fringe benefits : yesterday, today, tomorrow
TRANSCRIPT
FRINGE BENEFITS:
YESTERDAY, TODAY, TOMORROW
by
CHRIS PRETORIUS
SHORT DISSERTATION
presented in the partial fulfilment of the requirements of the degree
MASTER COMMERCII
in
TAXATION
of the
FACULTY OF ECONOMICS AND BUSINESS MANAGEMENT
at the
RAND AFRIKAANS UNIVERSITY
STUDY LEADER: PROF. K. JORDAAN
SEPTEMBER 1997
ii
SAMEVATTING
FRINGE BENEFITS: YESTERDAY, TODAY, TOMORROW
deur
CHRIS PRETORIUS
STUDIELEIER: PROF. K. JORDAAN
DEPARTEMENT: REKENINGKUNDE
GRAAD: M. COM. (BELASTING)
Inleiding
Die doel van hierdie studie is om soveel as moontlik aspekte en uitsonderings van
belasting op byvoordele vir beide die werknemer en die werkgewer te identifiseer en
betekenisvol te omskryf ten einde tot 'n gevolgtrekking te kan kom.
Die relevansie van die belasting op byvoordele is toenemend - nie net vir die huidige
strukturering van pakette nie, maar ook met die oog op moontlike verandering in die
huidige wetgewing. Dit is verder 'n alledaagse feit dat die regering van vandag op soek
is na bronne vir die finansiering van die Her-Opbou en Ontwikkelings Program (hierna
verwys as HOP) en dat daar ook op aandrang van die meer radikale vakbonde gelet
moet word op die kwessie van die 'herverdeling van rykdom'. Byvoordele, normaalweg
ontvang deur die hoer inkomste groep, is 'n bale aanloklike bron vir die finansiering en
oplossing van bogenoemde kwessies.
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Belasting op byvoordele
Belasting op byvoordele kan onderverdeel word in die volgende komponente:
Definisie van byvoordele;
Die waardasie van byvoordele;
Byvoordele wat nie belas word deur die Kommissaris nie;
Die aftrekbaarheid van die koste van byvoordele vir die werkgewer;
Die Belasting op Toegevoegde Waarde (hierna BTW genoem) - implikasies van
byvoordele vir die werkgewer;
Skemas alreeds geklentifiseer deur die Ontvanger van Inkomste en skemas
huidiglik in gebruik deur belastingkonsultante in die praktyk; en
Die byvoordele beskikbaar in geIdentifiseerde internasionale lande.
Die belasting op byvoordele moet uit die oogpunt van beide partye beskou word,
naamlik die van die werknemer en die van die werkgewer. Vir die werknemer is dit
belangrik om kennis te dra van byvoordele beskikbaar en die waarde daarvan te
verstaan ten einde dit ook te kan toepas in die strukturering van vergoedingspaket. Die
werkgewer is belas met die koste van die byvoordele en die moontlikheid dat sommige
van hierdie koste nie aftrekbaar- sal wees van sy belasbare inkomste nie. Bykomend
hiertoe dit is daar ook die moontlike BTW - implikasies van byvoordele toegestaan aan
die werknemers.
Die bespreking is gekonsentreer op relevante hofsake afkomstig uit die appelhof,
hooggeregshof en die spesiale inkomstebelastinghof. Die kollig is ook waar moontlik
gevestig op die uitsonderings en skemas voortspruitend uit belasting op byvoordele. In
plaas van die herhaling van uitgebreide besprekings deur erkende belastingkenners, is
daar eerder gepoog om slegs 'n gedetaileerde opsomming van die belangrikste aspekte
van byvoordele weer te gee.
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INDEX
Page 1. INTRODUCTION 1 1.1 Subject of the Research 1 1.2 Background of the Research 1 1.3 Motivation and Aim of the Research 3 1.4 Approach to the Research 6 1.5 Summary of the Contents per Chapter 7 1.6 Conclusion 8
2. DEFINING FRINGE BENEFITS 10 2.1 Introduction 10 2.2 A Text Book Description of Fringe Benefits 11 2.2.1 Defining Gross Income 11 2.2.2 Taxable benefits acquired on account of a service or a position 13 2.2.3 Word definitions 13 2.2.4 Taxable fringe benefits 15 2.3 Conclusion 19
3. THE TAXABLE VALUE OF FRINGE BENEFITS. 20 3.1 Introduction 20 3.2 Entertainment Allowances 21 3.3 Travelling Allowances 24 3.4 Subsistence Allowances 29 3.5 Taxable Benefits Arising from Employment or Office 30 3.5.1 Introduction 30 3.5.2 Use of asset 31 3.5.3 Use of a motor vehicle 32 3.5.4 Residential accommodation 35 3.5.5 Free or cheap services 38 3.5.6 Interest on loans 40 3.5.7 Subsidy in respect of loans 42 3.5.8 Employee's debt 43 3.6 Gains by Directors or Employees in Respect of Marketable Securities 45 3.7 Conclusion 49
4. THE FRINGE BENEFITS THAT ARE EXEMPT FROM THE TAXABLE INCOME OF THE TAXPAYER 50
4.1. Introduction 50 4.2. Relocation Expenses of Employee 51 4.3. Education Grants to Employees' Children 53
4.4. Loans to Employee under Share Incentive Scheme 53 4.5. Employees' Share Incentive Schemes, Cancellation or Repurchase 54
4.6. Gratuity by Employer for Obtaining Degree or Diploma or Passing Examination 55
4.7. Employees' Uniforms 56
4.8. Taxable Benefits Granted Prior to Part-time Re-employment 56
4.9. Bursaries and Scholarships 58 4.10. Conclusion 59
FRINGE BENEFITS AND TAX PLANNING 60 5.1 Introduction 60 5.2 Tax Planning Opportunities Identified by the Legislator 61 5.2.1 Holiday accommodation 61 5.2.2 Employee occupying more than one residential unit 62 5.2.3 Hire of employee's (or associated persons) house 62 5.2.4 Employee, spouse or minor child entitled or obliged to buy accommodation
after a period 63 5.3 Tax Planning Opportunities Identified by Practicing Tax Consultants 64 5.4 Conclusion 66
THE DEDUCTIBILITY OF THE COST OF FRINGE BENEFITS FOR THE EMPLOYER 67
6.1 Introduction 67 6.2 Principles Regarding the Deductibility of Costs in General 68 6.2.1 Carrying on a trade in the Republic 70 6.2.2 Expenditure or loss 70 6.2.3 Actually incurred 71 6.2.4 During the year of assessment 72 6.2.5 In the production of income 73 6.2.6 Application to fringe benefits 75 6.3 Deductibility of Specific Costs Related to Fringe Benefits 75 6.3.1 Costs related to services provided to the employees of an employer 76 6.3.2 Travelling expenses 77 6.3.3 Entertainment expenses 79 6.3.4 Expenditure on housing for employees 80 6.4 Conclusion 82
IMPLICATIONS OF THE VALUE ADDED TAX ACT ON THE GRANTING OF FRINGE BENEFITS 83
7.1 Introduction 83 7.2 Employee's Remuneration 84 7.3 Fringe Benefits Subject to Value Added Tax 86 7.3.1. The time implications for Value Added Tax as discussed 87 7.3.2. The reason for the provisions of fringe benefits in the Value Added Tax Act 87 7.3.3. Fringe benefits being affected by the Value Added Tax Act 89
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7.3.4. Published article about the Value Added Tax implications on the travel allowance and company car fringe benefits 91
7.4 Conclusion 93
THE TAXATION OF FRINGE BENEFITS IN OTHER COUNTRIES 95 8.1. Introduction 95 8.2. Australia 96 8.3. Canada 99 8.4. Japan 106 8.5. The Netherlands 110 8.6. New Zealand 112 8.7. Switzerland 116 8.8. United Kingdom 120 8.9. United States of America 126 8.10. Conclusion 129
CONCLUSION , 130 9.1. Summary of the Research 130 9.2. Conclusion of the Research 131 9.3. Recommendation 132
SOURCES Books 133 Commissions 134
C. - Acts 135 Articles 135 Table of Cases 138
1
CHAPTER 1
INTRODUCTION
1.1 Subject of the Research
1.2 Background of the Research
1.3 Motivation and Aim of the Research
1.4 Approach to the Research
1.5 Summary of the Contents per Chapter
1.6 Conclusion
1.1 SUBJECT OF THE RESEARCH
Fringe benefits in all its different understandings and debates is discussed
in this research, in accordance with the Income Tax Act, Act 58 of 1962
(hereafter called the Act).
