FRINGE BENEFITS AND INCOME TAX: CAN EMPLOYEES STILL BENEFIT FINANCIALLY FROM FRINGE BENEFITS?

A4BIn the past there were definite financial gains attached to certain fringe benefits granted by an employer to employees. There were also quite a few loopholes which were abused by a number of taxpayers. As a result SARS has clamped down on the tax treatment of fringe benefits by changing the Tax Laws and closing the loopholes.

SARS started taxing the cash value of fringe benefits. The cash value of a fringe benefit is equal to the cost of the benefit to the employer. If the asset depreciates over time, the cash value will have to be re-considered each year, otherwise the employee will be paying too much tax.

The following fringe benefits granted by an employer to an employee will be taxable in the employee’s hands at the cash value as set out below:

  • Private use of a cellphone or computer equipment, except if the private use of the asset is incidental to the business use thereof and the employee uses the asset more than 50% for the employer’s business.The onus to prove that the asset is required to be used outside of the workplace by the employee and mainly for business purposes, rests on the employer and the employee.
  • Company car:The cash value of the company car fringe benefit will be calculated on the original cost of the vehicle to the employer.There are special tax considerations to be taken into account in the following circumstances:
  1. A vehicle not acquired by the employer in a sales or exchange transaction;
  1. Maintenance plans;
  1. Employee contributes towards the cost of the vehicle;
  1. Employee used the vehicle for a period shorter than a month; or
  1. Employee is regularly required to use the motor vehicle for the performance of his/her duties outside their normal working hours.
  • Giving an asset to an employee for free or for less than its actual value:The cash value of the fringe benefit will be the value of the asset less any consideration paid by the employee.
  • Low interest or interest-free loans:The fringe benefit will have a cash value of interest calculated at the SARS official tax rate and be reduced by any interest paid by the employee.
  • Subsidies in respect of loans:The cash value will be equal to the cost of the subsidy to the employer in respect of any interest and/or capital repayments.
  • Employer subsidies to pension funds, provident funds, etc.:The cash value will be the amount of the subsidy paid by the employer.
  • Employer contributions to insurance policies where the employee or a relative of the employee will be benefitted by the policy:The cash value will be equal to the amount of the premiums paid by the employer.
  • Medical aid contributions paid on behalf of an employee:The cash value is equal to the amount paid by the employer.
  • Payment or refund of medical expenses incurred by the employee or his immediate family:The cash value is equal to the cost to the employer.
  • Debt paid on behalf of an employee or releasing an employee from an obligation to pay a debt:The cash value is equal to the amount paid by the employer or the amount of the debt of which the employee has been released.

    There are a number of exceptions where no value will be placed on the payment or the release of the debt. Please contact your tax practitioner for more information.

  • Free or cheap services:The cash value will be calculated as the cost of the service to the employer less any amount paid by the employee.
  • Free meals, refreshments or meal vouchers:

    The cash value of this benefit will be equal to the cost to the employer less any amount paid by the employee.

It is important to ensure that an employee is taxed on the correct amount for a fringe benefit. Taxing an employee on an amount higher than the cash value of a fringe benefit will result in the employee paying too much tax. Taxing the employee on an amount lower than the cash value, thus deducting too little Employees’ Tax will cause the employer to become liable for fines and penalties from SARS.

As can be seen from the above, an employee will be taxed on his/her cost to the employer and it is fast becoming irrelevant whether an employee’s package is structured in a certain way to reduce income tax.

If you would like more information about this topic, please contact us for professional assistance and advice.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Reference List:

ADVANTAGES AND DISADVANTAGES OF TRUSTS

A1BTrusts have various advantages, but unfortunately there are also disadvantages.

Although this is not a complete synopsis of all the pros and cons, our experience may assist you in making decisions about Trusts.

