members), or the employer has entered into an arm’s length lease agreement with an independent landlord and the actual rent payable is much less than the rental value determined in accordance with the formula.
SARS is not obliged to reduce the rental value if any of the aforementioned factors are present. In each instance, the applicable circumstances must be presented to and be considered by SARS before it may exercise this discretion. Employers are not permitted to reduce the value to an amount that they consider fair and reasonable without a directive from SARS authorizing such a reduction. To do so will result in an under-deduction of PAYE by the employer, with possible penalty and interest consequences.
For more information, see the following documents on the SARS website (and previous articles on the Fincor website):
• PAYE-GEN-02-G01 Guide to Determine Fringe Benefit Value on Accommodation
• PAYE-GEN-01-G02 Guide for Employers in Respect of Fringe Benefits
(b) Use of a motor vehicle
A taxable benefit arises when an employer has granted an employee the right of use of a motor vehicle for private or domestic purposes and such use has been granted:
• free of charge; or
• for a consideration payable by the employee that is less than the value of the private or domestic use.
For a taxable benefit to arise, the employee must have been given the right to use the company car for private or domestic purposes. The absence of such private use means a taxable benefit does not arise. Private use includes, amongst others, travelling between the employee’s home and his or her place of employment.
The cash equivalent of the value of the taxable benefit, which is included in the employee’s gross income, is equal to the value of private use less any consideration given by the employee to the employer for private use (excluding any consideration given for the cost of licenses, insurance, maintenance, or fuel).
The value of private use is equal to:
• where the vehicle is owned or rented by the employer, other than rental under an “operating lease”: Fixed percentage per month × the determined value of the motor vehicle OR
• where the employer rents the vehicle under an “operating lease”: Actual cost incurred under operating lease + cost of fuel incurred on the same vehicle Should the motor vehicle be owned or rented (other than under an “operating lease”) by the
employer, then the private use is calculated as a fixed percentage, generally 3.5% of the determined value per month. However, the fixed percentage may be reduced to 3.25% of the determined value per month if the motor vehicle was the subject of a maintenance plan when it was acquired by the employer.
A maintenance plan is:
• a contractual obligation undertaken by the provider in the ordinary course of trade within the general public;
• to underwrite the costs of all maintenance of that motor vehicle (other than top-up fluids, tyres or abuse of the motor vehicle);
• for a period of at least three years or a distance of 60 000 kilometers, whichever comes first.
In order for the fixed percentage to be reduced to 3.25%, the maintenance plan must commence at the same time that the motor vehicle is acquired by the employer. The rate does not increase to 3.5% once the maintenance plan expires but remains at 3.25%. A motor vehicle is not the subject of a maintenance plan if the maintenance plan is either a top-up or an add-on plan that was taken out after the acquisition of the motor vehicle. In these circumstances the rate of 3.5% must be used.
The determined value in broad terms means the:
• original cost to the employer (excluding any finance charge or interest payable and including any VAT borne by the employer) if the motor vehicle was acquired by the employer;
• retail market value of the vehicle if it is held by the employer under a lease other than an operating lease; or
• market value of the vehicle in any other case.
The value to be placed on the private use of a motor vehicle is determined for each month or part of a month during which an employee was entitled to use the motor vehicle for private purposes. An employee who only had the use of a motor vehicle for part of a month must apportion the value of private use according to the number of days that the employee had the use of the motor vehicle. For instance, if the employee is first granted the right to use a motor vehicle in the middle of the month (for example, 15 June), the value of the private use must be based on the total number of days that the employee had the right to use that motor vehicle. In other words, 15 days in June divided by the total number of days in that month, that is, 30 days.
The value of the private use of the motor vehicle may not be reduced if, for whatever reason, the employee does not temporarily use the motor vehicle for private purposes, for example, going on holiday or being outside South Africa for a period of time.
In instances when more than one vehicle is made available to an employee at the same time, each vehicle represents a separate taxable benefit. However, if SARS is satisfied that each vehicle was used during the year of assessment primarily for business purposes, the value to be placed on the private use of all the vehicles is deemed to be that of only the vehicle with the highest value of private use.
Exclusions
Available for use by employees in general
The value of the private use of the motor vehicle by an employee is deemed to be nil if all three of the following requirements are met:
• The motor vehicle is available and used by employees of the employer in general (that is, the motor vehicle is a pool car generally used by the employees for business purposes and which is not allocated to a particular employee).
• The private use of the motor vehicle by the employee is infrequent or merely incidental to business use.
• The vehicle is not normally kept at or near the residence of the employee when it is not in use outside of business hours.