The research is restricted to the provisions of the Act regarding fringe
benefits as applied by the Commissioner of Inland Revenue (hereafter
called the Commissioner). The other forms of direct taxes in the Act is not
dealt with and the only indirect tax that is discussed in this research is
Value Added Tax (hereafter called VAT).
2
1.2 BACKGROUND OF THE RESEARCH
To try and summarise the history of fringe benefits in a few paragraphs is
virtually impossible. The following comments and statements by certain
well-known tax consultants in a published tax magazine, are presented
below in an attempt to achieve this:
Fringe benefits phase-in
"... The taxation of fringe benefits is an emotional issue. And the manner in which the new regime for the taxation of these benefits has been introduced into our law has brought credit to no one. But the painfully protracted process has been instructive. It has been a Microcosm of the greater legislative process, and must have opened the eyes of many taxpayers. When the Seventh Schedule was introduced, there were four benefits to be phased in; the right of use of an asset (other than residential accommodation or a motor vehicle), the right of use of a motor vehicle, the occupation of residential accommodation and the granting of an interest-free or low-interest loan. When the Commissioner of Inland Revenue, having regard to the circumstances, is satisfied that a taxable benefit has been granted to an employee in substitution for remuneration that would normally have been payable to the employee in cash or with the sole or main object of providing the employee with the benefit of the phasing-in relief, the phasing-in relief will be unavailable ...." (Stein, 1985:4).
Fringe benefits in 1989
"... It is hard to believe that we are already into our forth year of so-called fringe-benefits taxation, and for many fringe benefits the 'phasing-in' concessions are running out this year. But does this circumstance mean that the structuring of remuneration in general, and fringe-benefits planning in particular, is any less relevant in the present year of assessment than in 1986, when the fringe-benefits legislation first came into effect? Available options mentioned in 1989 that were to be kept in mind by the employers and employees for structuring packages: acquisition of an asset at less than actual value; right of use of an asset other than housing or vehicles; right of use of a motor
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vehicle; meals, refreshments and vouchers; residential accommodation; free or cheap services; interest-free or low-interest loans; subsidies on loans and payment of employee's debt ...." (Lockhart-Ross, 1988:137).
Remuneration confusion
"... The employment practice of offering senior employees a flexible remuneration package is now commonplace in South Africa. Under this policy the employer will stipulate a maximum amount that he is prepared to spend on a particular employee and will within prescribed parameters, permit him to structure this amount to suit his personal financial situation. An employee may, therefore, opt to take some portion of the amount in the from of allowances and fringe benefits. One of the most important issues stemming from this concept of a flexible package is how to treat the employee's earnings for pension fund purposes. Should only the basic cash-salary component be pensionable or should the employee's pension fund contributions and ultimate pension benefits be based on the full value of his package. Going on to state the effect of allowances and fringe benefits of a flexible package on the pension contributions and ultimate pension to be received when retired ...." (Lockhart-Ross, 1991:7).
Cafeteria remuneration packages, a shrinking menu?
"... In addition, in accordance with a recommendation by the Margo Commission, it has become Inland Revenue's stated policy to move towards a tax system in which the true benefit of employment perks will be fully taxed in the same way as remuneration paid in cash. The author concludes with the possible lists of fringe benefits that fall under the possible sources still available: List of components of remuneration packages that existed in the 1989 year of assessment and their normal tax treatment. List of perks attacked by Inland Revenue prior to the 1991 Income Tax Act. List of perks attacked by Inland Revenue through the amendments contained in the 1991 Income Tax Act ...." (Lockhart-Ross, 1991:122).
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1.3 MOTIVATION AND AIM OF THE RESEARCH
The development of fringe benefit tax over a complete spectrum of
taxpayers, is the one topic on which much has been said and written, but
no satisfactory, useful information rendered yet. Fringe benefits are no
longer relevant only to the salaried personnel in a company, but today,
after the latest democratic development in our country, also to the Re-
developement Programme (hereafter called the RDP programme). Not
that there are any prospects of fringe benefits for wage labourers, but the
possibility exists that the RDP programme could be financed from the
increased tax on fringe benefits of so-called senior employees in the
business sector.
Enough of philosophy and prediction - let the focus rather be on the
present situation. It is essential to paraphrase definite problems to create
a structure for research study.
The issue of fringe benefit tax and the adherent implications, saw the light
in 1914 and can be illustrated by the following illustration by Broomberg:
"... (the Commissioner) can fall back only on the provisions of paragraph (i) of the definition of `Gross Income'. This provision was embodied in the original Income Tax Act introduced into South Africa by General Smuts as the then Minister of Finance in 1914 and the wording of the paragraph remains quaint: Every taxpayer is required to include in his Gross Income: `the value during the year of assessment of any quarters or board or residence or of any other benefit advantage granted in respect of employment or to the holder of any office ...'. In a sense this provision actually detracts from the power of the Commissioner to assess tax in respect of employment. Thus, it will be remembered that the provisions of paragraph (c) included in a taxpayer's Gross Income any amount, including any voluntary award received or accrued in respect of services rendered or to be rendered. Furthermore, the opening words of the definition of 'Gross Income' made it clear that it was a total amount in cash or otherwise' which was received by or accrued to a person which
5
had to be included in Gross Income. In other words, The Commissioner always had the right, under paragraph (c), to include any amount, whether in cash or otherwise, and including any voluntary award, received or accrued in respect of services rendered .". (Broomberg, 1983:182)
Despite the implementation of legislation referred to by Broomberg above,
a lack of efficiency exists in the implementation of the tax on fringe
benefits. The major subjective question on the 'value to the taxpayer'
mainly contributed to the various investigations on fringe benefit tax. The
first investigation launched, was that of the Franzen Commission in 1970
where various others were preceded in the slope upwards to new
legislation that would later be included in the Income Tax Act of 1984.
Ever since then, changes in legislation also followed investigations by the
Margo Commission in 1986 and possibly the Katz Commission in 1994.
For the further scrutiny of fringe benefits, it is essential to differentiate
between the viewpoint of the employer and that of the employee. From
the employee's perspective, the following aspects need to be considered:
the nature of fringe benefits; the estimated value of a fringe benefit that
should be included in the taxable income of the taxpayer; which fringe
benefits are exempted; which aspects of the income tax act need to be
considered in the assessment of taxable fringe benefits. Relevant factors
from the viewpoint of the employer, are the deductibility of awarded fringe
benefits on the assessment of the employer's taxable income and VAT
implications for the registered employer. This information already opens
up a maze of possible complications and problem areas which confront
the consultant as well as the uninformed beneficiary.
The divergent, though successful practices regarding fringe benefits
applied abroad, disclose a deficiency in the application thereof in South
Africa. It is, therefore, advisable that the study be extended to the
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investigation of such practices that could possibly influence future
legislation. This information confirms that fringe benefit tax is not merely
another interesting field of study, but indeed a topic to be investigated in
depth.
The auditor was finally motivated to undertake this specific study when
working students, during lectures by the author on Aspects of Tax to the
Financial Management honours students, pointed out that the definition of
relevant aspects of fringe benefit tax had shortcomings in practice. This
urged the need to study the Income Tax Act in more detail.
The compoiition of a remuneration structure becomes increasingly
relevant - especially when seen in the light of the tendency of unstructured
packages being offered by employers. Where the employee currently
might find himself in the position of having to structure his own package
from an offer of R 180 000 annually, with the tax implications unknown to
him, it is essential to release relevant information as widely possible.
