Author: Ian Hurst — Managing Director, Paymaster People Solutions
Fringe benefits and how they are taxed has the potential to become a complicated discussion. To begin the discussion, this introductory article about fringe benefits outlines a basic foundation for the reader.
Firstly, 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 (although some might disagree) when one works for a particular employer. Secondly, the word “fringe” may be defined as being “on the edge”, “a border” or “not part of the main”. Consequently, 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).
A few simple administrative rules
When an employee receives certain fringe benefits, these need to be added to his/her remuneration package and taxed accordingly. Before looking at some fringe benefit examples, let us first turn our focus to the employer’s obligations as prescribed under the relevant Acts: specifically, the seventh schedule to the Income Tax Act No. 58 of 1962, and the Tax Administration Act No. 28 of 2011.
- First, the employer must determine the cash value of the fringe benefit received by the employee.
- Second, the employer must add the aforementioned cash value to the employee’s remuneration. Accordingly, the employee may be obliged to pay tax on his/her fringe benefits.
- Third, 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 therein.
Categories of fringe benefits
The following categories of fringe benefit are identified in the Guide for employers in respect of fringe benefits (2018 tax year).
- When receiving an asset or gift at less than its value. This is best explained with an example, such as an employee who receives an award for bravery or long service. Think of it this way: wouldn’t it be bizarre if an employee was expected to pay for his/her long-service award? It certainly would be. For this reason, the Receiver of Revenue (i.e. SARS) recognises that employees receive long-service awards. For this reason, SARS places a ‘cap’ (i.e. sets a limit on) on the amount which may be regarded as a tax-free fringe benefit. This value is currently set at R5000 per year. Note: this particular fringe benefit category can get rather involved, with several examples relating to “movable assets” and “asset of no value” being mentioned. Readers wishing to know more are invited to watch this space for a follow-up article, or to refer directly to the Act (referred to in this article) for more details.
- When an employee is granted personal use of an asset for private purposes (excluding a house and/or a motor vehicle). The guide states that the employee should be taxed according to the market-related value of such an asset. Note: specific rules give direction on how to calculate such a market-related value. This may also depend upon the type of ownership and usage rights.
Editor: watch this space for a follow-up article that will deal with this in more depth.
- 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.
Note: in certain cases, exceptions to this rule may apply, particularly when dealing with the reason an employee receives meals, as well as the location where his/her meals are consumed.
- A large section of the guide deals with accommodation fringe benefits. Whilst a detailed discussion of all aspects falls outside of the scope of this article, suffice it to say that when an employee benefits from reduced-cost (or free) accommodation, a taxable amount must be added to the employee’s remuneration package.
- Free or cheap services. When an employee benefits from the use of company or supplier goods and/or services and which are determined to be received at an amount below the market value of such goods and/or services, then an amount needs to be added to the employees remuneration package. For example, if the employee (or his/her children receive free school or tertiary education) then the taxable value of the fringe benefit is the marginal cost of the education being received.
- Low or interest free debt. When an employee receives a financial loan that is greater than R3000, and the interest rate levied on such a loan is less than the current SARS interest rate, then a taxable fringe benefit value must be determined. In this case, the difference between the interest rate charged and the current SARS interest rate must be treated as taxable income which is to be added to the employee’s remuneration package. Note: smaller loans of an incidental nature do not attract interest and are not regarded as a taxable fringe benefit either.
- Subsidies in respect of debt. When an employer pays an employee’s debt whilst also not requiring the need to recover the money paid to settle the debt, then the full amount (of the debt paid off by the employer) be treated as taxable income and added to the employee’s remuneration package.
- Employer contributions to insurance and/or medical schemes and/or medical costs incurred by the employer. The full contribution made by the employer, on behalf of the employee, and needs to be treated as a taxable fringe benefit. Note: the exception is where the employer pays for an “injury on duty” medical bill. Such an ad-hoc medical expense will instead be recovered by the employer, from the Workmen’s compensation fund (which is covered under the Compensation for Occupational Injuries and Diseases Act — see basic claim procedure here).
- 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.
In closing, I invite you to watch this space for more articles which will deal with each of the fringe benefits that have been briefly discussed in this article. Should you have further questions or comments related to this topic, you are encouraged to email me, Ian Hurst, and I will be happy to respond to your correspondence.
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