Nature of employee duties
The value of the private use of the motor vehicle by an employee is deemed to be nil if:
• the nature of the employee’s duties is such that the employee is regularly required to use the motor vehicle for the performance of those duties outside normal working hours; and
• the employee is not permitted to use that motor vehicle for private purposes other than:
for travelling between his or her place of residence and his or her place of work; or
private use that is infrequent or merely incidental to business use.For purposes of employees’ tax, 80% of the cash equivalent of the right to use a motor vehicle is treated as remuneration, and accordingly 80% of the benefit is subject to employees’ tax on a monthly basis. However, in the event that an employer is satisfied that at least 80% of the use of the motor vehicle during a year of assessment will be for business purposes, only 20% of the cash equivalent of the use of the motor vehicle is included as remuneration and is subject to employees’ tax.
This does not mean that only a portion (80% or 20%, as the case may be) is subject to income tax. The full taxable benefit (that is, 100%) is potentially taxable when the employee submits an annual tax return and the employee is unable to claim sufficient deductions for business use or the cost of expenses borne. It is only for the purposes of the employee’s tax that 80% or 20%, as the case may be, is subject to tax.
For more information on the correct tax treatment of this benefit, see Interpretation Note No. 72 dated 22 March 2013, “Right of Use of a Motor Vehicle.”
(c) Personal use of business cellular phones and computers
A taxable benefit arises when an employee is granted the right to use an employer’s asset (such as a cell phone or a laptop) for private or domestic purposes. The cash equivalent value of the taxable benefit is equal to the value of the private or domestic use of the asset less any consideration payable by the employee for such use or any amount spent by the employee on repairing and maintaining the asset.
Subject to specified exceptions, the value of private use is calculated using one of the following methods:
• If the asset is held by the employer under a lease or hiring agreement, the rent payable by the employer for the period of use; or
• If the asset is owned by the employer, an amount calculated for the period of use at the rate of 15% per annum of the lesser of the cost or the market value of the asset at the date the employee obtained the use of the asset.
If the employee is granted the sole right of use of the asset over its useful life or a major portion of its useful life, the value of the private or domestic use is equal to the cost of the asset to the employer, and the benefit is treated as accruing to the employee on the date he or she was first granted the right to use the asset. This would often be the case when an employee is granted the use of an employer-purchased laptop or cell phone, as employees would generally have the use of these assets over their useful lives.
Exclusions
No value is placed on the private or domestic use of an asset if the asset consists of a cellular phone or computer that the employee uses mainly for the purposes of the employer’s business. The term “mainly” has been interpreted to mean usage in excess of 50%.
For more information on the tax treatment of this benefit, see Interpretation Note No. 77 dated 4 March 2014, “Taxable Benefit – Use of Employer-Provided Telephone or Computer Equipment or Employer-Funded Telecommunication Services.”
(d) Free or cheap services
A taxable benefit will arise to the extent that a service, which has been rendered to an employee at the employer’s expense, is used for the employee’s private or domestic purposes. The service can be rendered by the employer, although it is often rendered by a service provider under an arrangement with the employer. This would include, for example:
- the monthly subscription and call charges payable by an employer to a telecommunications service provider (but see the possible exclusion below);
- network access to enable the employee to make and receive telephone calls and internet connectivity;
- home leave flights for the employee and the employee’s family;
- the cost of tax or work permit services rendered to the employee by a third party, at the employer’s cost; and
- security costs incurred for an employee’s private safety (including his or her family) at his or her home. The payment of such costs by an employer would be fully taxable as a benefit in the hands of the employee.
The amount of the taxable benefit is equal to the cost to the employer of rendering or having the service rendered less any consideration payable by the employee for such services.
Exclusions
No value is placed on the private or domestic use of communication services (for example, access and call charges to a telecommunication service provider) if the service is used mainly for business purposes. For example, if the employer’s cellular phone is used mainly for business purposes, the portion of the bill that relates to private use will not result in a taxable benefit in the hands of the employee.
No value is placed on the provision of a flight that was undertaken by an employee mainly for business purposes. For example, when an employer incurs the cost for a flight that is used mainly for business purposes, the portion of the cost that relates to private use will not result in a taxable benefit in the hands of the employee. The costs of a flight for family members will remain a taxable benefit in the hands of the employee.
No value is also placed on the private use of a telecommunication service if the service is rendered to employees as a benefit to be enjoyed by them at their place of work.
For example, private calls made from the office using the employer’s fixed line service. For more information on the tax treatment of this benefit, see Interpretation Note No. 77.
Additional benefits will be discussed in the next article.