With the increasingly higher demands of the labour market, it is of vital
importance that the employer should be informed about the deductibility of
salaries and wages, and more specifically fringe benefits, in order to enter
into meaningful wage negotiations.
Major companies should also be conversant with the VAT implications of -
fringe benefits to avoid owing material amounts to the Receiver of
Revenue due to ignorance.
This study is, therefore, conducted to identify as many aspects of fringe
benefit tax as possible to the employer as well as employee, but it also
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aims to render the necessary advice to deal with any question arising from
the structuring of remuneration packages and the tax implications thereof.
1.4 APPROACH OF THE RESEARCH
The literature used in this research consist of court cases, relevant articles
and studies, well known textbooks on the subject, the Act and any other
relevant act identified in the research.
1.5 SUMMARY OF THE CONTENTS PER CHAPTER
The following summary gives an overall view of the contents of this thesis
per chapter.
Chapter 1 presents an overview of the motivation, background and aim of
the research, as well as a short summary of the different chapters.
In chapter 2 the definition of fringe benefits is compiled according to the
different views expressed by the best-known and important textbooks
available on the Income Tax Act. The author finally attempts to compile a
definition that could be understood by the 'man on the street'.
Chapter 3, covers the taxable value of all possible fringe benefits
available according to the Income Tax Act per relevant articles as well as
the Seventh Schedule. Exceptions identified from court cases and
relevant articles, were also included.
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Chapter 4 provides a list of all possible fringe benefits that could be used
in structuring a remuneration package, but contrary to the previous
chapter, all these benefits are exempted from the taxable income of the
taxpayer according to current legislation.
Chapter 5 describes the possible tax planning opportunities available to
the taxpayer from two different viewpoints. The one relates to
opportunities implemented in the past by the taxpayer - to which the
Commissioner retaliated with anti-avoidance legislation. The other relates
to any further opportunities as identified by practicing tax consultants in
South Africa.
In chapter 6 the next main topic of this research is discussed in detail,
namely the deductibility of costs originating from fringe benefits awarded
to the employee, by the employer in his calculation of his taxable income.
This discussion was done according to the current Income Tax Act and
the most relevant decisions in essential court cases.
Chapter 7 identifies the possible Value Added Tax (hereafter called VAT)
implications according to the VAT Act that could result from the situation
where the employer is incurring certain costs or expenses to supply the
employee with the fringe benefit, but also where certain fringe benefits are
assumed to be a taxable output transaction as stipulated by the VAT Act.
Chapter 8 takes a brief look at fringe benefits available to taxpayers
internationally and was done in terms of employer and employee
requirements in eight other countries. The tax implications for the
taxpayer, sent by his employer on secondment to a foreign country, were
also taken into account and discussed.
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Chapter 9 provides finally a summary, conclusion and recommendation of
the research.
1.6 CONCLUSION
The door to the wide world of fringe benefits has now been opened to the
reader, and it would be appropriate to end the discussion with the
following statement by Broomberg:
"... Par (i) of the definition of Gross Income has been introduced by the Income Tax Act of 1914 by General Smuts (Minister of Finance) with the focus on the following wording:
"... Every taxpayer is required to include in his Gross Income: 'the value during the year of assessment of any quarters or board or residence or of any other benefit or advantage granted in respect of employment or to the holder of any office ..."
(Broomberg, 1983:182).
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CHAPTER 2
DEFINING FRINGE BENEFITS
2.1 Introduction
2.2 A Text Book Description of Fringe Benefits
2.2.1 Defining Gross Income
2.2.2 Taxable benefits acquired on account of a service or a position
2.2.3 Word definitions
2.2.4 Taxable fringe benefits
2.3 Conclusion
2.1 INTRODUCTION
In this chapter the definition of fringe benefits is being discussed from the
different views expressed by some well known authors of important
textbooks available on the Income Tax Act, Act 58 of 1962 (hereafter the
Act).
The following statement concerning the misconception of the extent of
fringe benefits was recently reported in the daily press (Meyer, 1995:S3):
"... As 'n mens van byvoordele praat, gaan gesprekke gewoonlik oor belasbare voordele, soos 'n huissubsidie of 'n motor. Die belastingnet strek ongelukkig bale wyer as dit. Daar is verskeie ander byvoordele wat werknemers van 'n ondememing ontvang wat belasbaar is ..."
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This quotation shows the present-day ignorance of taxpayers and has
impelled the author to ascertain the real meaning of a fringe benefit. In
the compiling of a definition that will be understood by the 'man in the
street', it would be senseless to focus only on the exact verbalisation of
the Act. The trend that was rather persued, was to investigate the
description of fringe benefits as rendered by most renowned and leading
text books and consequently compile an intelligible definition congruent
with the Act.
Set out below is the different views of some well known authors of
textbooks on the fringe benefits identified in the Act.
2.2 A TEXT BOOK DESCRIPTION OF FRINGE BENEFITS
It should be kept in mind that all premises described here are based on
decisions of judges in relevant court cases. The first approach
investigated was that of Huxham & Haupt, (1995:367).
2.2.1 Defining Gross Income
In terms of par (c), section 1 of the Act, Gross Income should include
the following:
An amount;
Inclusive of voluntary allocation;
Received by or accrued to or in favour of proven services or
services to be proved; or
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• An amount (except the amount referred to in section 8(1)) received
by or accrued to with respect to or of pertinence to a service or the
holding of a position.
In determining Gross Income, the following factors need to be taken
into consideration. The first factor is that there must be an amount that
was paid over to the taxpayer. In a few situations the attempt to define
Gross Income led to court cases because it was not clear whether or
an amount was paid over. In the case of W.H. Lategan v CIR, (1926
CPD:203 (2 SATC 16)) an opinion was expressed that the term
"amount" usually refers to an amount of money and that unless the
word meant something more than an amount of money, it would not be
wide enough to include the value of property or rights. It was,
therefore, considered that "amount" included property and rights. In
the case of CIR v Butcher Bros (Pty) Ltd, (1945 AD:301 (13 SATC 21))
the judge referred to the word "amount" as an amount having an
ascertainable money value.
The reason for the inclusion of "voluntary awards" in the definition of
Gross Income, is found in the case of CIR v Lunnon, (1924 AD:94 (1
SATC 7)). In this Appellate Division decision it was decided that a
voluntary payment made to an employee some months after the
termination of his services, did not fall within Gross Income because it
was of a capital nature. Paragraph (c) of the definition of Gross
Income in section 1 of the Act was consequently introduced to avoid
any dispute about the nature of the amount received. It was
concluded that as long as the amount is received for services
rendered, it will be classified as income.
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It is important to note that a benefit received by a taxpayer would only
be taxable in the instance where the benefit is acquired on account of
a service or a position.
2.2.2. Taxable benefits acquired on account of a service or a position
A further paragraph of the definition of Gross Income that needs to be
taken into consideration, is the widely known paragraph (i) of the
definition of Gross Income which states that fringe benefits is included
in Gross Income. It must, however, be kept in mind that fringe benefits
are not valued by section 1 (definition of Gross Income), but by the
Seventh Schedule of the Act. Paragraph (i) of the definition of Gross
Income in section 1 of the Act reads as follows:
"... the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit or advantage granted in respect of employment or to holder of any office, being a taxable benefit as defined in the said Schedule, and any amount required to be included in the taxpayer's income under section 8A; ..."
The following view on fringe benefits is held by Vorster & Coetsee
(Permanent Volume:7-3).
A number of terms are normally used by tax consultants when giving
advice on the structuring of remuneration packages. The
understanding of these terms are essential for the understanding of
fringe benefits. The following section deals with the most important
terms according to the definition provided by one of the well known
textbooks.
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2.2.3 Word definitions
Certain definitions need to be taken into consideration when compiling
the definition of fringe benefits which is defined in Seventh Schedule to
the Act. The author will highlight the following definitions for this
purpose:
'Official rate of interest'
"... means a rate of interest of 14 per cent per annum ..." (Vorster & Coetsee, Permanent Volume:7-3).