 

Advantages:

  • Growth taking place in the Trust assets settles in the Trust and not in your personal estate.
  • By selling the assets to the Trust, the amount owed to you by the Trust will remain outstanding on the loan account and shall be regarded as an asset to your estate. This amount may be decreased for Estate duty purposes by utilising the annual Donations Tax exemption of R100 000.
  • A Trust offers protection against problems should you become mentally incompetent. This may also make the appointment of a curator to handle your financial affairs unnecessary.
  • A Trust remains confidential as opposed to documents like wills and records of deceased estates which are public documents and therefore open for inspection.
  • A Trust can offer financial protection to disabled dependents, extravagant children or beneficiaries with special needs.
  • A Trust can evade the administrative costs of consecutive estates by making provision for consecutive beneficiaries.
  • A Trust can lighten the emotional stress on your family when you die because the Trust will continue without any of the formalities that are required from a deceased estate.
  • By choosing your Trustees well you can ensure professional asset and investment management.
  • The Trust will enable you to have a degree of control over the assets in the Trust after your death, via the Trustees.
  • After your death and before the estate has been settled the Trust can provide a source of income for your dependent(s).
  • You will prevent your minor child’s inheritance from being transferred to the Guardian’s Fund.
  • You will avoid the problem of trying to distribute assets equally among the heirs.
  • Trust income can be divided among the beneficiaries with lower tax categories after the death of the initiator when individual exemptions may be utilised, but all taxable income kept in the Trust will be taxed at 40% without exemption benefits.
  • Levels of income may be varied according to the changing needs of the beneficiaries at the discretion of the Trustees.
  • Due to the assets remaining the property of the Trust and not the beneficiaries it need not be included in people’s estates as part of their assets when they die, which effects a saving in Estate duty.
  • The Trust assets will be protected from creditors for the same reason.

Disadvantages:

  • You don’t have full control of your assets, as the other Trustees also have a say in the matter.
  • A Trust is registered and the authorities can gain access to it.
  • You could possible choose the wrong Trustees. You could expect problems if the Trustees are vying heirs. This shows how important it is to have at least one independent Trustee.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

SARS VAT REVIEWS AND AUDITS

A2BIt has become a common occurrence for vendors to receive a notice for a VAT review from SARS, which requires the vendor to submit supporting documentation in respect of a specific VAT201 return within 21 days. If the vendor fails to submit the supporting documentation, SARS may issue an additional assessment, disallowing the full value of the input tax claimed for that period. The vendor then needs to lodge an objection against this additional assessment and submit the necessary supporting documentation to substantiate the input tax claimed.

When a VAT return is submitted, that return is measured against certain pre-set risk factors on the computerised system of SARS. If certain parameters according to this system are exceeded, a review letter will be issued automatically by the system to the particular VAT vendor. No historical profile is maintained per vendor, and there is no limit on the number of review letters that can be issued. SARS can issue a review letter for each VAT period, even for periods where the vendor had made a payment to SARS.

During December 2011 SARS issued a number of limited scope audit engagement letters to various large companies, more specifically companies in the construction industry. The information requested was to be submitted within 21 days from the date of the engagement letters, which were issued between 12 and 20 December 2011. Many of the companies had already closed for the holidays, and had limited or no staff available.  Unfortunately the legislation provides no relief in this regard, except that the notice period should be reasonable. The engagement letters focused in particular on:

  • the VAT treatment of indemnity payments received;
  • bad debts recovered;
  • creditors older than 12 months on which an input tax deduction was claimed;
  • the sale of fixed assets;
  • input tax claimed on deductions relating to “motor car” and “entertainment” expenses; and
  • input tax claimed on supplies that are defined as “financial services”.

Regardless of the care taken by vendors to ensure the correct treatment of VAT claims, errors may still occur. Basic errors made by vendors include the claim of input tax deduction on the use of a rental vehicle for business trips, if that vehicle is a “motor car” as defined.  Year-end functions and staff refreshments are defined as “entertainment”, and no input tax deductions may be claimed. It is only when these supplies are consumed or used to make taxable supplies, that a valid input tax deduction may be claimed.

