Do you produce promotional items to market your business? And, if so, do
you give those items to your employees?
If so, have you considered that there may be an employees` tax implication
as a consequence? Why? Because the employee may be receiving a "benefit or
advantage" which has arisen "by virtue of" his or her employment with you!
Consider these situations:
* Your company is sending its sales staff on a sales conference which is
being hosted by the company. On arrival, each employee is given a whisky
decanter with the company`s logo engraved;
* Your company is sending its sales staff on a sales conference which is
being hosted by the company. On arrival at the conference, each employee is
given a leather folder with the company`s name on it, to be used during the
conference and for the employees to use afterwards when visiting customers;
* You are holding a function for clients. You would like your public
relations people to look smart, so you tell each one to go out and buy a
dress (for the women) or a suit (for the men). The employee may spend up to
R1 000. After the function, you say to your employees that they are welcome
to retain the garments;
* At the same function you take the garments back, and sell them to a
second hand clothing store for an average of R500 each; and
* At the same function you provide jerseys to the staff and watches which
have the company`s logo in bright colours all over them.
What might the tax implications be for the employees involved in each
situation?
* Clearly, the employee derives a personal benefit from being given the cut
glass decanter, and that benefit has arisen by virtue of the employee`s
employment with your company (you have given it to him because he is an
employee and has attended the conference). There is no specific business
purpose that the decanter might have, in terms of which one might argue
that the private use is incidental. Consequently, the cost of the decanter
should probably be included in the employees` taxable income to be taxed.
* The folder is clearly to be used for business purposes, and any private
use would be incidental. Consequently, it can be argued that the cost need
not be included in the employee`s taxable income.
* The clothing given to the employees after the function constitute a
benefit in the employee`s hands, which has arisen by virtue of his or her
employment. Since the clothes were not initially bought for the purpose of
giving them to the employee as a benefit, but to be used at the client
function, it may be argued that the market value of the clothes should be
included in the employee`s hands and not the cost to your company. (The
rule is that the market value must be included unless the asset was
acquired specifically to give it to the employee). The market value would
be somewhat less than the cost because the clothes would, at that point, be
second hand.
* If the clothes are not retained by the employees, they will not be taxed
on any benefit.
* If the logo is large, such that the employee would not wish to wear the
clothes or the watch during his or her leisure time, it may be argued that
their purpose is purely business and any private use incidental. In such a
case a taxable fringe benefit amount would not need to be included in the
employee`s income. This would be particularly true if the garments are left
on the company premises when not used for a function.
It may seem absurd to have to consider these items and their tax
consequences, but better to do so than to discover you should have deducted
employees` tax when you haven`t.