'Taxable benefit'
"... means a taxable benefit contemplated in paragraph 2, whether the grant of such benefit is voluntary or otherwise, but excluding -
any benefit the amount or value of which is exempt from normal tax under the provisions of section 10 of this Act or any benefit provided by any benefit fund in respect of medical, dental and similar services, hospital services, nursing services and medicines; or any lump sum benefit payable by a benefit fund, pension fund or provident fund, being a benefit referred to in the definition of "benefit fund" in section 1 of this Act or in paragraph (i) of the proviso to paragraph (c) of the definition of "pension fund" in that section or in paragraph (a) of the definition of "provident fund" in that section ..." (Vorster & Coetsee, Permanent Volume:7-3).
'Month'
"i.. means any of the twelve portions into which any calendar year is divided ..."(Vorster & Coetsee, Permanent Volume:7-3).
'Consideration'
"... does not include any consideration in the form of services rendered or to be rendered by the employee ..." (Vorster & Coetsee, Permanent Volume:7-3).
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'Associated institution'
"... is defined, in relation to an employer, as meaning: where the employer is a company, any other company associated with the employer company by reason of the fact that both companies are managed or controlled directly or indirectly by substantially the same persons; or where the employer is not a company, any company which is managed or controlled directly or indirectly by the employer or by any partnership of which the employer is a member,. or any fund established solely or mainly for providing benefits for employees or former employees of the employer or for employees or former employees of the employer and any company which is in terms of paragraph (a) or (b) an associated institution in relation to the employer, but excluding any fund established by a trade union or industrial council and any fund established for post-graduate research otherwise than out of moneys provided by the employer or by any associated institution in relation to the employer ..." (Vorster & Coetsee, Permanent Volume:7-3).
'Employer'
"... means any person who is an employer for employee tax purposes, including a company, closed corporation and the State ..." (Vorster & Coetsee, Permanent Volume:7-3).
'Employee'
"... in relation to any employer means his employee for employee tax purposes excluding any person who prior to 1 March 1992 by reason of superannuation, ill-health or other infirmity retired from the employ of the employer but including, in relation to a company, any director or former employee who is or was the sole shareholder or one of the controlling shareholders in the company. Those persons who are excluded from the definition (e.g. pensioners) can enjoy any benefit or advantage which would otherwise be a taxable benefit, without any liability for tax thereon that receives remuneration or to whom remuneration befalls ..." (Vorster & Coetsee, Permanent Volume:7-3).
16
2.2.4 Taxable fringe benefits
Vorster & Coetsee (Permanent Volume:7-4) also render a summary of
taxable fringe benefits that clearly portrays the inclination of the
definition of fringe benefits and warns the taxpayer of the true extent of
the net:
"... 'n Belasbare voordeel word geag deur 'n werkgewer aan sy werknemer verleen to gewees het ten opsigte van die werknemer se diens by die werkgewer, indien by wyse van 'n voordeel of bate of uit hoofde van sodanige diens of by wyse van beloning vir dienste deur die werknemer aan die werkgewer gelewer of wat gelewer moet word ...".
An extensive list is subsequently rendered of such benefits (Ibid.), but
only in summary for the purposes of this dissertation:
Acquisition of an asset (other than money) for no consideration or
for an inadequate consideration (Seventh Schedule, paragraph 5 of
the Act);
Right of use of an asset other than residential accommodation or a
motor vehicle (Seventh Schedule, paragraph 6 of the Act);
Right of use of a motor vehicle (Seventh Schedule, paragraph 7 of
the Act);
Meals and refreshments and meal and refreshment vouchers
(Seventh Schedule, paragraph 8 of the Act);
Residential accommodation (Seventh Schedule, paragraph 9, 10A
of the Act);
Free or cheap services (Seventh Schedule, paragraph 10 of the
Act);
Low interest loans (Seventh Schedule, paragraph 11 of the Act);
17
Housing subsidies (Seventh Schedule, paragraph 12 of the Act);
Housing subsidy schemes (Seventh Schedule, paragraph 13A of
the Act); and
Payment of employee debts or release of an employee from an
obligation to pay debt (Seventh Schedule, paragraph 13 of the Act).
It is, however, important to take note that an employer-employee
relationship must exist before a taxable fringe benefit can arise. The
benefit must, therefore, be provided on the basis of remuneration for
services rendered by the employee. The taxable benefit could also be
granted to a family member of an employee in which case it is still taxable
in the hands of the employee. Furthermore, any agreement between the
employer and employee in respect of which a benefit is granted to
someone other than the employee, is still considered as received in the
hands of the employee (whether directly or indirectly) (Vorster & Coetsee,
Permanent Volume:7-5). The voluntary or otherwise involuntary rendering
of a benefit does not change the nature of the taxable benefit or the
taxability thereof (Vorster & Coetsee, Permanent Volume:7-5).
The last approach looked at in this chapter, is that of Meyerowitz & Spiro
(Permanent volume:140). It is interesting to note that the approach
followed by these authors deviates from the others in that fringe benefits
are not dealt with in a separate chapter, but under the following heading:
"Receipts and accruals specifically included in Gross Income".
It is being held that services are not confined to employment as such
(Meyerowitz & Spiro, Permanent Volume:145), but include any form of
services, for example professional services, such as medical, legal,
architectural, or as a director, and so on, and casual services, for example
18
passing on information. It was stated in ITC 689 (16 SATC 501) that the
services need not be rendered by virtue of any contract nor need the
amount received or accrued be in terms of any contract or obligation; it
can be a purely voluntary payment. The only definite criterion for a
taxable fringe benefit is that the amount is received or accrues in respect
of services, whenever the services were rendered or are to be rendered
(ITC 143 (4 SATC 220) and De Villiers v CIR, 1929 AD:227 (4 SATC 86)).
The phrase "in respect of means that there must be a casual or
necessary relation between the amount received or accrued and the
services rendered or to be rendered (De Villiers v CIR, 1929 AD:227 (4
SATC 86) and CIR v Butcher Bros (Pty) Ltd, 1945 AD:301 at 320 (13
SATC 21)).
The whole remuneration for services rendered or to be rendered is taxable
even though the person making the payment may not be entitled to
deduct the whole or any portion thereof, had expenditure been incurred in
the production of income (W.F. Johnstone & Co. Ltd v CIR, 1951(2)
AD:283 (17 SATC 235)). The following court cases serve as examples of
instances where the benefit received by the taxpayer was regarded as
taxable by the court:
"... a price awarded to an insurance agent for writing up policies, ITC 117 (4 SATC 70); Salary in lieu of leave, De Villiers V CIR, 1929 AD:227 (4 SATC 86), or notice, ITC 143 (4 SATC 220); Commission for underwriting a share issue, ITC 173 (5 SATC 174); A retiring allowance or pension paid to an ex-employee, ITC 267 (7 SATC 156); A living away allowance, ITC 994, 1963 Taxpayer 228 (25 SATC 134); Payment for passing on information voluntarily, ITC 319 (8 SATC 176); Payment for promotion of a company, ITC 430 (10 SATC 424); Climatic allowance paid to civil servants, ITC 470 (11 SATC 263); Sea-giving allowance paid to a naval officer, ITC 922, 1961 Taxpayer: 94 (24 SATC 244);
19
Executor's commission even where the executor is the surviving spouse and the marriage is in community, ITC 514 (12 SATC 253); Administrator's and trustee's remuneration; danger pay; tips and gratuities received by waiters, doorman, etc.; fees for guaranteeing a debt, H v COT, 1957 (4) SA: 478 (SR), 1957 Taxpayer: 245 (21 SATC 346); and Annual bonus, Christmas bonuses, retirement gifts and the like ..." (Meyerowitz & Spiro, Permanent Volume:146).
