In last week's article, I discussed the fact that the South African Revenue Services (SARS) has found a lucrative source of tax for collection, in the form of non-cash fringe benefits put in place by employers who have not been diligent in ensuring that the benefits have been properly implemented.
This week, I would like to look at areas where benefits are being provided, but which, perhaps, are not be being taxed, due to an impression that such benefits may be legitimately provided tax free.
Again, if you are an employer and you are providing these benefits, and not taxing them correctly, you could be exposing yourself to potential penalties and interest, as well as to the risk that you might have to pay the tax, and may not be able to recover it from the employee at a later stage.
The most common areas where we see errors are as follows:
* You may have provided your employees with residential accommodation for many years now. To do this you may have leased accommodation from a third party and made its use available to your employee for no cost. You have taxed this benefit in your employees hands in terms of a formula, which is based primarily on his or her last year's remuneration. If you are still using this formula, you may well be exposing yourself to the tax and penalties that arise when employees' tax is underpaid.
This is because, from March 1 1999, the taxable benefit will equal the rental you pay for the accommodation, unless it is customary to provide accommodation in your industry (as in farming or mining), or it is necessary for you to provide the accommodation - in order to enable your employee to perform his or her duties, or because he or she must move around frequently, or because you don't own accommodation. In addition, the objective of providing the accommodation must not be to provide a tax benefit.
* You may have a policy whereby you give long service awards to employees who have been loyal to you and have, consequently, remained with your business for a long time. If you give such an award, your employee will be taxed on its cost to you, unless it is a gift (not cash) and it costs less than R2 000. In addition, in order to be tax free, it must be given to the employee after 15 years of unbroken service, or every 10 years thereafter.
* You may need your employees to spend time out of town on business and they may ask you to secure their home because they are away. Although you may agree to do this, because you feel responsible for the safety of their home and family whilst they are away, they are clearly benefiting privately from the fact that they do not have to pay for the security themselves. This benefit is not considered by SARS to be a benefit, it is merely incidental to the business benefit. Consequently, the amounts you spend on providing the security, in the form of installing an alarm system, burglar bars and/or the provision of an armed response service, must be treated as a taxable amount in your employees' hands and taxed.
* If you give your employee a travel allowance because he or she uses his or her own car for business purposes, but you also pay for all his or her petrol via an account you have with the local petrol station, the amount you pay for the petrol must also be added to the amount reflected as the employee's travel allowance. And he or she must claim a deduction for travel costs against the allowance in his or her tax return.
* You may organise for your employee to acquire an asset, for example, the company car you lease which is used by him or her, from a third party (for example, the car sales garage) at a good price, that is, with a discount. The fact that you have arranged this as a benefit to your employee, means that the amount of that benefit must be taxed in your employee's hands, because it arose as a consequence of his or her employment.
These are just a few examples of areas where errors are made. If you have any doubts, you probably need to talk to your tax consultant.