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 Five, will discuss the tax implications of the most common benefits received by foreigners.
The tax implications of four common benefits received by foreigners were discussed in a previous article. Additional benefits are discussed in this article.
(e) Payment of an employee’s debt
A taxable benefit arises in the hands of an employee when the employer settles the employee’s debt to a third party, whether directly or indirectly, without requiring that employee to make any payment for the amount paid by the employer. The employer may also release the employee from an obligation to pay an amount owing by that employee to the employer.
The value of the benefit is the amount paid by the employer or the amount of the debt from which the employee has been released. There is no limitation on the method by which this debt may have arisen or the size of the debt.
Examples of a payment of an employee’s debt are:
• School fees for the employee’s children
• Payment of the employee’s liability to a third party
• Membership fees at a club
There could be instances when an employee receives an assignment-specific benefit that is taxable in South Africa when the employer pays a debt on behalf of the employee, even though that benefit is not taxable in the employee’s home country.
For example, the benefit of the payment of school fees is regarded as an assignment-specific benefit and therefore could form part of the assignment benefit package, and the employer would normally settle the tax on the benefit. It is not included in the employee’s hypothetical tax calculation because it is not a benefit the employee would have received if he or she had stayed in the home country. Whether the payment of school fees is a taxable benefit in the home country is irrelevant in determining whether that benefit is taxable in South Africa. Payment of school fees by an employer on behalf of an employee will always qualify as a taxable benefit in the hands of the employee while on assignment in South Africa. The employee would have to carry the cost of the school fees out of his or her own pocket if this assignment benefit was not received from the employer.
Certain employers contractually agree to settle an employee’s tax liability whilst that employee is on secondment in a foreign country. The objective is to ensure that the seconded employee remains tax-neutral and is in no worse a position than if the
secondment had not been accepted. This practice, which encourages employees to accept secondment assignments in foreign countries, is known as tax equalisation.
A taxable benefit arises if an employer pays part or all of the employee’s South African tax liability. Should the employer also choose to settle the income tax on this benefit, a further taxable benefit will arise. The above process will continue on a recurring basis until a final income tax liability is determined. To simplify this recurring calculation for the taxable benefit of the tax liability in South Africa, SARS accepts the use of a gross-up formula that is calculated as follows:
Steps
(a) Calculate the tax on the “tax-free” salary.
(b) Multiply the tax determined in step (a) by 100 ÷ (100 – marginal tax rate applicable to the employee).
(c) Add the figure determined in step (b) to the “tax-free” salary to obtain the grossed-up salary after iteration.
(d) If the grossed-up salary after iteration as determined in step (c) falls within the same tax bracket as the “tax-free” salary, the calculations in steps (e), (f) and (g) are not required.
(e) If the grossed-up salary after iteration as determined in step (c) falls into a higher tax bracket than the tax bracket that applies to the “tax-free” salary derived by the employee, calculate the tax on the grossed-up salary after iteration from step (c).
(f) Subtract the figure calculated in step (b) from the tax calculated in step (e).
(g) Multiply the figure determined in step (f) by 100 ÷ (100 – marginal tax rate applicable to the employee).
(h) The taxable benefit derived by the employee is equal to the result of step (b) plus the result of step (g) – if applicable. The taxable benefit must be added to the employee’s “tax-free” salary to arrive at the employee’s taxable income.
(f) Employer contributions to medical schemes
A taxable benefit arises in the hands of an employee should an employer during any period directly or indirectly make any contribution or payment to any medical scheme registered under the Medical Schemes Act 131 of 1998 (MS Act) or to any fund which is registered under any similar provisions contained in the laws of any other country where the medical scheme is registered, for the benefit of the employee or the dependants of the employee. The value of the benefit is the amount of any contribution or payment made by the employer for a year of assessment, directly or indirectly, to the scheme. If the contributions by the employer relating to the employee and his or her dependants cannot be specifically attributed, the amount of the taxable benefit is equal to the total contribution by the employer divided by the number of employees for whom the contribution was made. SARS may direct an alternative apportionment that produces a fair and reasonable result if satisfied that this apportionment method does not reasonably represent a fair apportionment.
Exclusions
No value is placed on the taxable benefit derived from an employer by:
- a person who, by reason of superannuation, ill-health or other infirmity, retired from the employ of the employer; or
- the dependants of a person after such person’s death, if such person was in the employ of the employer on the date of death; or
- the dependants of a person after such person’s death, if such person retired from the employ of the employer by reason of superannuation, ill-health or infirmity.
(g) Costs incurred for medical services
A taxable benefit arises in the hands of an employee should an employer directly or indirectly incur any amount (other than the employer contribution or payment to any medical scheme or similar fund as discussed above) for any medical, dental and similar service, hospital services, nursing services or medicines provided to the employee, the employee’s spouse, child, relative or dependant. The value of the benefit is the amount incurred by the employer for these medical services. The amount of the taxable benefit is equal to the amount incurred by the employer for all medical services divided by the number of employees who are entitled to make use of those services if the amount cannot be attributed to a specific employee.
Exclusions
No value must be placed on any taxable benefit:
- resulting from the provision of medical treatment listed in any category of the prescribed minimum benefits determined by the Minister of Health to the employee, the employee’s spouse or children for a scheme or programme of that employer, which: constitutes the carrying on of the business of a medical scheme, or
does not constitute the carrying on of the business of a medical scheme, if that employee and his or her spouse and children are:o beneficiaries of a medical scheme, or o beneficiaries of a medical scheme, and the total cost of that treatment is recovered from that medical scheme; - for services rendered or medicines supplied for purposes of complying with any law of South Africa;
- derived from an employer by: a person who retired by reason of superannuation, ill-health or infirmity;
the dependants of an employee (who was employed at the date of death) after that employee’s death;
the dependants of a deceased retired employee who retired by reason of superannuation, ill-health or infirmity; or
a person who during the relevant year of assessment is entitled to the rebate for persons over the age of 65; - for services rendered by the employer to its employees in general at the employees’ place of work for better performance of their duties.
(h) Employer contributions to insurance funds
A taxable benefit arises in the hands of an employee should an employer during any period make any payment to an insurer under an insurance policy directly or indirectly for the benefit of the employee or that employee’s spouse, child, dependant or nominee. The value of the benefit is the amount of any expenditure incurred by the employer during a year of assessment for any premiums payable under the policy of insurance. Should it not be possible to attribute an appropriate portion of any expenditure for insurance premiums paid by an employer to the employee for whose benefit the insurance premium is paid, the amount of that expenditure in relation to the employee is deemed to be an amount equal to the total amount of expenditure incurred by the employer on insurance policies during that year of assessment for the benefit of the employee divided by the number of employees for whom the expenditure is incurred.
Note: Employer contributions to foreign insurance funds are similarly a taxable benefit in the hands of the employee if such contributions are for the direct or indirect benefit of the employee.
(i) Employer contributions to foreign pension funds
Employer contributions to a foreign pension fund that is similar to an approved South African fund or social security system are not subject to tax in South Africa. Contributions by an employer to a pension fund are made by the employer as a result of an obligation that rests on the employer under rules of the fund and therefore do not accrue to the employee. Contributions by an employer to a foreign pension fund where the obligation to make those contributions vests in an employee under the rules of the fund will result in a taxable benefit in the hands of the employee.
Tax-free benefits, other taxable income, and exempt income will be discussed in the next article.