2.3 CONCLUSION
It must be admitted that the compiling of a definition of a fringe benefit in
accordance with the Act and which tax experts will subscribe to, yet
intelligible to the man on the street, is indeed an intricate endeavor. It
would, however, be possible to list the following essential elements that
should be present in a definition of a fringe benefit:
"... a Fringe benefit is something (that has determinable value); That is granted (directly or indirectly); By the employer to the employee; In respect of services rendered; also Excluding any normal salary and commission remuneration ...".
This description may cast some light on the subject and make the
taxpayer aware of the fact that the Act, as promulgated at present,
renders a wide application for the taxability of fringe benefits.
In the next chapter it is the goal of the research to list the possible fringe
benefits that could be identified from the Act, relevant articles and the
Seventh Schedule to the Act. Exceptions that have arisen over the past
few years from court cases and relevant articles were also included.
20
CHAPTER 3
THE TAXABLE VALUE OF FRINGE BENEFITS.
3.1 Introduction
3.2 Entertainment Allowances
3.3 Travelling Allowances
3.4 Subsistence Allowances
3.5 Taxable Benefits Arising from Employment or Office
3.5.1 Introduction
3.5.2 Use of asset
3.5.3 Use of a motor vehicle
3.5.4 Residential accommodation
3.5.5 Free or cheap services
3.5.6 Interest on loans
3.5.7 Subsidy in respect of loans
3.5.8 Employee's debt
3.6 Gains by Directors or Employees in Respect of Marketable Securities
3.7 Conclusion
3.1 INTRODUCTION
The taxable value of fringe benefits is of utmost importance. The focus for
the use of fringe benefits in the structuring of remuneration packages is
evidently to decrease the tax liability of the taxpayer. The taxpayer
should, therefore, be able to determine the taxable value of a fringe
21
benefit to enable him to determine his new tax liability. Set out below is a
summary of the provisions as per the Act and the .Seventh Schedule that
need to be used in the determining of the taxable value of fringe benefits.
In order to determine the taxable value of fringe benefits that should be
included as taxable income, the definition of taxable income according to
the Income Tax Act needs to be qualified:
"... Any amount received or accrued in commutation of amounts due under any contract of employment or service is Gross Income ..." (Meyerowitz & Spiro, Permanent Volume:147).
As the emphasis is placed on the word "amount" in the definition, it is
necessary to focus on the method of valuation. To concentrate only at the
taxable value in general, will not be of much use - individual items will,
therefore, be focused on when setting out the taxable value of fringe
benefits.
One of the most known fringe benefits is entertainment allowance - it is,
however, not being governed by the Seventh Schedule, but by section 1
and 11(u) of the Act as stated below.
3.2 ENTERTAINMENT ALLOWANCES
It is stated by the Act in section 1 "Gross Income" paragraph (c) proviso
(iii), that:
"... Any amount received by or accrued to any employee or of holder (e.g. director of a company) by way of allowance or advance granted by his principal (that is, his employer, or the body in relation to which his office is held) for the purpose of defraying entertainment
22
expenditure incurred or to be incurred in entertaining other persons, is deemed to be in respect of services ...".
It should be noted that in the case of reimbursement of expenditure
actually incurred, the amount received will not be included in the taxable
income of the taxpayer (Section 1, definition of Gross Income, proviso (vi)
of the Act).
Entertainment expenditure needs to be incurred in the production of
income by the employee in performing his duties, before the cost incurred
could be deducted (Port Elizabeth Electric Tramway Co Ltd v CIR, 1936
CPD:241 (8 SATC 13)). As long as the taxpayer is entertaining for the
purpose of earning income, he may deduct the expenses in respect of
himself or his wife (ITC 818 (20 SATC 507); CIR v Hickson, 1960(1)
SA:746 (AD) (1960 Taxpayer:49, 23 SATC 243)).
Care has to be taken when an employee has the use of a credit card in
the name of his principal for the purpose of entertaining on behalf of the
employer, as any expenses paid in excess of the actual entertainment
costs will be taxable in the hands of the taxpayer. It should also be noted
that when an amount is received and the Commissioner is not satisfied
that it relates only to entertainment expenditure, the amount received will
be taxable simply as an amount received for services rendered - keeping
in mind that his decision is normally subject to objection and appeal.
Difficulties may arise with regard to the meaning of "entertainment
expenditure". This is defined in section 1 of the Act as:
"... expenditure incurred in providing hospitality of any kind, including, without limiting the scope of this definition, expenditure incurred in providing or supplying: (i) food, drink, Or accommodation; or
23
any ticket or voucher entitling any person to admission to any theatre, exhibition, or club or to attend any show, display or performance or to use or enjoy sporting, recreational or other facility; or any gift of goods intended for the personal use or enjoyment of any person; or any travel facility; or any voucher entitling the recipient or any holder thereof to exchange it for food, drink or accommodation, ticket, voucher, gift or travel facility, but excluding such expenditure on hospitality as it is referred to in par 8 of the Seventh Schedule of the Act ...".
The problem with regards to the taxable value of benefits that have to be
included, in what, actually only arises when the employee is given an
allowance to cover expenditure that still has to be incurred. The taxable
value will then be determined according to the Act, section 11(u).
In an article from the well-known tax magazine, Information from Tax
Planning, Corporate & Personal, the following was mentioned by Brigitte
Keirby-Smith (1994:115):
"... Certain employees holding management-type positions could save tax if they were to- restructure their salary packages to include an entertainment expenditure when the taxpayer seeking the deduction is an employee or office-holder deriving remuneration-type income or is a director of a private company. Savings in normal tax available under section 11(u), require the following conditions to be met: the employee or office-holder must actually incur the entertainment expenditure himself, if any amount is recovered or is recoverable by him from his employer or from some other source, it will not qualify for a deduction; the Commissioner of Inland Revenue must be satisfied that the employment or office is of such a nature that the employee's duties regularly and necessarily involve his incurring entertainment expenditure; the type of expenditure incurred (definition of entertainment expenditure, section 1) and Commissioner must be satisfied that the entertainment expenditure was incurred directly in connection with the taxpayer's trade ....".
24
Suggestions have already been made in the past to overcome the
problem where the employee is not merely reimbursed for expenditure as
and when incurred by him on behalf of the employer, but is given an
allowance to cover expenditure to be incurred. If the allowance is made at
regular intervals, for example on a monthly basis, then the employee
should account each month of expenditure to his employer and only the
balance should be subject to the deduction of employees' tax. Should
allowances be paid over a longer period of time, the balance not
expended on behalf of the employer should be accounted for employees'
tax deduction at the end of the period, irrespective of the fact that other
remuneration is paid to the employee over shorter intervals (Meyerowitz &
Spiro, Permnent Volume:149).
In can be concluded that although the tax saving in respect of the
entertainment allowance is heavily restricted by the provisions of the Act,
employees qualifying for a deduction of their entertainment expenses
should not let this opportunity pass them by (Robin Lockhart-Ross,
1994:115). The next major fringe benefit, dealt with in section 8 of the
Act, is traveling allowances normally paid to the taxpayer in the case of
traveling expenses incurred for business purposes.
3.3 TRAVELING ALLOWANCES
Receiving a travel allowance from your employer could have a dual
motive, namely to cover actual traveling expenditure or to structure
remuneration packages for the purpose of paying less tax. Whatever the
motive, it is still essential to look at legislation, court cases and articles
from practice.
25
Expenses incurred by the taxpayer when traveling between his place of
residence and the place where his business is conducted, are of a private
nature and will not be deductible from his taxable income. Should the
taxpayer need to travel between two places to conduct his business, the
cost incurred will not be deductible as traveling expenses either.
Traveling expenses will only be deductible if the performing of his duties
compels him to travel from one place to another when being a sales
representative, or business man traveling from one branch to another of
the same company (CIR v De Villiers, 1962 (1) SA:581 (AD) (1962
Taxpayer:111, 24 SATC 385); Earl of Verulam v COT (9 SATC 107) &
Colby v SIR (31 SATC 59)).