Amongst others, SARS focuses on the correct VAT treatment of the following during the performance of an audit:

  • validity of VAT invoices issued and received;
  • zero rated sales;
  • employee benefits as defined in the Seventh Schedule of the Income Tax Act;
  • insurance claims received; and
  • sale of capital goods.

It is very important that the staff responsible for the keeping of the accounting records should be adequately trained and informed in this regard, and sufficient controls should be in place to avoid these errors.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

PROVISIONAL TAX FOR INDIVIDUALS: DID YOU KNOW?

A3BProvisional tax is not a separate type of tax  but pre-payments on income tax for a specific tax year.  The aim of provisional tax payments is to help taxpayers to fulfil their tax responsibilities by spreading tax payments over a tax year. After SARS has assessed a taxpayer for income tax, the provisional tax payments will be set off against the final liability for income tax for a specific tax year. 

 

Underpayment of provisional tax

If a taxpayer did not pay enough provisional tax during the tax year and there is a liability after offsetting provisional tax against income tax due on assessment, the taxpayer will be liable for penalties and interest on underpayment of provisional tax. The table below provides more information on the penalties and interest applicable to the underpayment of provisional tax. 

Overpayment of provisional tax

If provisional tax was overpaid, i.e. provisional tax payments were more than the assessed income tax liability for a tax year, the excess amount will be refunded to the taxpayer with interest. Please refer to the table below for more details on overpayment of provisional tax. 

Three provisional tax returns per tax year

The provisional tax return/IRP6 must be submitted two or three times per year, depending on the circumstances of the taxpayer.

The following table sets out the deadlines, penalties and interest, and calculations for the different provisional tax payments for the current tax year starting on 1 March 2015 and ending on 29 February 2016.

Please note: the interest rates below are as per the SARS website on 13 April 2015 and subject to change as published in the Government Gazette from time to time.

Description First provisional tax return – IRP6 (compulsory) Second provisional tax return – IRP6 (compulsory) Third provisional tax return – top-up payment – IRP6(3) (optional)
Deadline for submission  and payment (if applicable) of IRP6 return 31 August 2015 29 February 2016 30 September 2016
Taxpayer fails to submit provisional tax return (IRP6) SARS may estimate taxable income and amount of tax payable N/A
Penalty payable by taxpayer on late payment of provisional tax 10% of amount paid late
Interest payable by taxpayer on late payment of provisional tax 9% per annum on amount paid late
Penalty payable by taxpayer  on under-estimated provisional tax 20% of amount under-estimated
Interest payable by taxpayer on under-estimated provisional tax (interest is not tax-deductable) 9% per annum of amount under-estimated
Interest payable by SARS to taxpayer on over-estimate of provisional tax (interest is taxable) 5% per annum on amount over-estimated
SARS’ suggested guidelines for the calculation of provisional tax payments Half of total tax on estimated taxable income for the tax year Total tax on estimated taxable income for the tax year Total tax on estimated taxable income for the tax year
Less: PAYE for the first 6 months of the tax year Less: PAYE for full tax year (12 months) Less: PAYE for full tax year (12 months)
Less: Foreign tax credits (if applicable) Less: Foreign tax credits (if applicable) Less: Foreign tax credits (if applicable)
Less: First provisional tax payment Less: First provisional tax payment
Less: Second provisional tax payment
First provisional tax payment due (note 1) Second provisional tax payment due (note 1) Third provisional tax payment due

Note 1: If there is not provisional tax due, the IRP6 return must still be submitted.

As can be seen from the above table, provisional tax payments are based on an estimate of the taxpayer’s taxable income. Therefore it is crucial to estimate taxable income and tax-deductible expenses as accurately as possible.

If you need professional assistance with the calculations, submission or payment of any of your provisional tax returns, please do not hesitate to contact our office. Our staff are friendly and knowledgeable and looking forward to the opportunity to assist you. 

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

Reference List:

  • sars.gov.za