FRINGE BENEFITS ON RESIDENTIAL ACCOMMODATION

A3bEmployees’ remuneration packages are often comprised of more than only a monthly cash salary component. Many employees also receive various other benefits from their employers, be it in the form of an interest free loan, use of an employer-owned vehicle, vouchers or gifts, or the provision of residential accommodation. These fringe benefits are all required to be quantified by the Seventh Schedule to the Income Tax Act, 58 of 1962, and which benefits are required to be included in such recipient employees’ taxable income and subject to income tax (and PAYE).

The provision of residential accommodation to employees is at times controversial and complicated. This article seeks to focus on the calculation of this specific form of fringe benefit popularly provided to employees, and is especially relevant in certain specific industries such as mining and farming, although by no means limited thereto.

The standard approach prescribed by paragraph 9 of the Seventh Schedule to the Income Tax Act is to calculate the fringe benefit by applying the below formula and to arrive at the appropriate “rental value” to be placed on the accommodation supplied to the employee:

(A – B) x C/100 x D/12

A:  the “remuneration proxy” (typically, the remuneration paid to the employee by that employer during the previous tax year);

B:  an abatement of R75,000 (for 2017 specifically, which amount is linked to the annual primary rebate enjoyed by taxpayers who are individuals);

C:  an amount of 17 (increased to 18 if the accommodation consists of at least 4 rooms and either the accommodation is furnished or power is supplied by the employer, and increased further to 19 if the accommodation is both furnished and power is supplied at the cost of the employer); and

D:  the number of months that the employee was entitled to use the accommodation.

The value of the fringe benefit must be declared on the employee’s IRP5 under code 3805.

Where the employer has obtained the accommodation from an unconnected person to supply to its employee, the fringe benefit value adopted may be such actual cost to the employer if less than the fringe benefit value determined in terms of the above calculation. Any fringe benefit value should further be decreased by any amount contributed thereto at the employee’s own expense. Finally, it is worth noting that no fringe benefit arises if the employer is providing accommodation to an employee where necessary for the employee to spend time away from his usual place of residence to perform his/her duties.

It should be noted that the above is intended to serve as general guidance only. Several nuances and specific provisions exist where international considerations come into play, where the employee has a fixed or contingent interest in the property concerned or where the property is made available for holiday purposes only.

This article is a general information sheet and should not be used or relied upon 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. Errors and omissions excepted (E&OE)

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.

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