Should the taxpayer's place of residence and of work be the same, it will
not influence the deductibility of the traveling expenses (SIR v Ineson (42
SATC 125)). The traveling expenses will consequently only be deductible
if it is not of a capital nature and incurred in the production of income (ITC
825 (21 SATC 188); ITC 666 (16 SATC 130); ITC 1332 (43 SATC 87)).
An apportionment of the traveling expenses is permissible where the
expenses relates to capital nature as well as costs incurred in the
production of income. In the situation of directors, managers and
employees receiving an allowance or an advance for traveling or
entertainment expenses, the deductibility of these expenses will be
decided on the general principles laid down in the Act and relevant court
cases (ITC 575 (13 SATC 476)).
In accordance with section 8(1) (a) and (b) of the Act, the travel allowance
is granted in respect of the use by an "employee" of his own car in the
performance of his duties, defined as follows:
26
`... the amount by which the allowance exceeds the cost to the employee ...".
The portion by which the allowance exceeds the cost constitutes Gross
Income.
Certain regulations pertaining to the determination of the value of the
vehicle, are laid down in section 8(1) of the Act. The calculation of the
rate per kilometer and other related calculations are also described in
detail by the legislator in section 8(1) of the Act. The Commissioner has
advised that where the employer pays for fuel or maintenance, the
amount paid by the employer will be regarded as part of the travel
allowance and that the employee will be allowed the fuel and maintenance
cost as a deduction (Taxpayer, 1985:220). If the employee's actual
expenditure is higher than the deemed expenditure as calculated above,
he will be allowed to deduct the actual expenditure as long as it can be
proved to the Commissioner. The determination of the value of the
vehicle boils down to the cash cost including Value-Added Tax incurred by
the employee. There are, however, exceptions to this general rule.
The following articles appeared in various proposals, possible tax
schemes and relevant arguments in the magazine, Information from Tax
Planning, Corporate and Personal:
• Hybrid Car Schemes (Robin Lockhart-Ross, 1987:60)
The choice between a company car and a travel allowance in
structuring an employee's remuneration package, is a personal
decision which will depend on each employee's particular
circumstances. Each option has its pros and cons, and a choice in
27
favour of one option, therefore, usually involves a trade-off of the
respective benefits.
"Hybrid car scheme" means that the employee acquires the vehicle in
his own name under a lease or suspensive-sale agreement with a
finance house. He then concludes an agreement with his employer
that the employer would be granted the right of the use of the vehicle
in exchange for a monthly rental equal to the employee's installment
under his finance agreement. The employer, as a holder of this right,
awards its actual use to the employee in the form of a fringe benefit.
The employer (as in a standard company car-scheme) pays all running
costs of the vehicle, for both the employee's business and private
travel.
This "hybrid car scheme", therefore, appears to combine the respective
advantages of the company car and the travel allowance options, to
avoid the disadvantages of both. There are, however, several issues
that should be examined in more depth before an employee decides to
enter into such a scheme.
Following this aggressive tax scheme, some anti-avoidance legislation
was introduced by the legislator, with the result that the above scheme
was taxed as a company car (Huxham & Huapt, 1995:374).
• Traveling expenses, car-allowances schemes (JC van Graan,
1991:29)
It has become common practice for many employers to operate a so-
called car-allowance scheme. Under such a scheme the employee
himself acquires the ownership or use of a motor car from someone
28
other than his employer and meets all the costs of running and
maintaining it himself, receiving from his employer a monthly
allowance designed to recompense him for some or even all of his
motoring expenses. The portion of the allowance regarded by the
Commissioner as not having been actually expended by him on
traveling for business purposes, is deemed to make up part of his
taxable income under section 8(1)(a) of the Act.
The next point to establish is whether the taxpayer may, within the
parameters described earlier, select a different permutation (method of
calculation) each year. In the instance of Caltex Oil (SA) Ltd v SIR (1975
(1) SA 665 (A), 37 SATC 1) judge Botha, delivering the judgement of the
Appellate Division of the Supreme Court, after quoting Sections 5(1),
66(13) and 66(13)quat and describing the meaning of the term 'taxable
income', said:
"... It is clear from these provisions that the income tax is assessed on an annual basis in respect of the taxable income received by or accrued to any person during the period of assessment, and determined in accordance with the provision of the Act ...".
The Caltex case confirms the procedure as set out by section 8(1)(B) of
the Act in respect of the determination of the taxable portion of traveling
allowances. This provision is, however, silent on the issue whether
reference must be made to the basis of calculation adopted in previous
years of assessment. The taxpayer is., therefore, not prevented from
selecting a different permutation each year. This interpretation is
supported by the 'contra fiscum' rule, which essentially requires that the
benefit of the doubt must be given to the person sought to be charged
(CIR V Widan 1955 (1) SA 226 (A), 19 SATC 341).
29
The taxpayer must, when furnishing data relating to the actual costs and
distances, remember that section 82 of the Act places the onus on him to
prove that an amount is not liable to tax. In discharging the onus, he must
provide such details and evidence as could reasonably, in the
circumstances, be expected of a taxpayer (LW v COT 1967 (3) SA 70
(High Court Rhodesia), 29 SATC 70). A court will not accept vague and
indefinite evidence, because to do so would be asking it to indulge in
guesswork in order to come to the taxpayer's assistance (ITC 1065 (1964)
27 SATC 111).
It is often impractical, however, for a taxpayer to furnish proof of every
cent spent or every kilometer traveled. In one such a case dealing with
entertainment expenses, it was stated that the court would not require
strict proof of actual items of expenditure when the keeping of an accurate
account is difficult (ITC 679 (1949) 16 SATC 349).
An extensive list of possible tax planning opportunities regarding the
travelling allowance fringe benefit could have been rendered here, but as
the discussion there of-could easily be extended to a thesis on its own, it
has been restricted to the above. The following paragraph is dealing with
the last possible fringe benefit not dealt with in the Seventh Schedule of
the Act.
3.4 SUBSISTENCE ALLOWANCES
The fringe benefit, subsistence allowance has been identified in practice,
as normally used by marketing-related employees. The subsistence
allowance that the employees is entitled to is allocated to a control
account which is then used to set-off bonuses receivable during the year.
30
Therefore, these bonuses will then be tax-free in the hands of the
employee. Whether this is allowable according to the practice of the
Commissioner is subject to argument.
When an employee's duties force him to spend at least one night away
from his usual place of residence in the Republic and he consequently
receives an allowance for expenses incurred for personal subsistence and
incidental costs, such allowance is deemed to have been expended up to
an amount calculated at the prescribed rates detailed section 8(1)(c) of
the Act. The different rates would apply, depending on the circumstances
of the employee and the cost that is normally already incurred by the
employer.
The first group of fringe benefits that has been discussed, is different from
the rest, because of not being governed by the Seventh Schedule, but by
certain sections of the Act (section 8, 11 and 23 of the Act). The rest of
the fringe benefits discussed, is specifically dealt with by the Seventh
Schedule of the Act.
3.5 TAXABLE BENEFITS ARISING FROM EMPLOYMENT OR OFFICE
3.5.1 Introduction
The Seventh Schedule of the Act classifies the fringe benefits as
"taxable benefits". In broad terms the Seventh Schedule defines the
taxable benefits, quantifies their value (the cash equivalent) and
imposes obligations upon the employer in respect of withholding of
employees' tax and notification of the benefits to the Commissioner
(these obligations are broadly discussed in chapter 6).
31
A description of the possible fringe benefits as identified by the
Seventh Schedule as well as the basis of the calculation of their
taxable value is discussed in the following paragraphs.
3.5.2. Use of asset (other than residential accommodation or household
goods supplied therewith or motor vehicles)
This fringe benefit normally relates to an employer that is able to
provide to his employees the use of certain assets either in existence
from his business or that, that has been obtained for the use of the
employees.
In this instance the right to use an asset for the employee's private or
domestic purposes, either free of charge or for a consideration less
than the value of such use, is a taxable benefit. The cash equivalent is
calculated by determining the difference between the value of the use
and the consideration (if any) given by the employee for its use and
any amount expended by the employee on its maintenance or repair
during the taxyear or relevant period.
The value of the asset is determined as follows:
Where the employer holds the asset under a lease or hiring
agreement, the value will be the rent payable by the employer
during the taxyear or the relevant period; or
Where the employer owns the asset, an amount calculated over the
taxyear or relevant period at the rate of 15% per annum on the
lessor of the cost of the asset to the employer or its market value at
32
the date of commencement of the period of use by the employer
(Seventh Schedule, paragraph 6 of the Act).
No value will placed on the private or domestic use if:
The use is incidental to the use of the asset for the employer's
business or is provided by the employer as an amenity to be
enjoyed by the employee at his place of work or for recreational
purposes;
The asset is equipment or machinery which the employer allows his
employees in general to use from time to time for short periods;
and
The asset consists of books, literature, recording of works, or art
(Seventh Schedule, paragraph 2(b) of the Act).
The following paragraph deals with the situation where the employer
provides the employee with the right of the use of a motor vehicle.
3.5.3 Use of a motor vehicle
The following discussion describes the method of determining the
taxable value of the use of a company vehicle including a look at the
background before the implementation of this benefit in the structuring
of packages.
The reason for a motor car fringe benefit has been defined in an article
published in Information from Tax Planning, Corporate and Personal,
and can be summarised as follows:
33
"... The motor car fringe benefit is here to stay. For as long as employers can use motor car schemes to give employees greater after-tax benefits than would be produced by cash awards costing employers the same amount, they will continue to include some type of motor car benefit in their remuneration packages ..." (Divaris, 1985:86).
The general taxation rule in respect of the use of a motor vehicle
consists of the following:
"... the grant of the use of a motor vehicle (which includes motor vehicles of any description e.g. a bakkie, van etc. for convenience referred to as 'vehicle' or 'car') to an employee for his private or domestic use either free of charge or for a consideration less than the value of such use, is a taxable benefit to the extent to which the value of the use during the period of use by the employee exceeds the consideration given by the employee for its use during the period ..." (Meyerowitz & Spiro, Permanent Volume:160).
Therefore, the value of the use of the motor vehicle has to be
determined for each calendar month or part of a calendar month
during which the employee has the use of the vehicle. In this regard
only legislature issued after 1 August 1991 will be dealt with. Prior to 1
August 1991, was the determining of the taxable value done on a
similiar basis than what is currently used for the travel allowance. The
legislation that came into effect from the 1 August 1991 changed the
whole concept of the determining of the taxable value of company
vehicles.
A current shortcoming of the Act seems to be in the instance where
the use of a motor vehicle is provided by some other person (not being
an associated institution in relation to the employer) by arrangement
with the employer and at the expense of the employer. Such an
arrangement would appear to escape tax unless it can be said to fall
34
under free or cheap services. It would, however, be a somewhat
strained reading of "services rendered" to include the use of a car
(Meyerowitz & Spiro, Permanent Volume:footnote d,160).
Use from 1 August 1991:
The monthly value of the benefit is 1,2% of the determined value of
the first car and 2% of the determined value for each additional car
(Seventh Schedule, paragraph 7(4) of the Act);
Where the employee bears the cost of all fuel (used for the
purposes of the private use of the vehicle) and maintaining the
vehicle (including the cost of repairs, servicing, lubrication and
tyres) the value of private use for each such month will be reduced
by R120 for fuel and R85 for the maintenance (Seventh Schedule,
paragraph 7(4) of the Act); and
The meaning of the determined value is defined by paragraph
7(1A) of the Seventh Schedule of the Act (The difference from the
value that was referred to in describing the travel allowance is that
in the benefit currently described the motor vehicle's Value Added
Tax (hereafter called VAT) or General Sales Tax (hereafter called
GST), the indirect tax that was in place before VAT was introduced,
has to be excluded from the value).
In the instance where the employer grants an employee the use of a
motor vehicle which has already been used by a previous employee,
the determined value has to be reduced by the following: a prorata
15% per annum on the diminishing balance. Thereafter it will remain
constant until an allocation is made to another employee (Seventh
Schedule, paragraph 2(b) of the Act).
35
The only possible exemption that could be granted to the taxpayer
using a company vehicle is defined by paragraph 7 of the Seventh
Schedule of the Act. The private use of a company car by the
employee will, in the following instances, not be taxable:
The car is available and is used by the employees in general;
The private use infrequent or merely incidental to its business use;
The car is not normally kept at or near the home of the employee
when not in use or after business hours; or
Due to the nature of the employee's duties he is required to use the
vehicle outside his normal working hours, but is not allowed to use
it for private purposes.
The following fringe benefit that is listed in the Seventh Schedule
relates to meals, refreshments and vouchers. The provisions set-out
by paragraph 2(c) and 8 of the Seventh Schedule of the Act does not
entail any exceptions and has been excluded for the purpose of this
research. Residential accommodation is currently the most
controversial fringe benefit due to current views and possible changes
in the legislation. As a result of this a detail discussion of this benefit
has been set out below.
3.5.4 Residential accommodation
The fringe benefit, residential accommodation, is being governed by
paragraph 2(d) and 9 of the Seventh Schedule of the Act. Set out
below is the relevant provisions of the Act together with relevant
statements of court cases and articles regarding this fringe benefit.
36
The reason for a taxable benefit arising out of accommodation
provided to the employee could be obtained from the following
statement in Meyerowitz & Spiro (Permanent Volume:164):
"... providing an employee with residential accommodation (whether furnished or unfurnished and with or without board, meals, fuel, power or water) free of charge or for an inadequate rental consideration, ..., the amount of which is the difference between the rental value of the accommodation less the rental consideration (if any) given by the employee therefor, any rental consideration given by him in respect of household goods provided with such accommodation and any charge made to him by the employer in respect of power or fuel provided with the accommodation ...".
Due to the fact that the taxpayer would be deemed to have received a
taxable benefit in the case of residential accommodation provided by
his employer, it were disputed by a number of taxpayers that the
accommodation used by them did not fall under the definition of
residential accommodation. The objections were settled in the court
over the past years, confirming the provisions of the Act that
accommodation received by the taxpayer for residential purposes will
be regarded as a taxable benefit (ITC 889 (23 SATC 347); ITC 932
(24 SATC 341); SIR v VVispeco Housing (Pty) Ltd (35 SATC 14); ITC
1511 (54 SATC 39); ITC 1566 (56 SATC 34)).
The rental value for any year is determined by a formula provided by
the Act as detailed in the Seventh Schedule, paragraph 9(3). The . -
formula consist of a number of essential components relating to the
personal circumstances of the taxpayer:
• The remuneration of the taxpayer derived in the preceding year of
assessment (this remuneration would exclude travel and
37
entertainment allowances and the taxable benefit of company
vehicles and residential accommodation);
a Constant rebate of R20 000 that would be deducted from the
remuneration above. It should be kept in mind that this could be
zero in some cases, as set out below;
a Percentage relating to the kind and extent of residential
accommodation provided to the taxpayer; and
The period that the taxpayer enjoyed the benefit of the residential
accommodation (Seventh Schedule, paragraph 9(3) of the Act).
A wider vision on the history of the legislation detailing the method in
the determination of the formula, as detailed above, could be obtained
from the following:
" ... Possible zero situation under B; the last part of the second possibility was added only afterwards in 1987. They were presumably intended to overcome the situation where the option was not held directly by the designated person but it is very doubtful that the addition has attained its objective, unless the words can be read as also qualifying the option or pre-emption right i.e. "... the employee, his spouse or minor child has the right, whether directly or indirectly by virtue of a controlling interest a company or otherwise, of option or pre-emption ...". It is doubtful whether the addition of the words compels this construction. In regards to the value of C; Nothing is added to the value of C where board, meals or water are supplied with the accommodation. The supply of board or meals as part of residential accommodation is excluded from the taxable benefit referred to in par 502-7 (meals, refreshments, etc.), and, therefore, escapes taxation. Foodstuffs such as groceries not in the form of a prepared meal and beverages supplied to the employee at the expense of the employer constitute, it is considered, taxable benefits under par 502-4. The supply of services (cleaning staff etc.) at the cost of the employer will fall under par 502-9 (free or cheap services). Repairs to and maintenance of the accommodation at the cost of the employer will, however, it is considered, be part and parcel of the
38
provision of residential accommodation ..." (Meyerowitz & Spiro, Permanent Volume:164).
Some variations exist in regards to residential accommodation, as
described above, consisting of; holiday accommodation, employee
occupying more than one residential unit, hire of employee's (or
associated person's) house and employee, spouse or minor child
entitled or obliged to buy accommodation after a period. One of the
possible schemes was mentioned by a well-known author in an article
published in Information from Tax Planning, Corporate & Personal, as
follows:
"... The low-income housing benefit could be summarized in the following headings;
Requirements of LIH schemes The anti-salary-substitution provision is an exceedingly stupid thing, since no employer in his right mind would give an employee a benefit unless it were a substitution for reward for services rendered. Fixing the cash equivalent Fixing the remuneration factor Calculating the LIH tax relief ..." (Costa Divaris, 1987:60).
These possible variances will be described in more detail in chapter 5.
The next fringe benefit that would normally only be received by
employees working for employers that is in the servicing industry is
where the employee receives a free or cheap service as discussed -
below.
39
3.5.5 Free or cheap services
This fringe benefit is governed by paragraph 2(e) and 10 of the
Seventh Schedule of the Act. The benefit is valued depending on the
circumstances and the kind of service received by the taxpayer.
Where any services, except for holiday accommodation referred to in
"residential accommodation" are rendered to an employee at the
expense of the employer, such services are treated as a fringe benefit.
The benefit arises if the employee received such service without
having paid for it or paying at a lower rate than the value of the service
and the service has been used by the employee for his own private or
domestic purposes.
The value of the services will be as follows:
In the case of a travel facility granted by an employer who is
engaged in conveying passengers for a reward by sea or by air and
if the employee or any relative of the employee is enabled to travel
to any destination outside the Republic for his private or domestic
purposes and the lowest fare for such a trip exceeds R500 at the
relevant time, the employee will be taxed on the difference of the
lowest fare and the amount paid by the employee or his relative in
respect of such facility (Seventh Schedule, paragraph 10 of the
Act); or
In the case of any other service the employee will be taxed on the
costs of the service to the employer less any amount paid by the
employee for the service (Seventh Schedule, paragraph 10 of the
Act). In the case of any other service it was decided by the English
40
court that it will be considered that where the service is rendered
generally by the employer it is the additional or marginal cost in
rendering the service to the employee and not the average cost of
rendering such services which constitutes the cash equivalents
(Taxpayer p.4 and Pepper V Hart [1993] 1 AER 42 (HL)). The
Receiver of Revenue has expressly accepted this in the case of
concessionary fees to children of teachers (Meyerowitz & Spiro,
Permanent Volume:165).
It is detailed in the Act that there are certain circumstances where no
value will be placed on possible free or cheap services. These are
stipulated in the Seventh Schedule of the Act, paragraph 10(2).
The following fringe benefit described, low interest loans, is certainly
one of the most frequent used fringe benefits. It will be discovered in
the following discussion, that both the employer and the employee is in
most of the instances uninformed regarding the determination of the
taxable value arising from this benefit.
3.5.6 Interest on loans
This fringe benefit relates to loans that is provided to employees at
either low interest or even no interest. The effect of this would be that
according to the Seventh Schedule of the Act a taxable benefit needs
to be included in the taxpayer's taxable income. This loan excludes
loans in respect of approved housing or home ownership schemes.
The general rule that is applied to this fringe benefit is stipulated by the
following extract of Meyerowitz & Spiro (Permanent Volume:170):
41
"... Where a loan, which includes any form of credit and any loan applied directly towards the replacement of any other loan has been granted to an employee ...".
The loan can be granted by the employer himself or by any associated
institution. The benefit will arise when the employee pays interest at a
lower rate than the official 16% and the value of the benefit will be the
difference between an amount calculated at the official rate of interest
over the relevant period of the loan and the interest, if any, being paid
the employee. The official interest rate of 16% is under the control of
the Commissioner of Inland Revenue (hereafter called the
Commissioner) and is being changed periodically.
Any scheme between a third person relating to the lending of the
money and schemes like the paying of possible management fees and
"back to back" schemes, will not help the employee in respect of the
paying of tax on the value of the benefit received relating to the lower
interest rate. Certain sections has been included in the Act to prevent
such schemes or tax planning opportunities (Section 103(1) of the
Act).
The following loans will be excluded from the taxable benefits normally
received by the employee (Seventh Schedule, paragraph 11(4) of the
Act):
A casual loan or loans to an employee not exceeding R3 000 in
total at any time; or
A loan to an employee to further his studies.
42
Some relief is available to the taxpayer in respect of the possible
deductions of the deemed interest that was included in his taxable
income regarding a taxable benefit received from the employer. The
interest deductible under section 11(a) of the Act is the total of the
interest actually paid and the deemed interest that was included in his
taxable income. This possible relief will not be applicable in the case
of a loan utilised to acquire shares due to the fact that dividends are
exempt from tax.
From court cases relating to this fringe benefit, it is evident that the
requirements of the general deduction formulae as detailed in section
11(a) of the Act are essential in the decision whether this interest on
loans needs to be included in the taxable income of the taxpayer.
Another form of fringe benefit used in the structuring of remuneration
packages is the subsidy in respect of loans received by the employee
for purposes of residential accommodation. The provisions of the
Seventh Schedule is discussed below.
3.5.7 Subsidy in respect of loans
This fringe benefit is closely related to the benefit as described above
in paragraph 3.5.6, but normally relates to the subsidies given to
employees relating to loans used for housing purposes.
The possible fringe benefit arises in the instance where an employer
has made the following payments to the employee(Seventh Schedule,
paragraph 2(g); 2(gA) and 12 of the Act):
43
An amount paid over to the lender in respect of interest or capital
repayments payable by the employee in terms of any loan; or
An amount paid over to the lender which, together with any interest
payable by the employee on the loan, exceeds the amount of
interest (if calculated at the official rate) that would normally be
payable on such a loan.
It should be noted that there will be no taxable benefit if the
contributions of the employee and the employer do not exceed the
official rate of interest.
The following fringe benefit could probably be regarded as the most
hide away benefit used by employer and employees in the structuring
of packages. The reason for this is, that both parties are unaware of
the circumstances when such benefit arise. The detail of this benefit is
discussed below.
3.5.8 Employee's debts
The taxable benefit that could arise from this benefit is being governed
by paragraph 2(h) and 13 of the Seventh Schedule of the Act.
A taxable benefit arises if the employer, whether directly or indirectly,
pays an amount owed by the employee to any third person without
requiring the employee to reimburse him; or in the case where the
employer has released the employee from an obligation to pay an
amount owed by the employee to the employer. This will be the case
whether the payment or release occurs before or after the retirement of
44
the employee but not in the case of an employer prior to 1 March 1992
(will be described in more detail).
No taxable benefit will arise from the following:
Payment of the employee's subscriptions to a professional body, if
the membership of the body is a condition to the employee's
employment (Seventh Schedule, paragraph 13 of the Act); or
As a result of recent court case, Kotze v KBI ((1991 TPD) 54 SATC
149) in which it was held that an amount paid by an employer to an
employee's previous employer in settlement of a debt was a
taxable benefit, let to an amendment in the Seventh Schedule of
the Act (paragraph 13). The facts argued in the case were that
Kotze received a bursary from the Department of Posts and
Telecommunications on the understanding that he could work for
them for three years after he had completed his studies. In terms
of his bursary agreement he would be required to compensate the
Department if he terminated his services without fulfilling his
obligations. Shortly after commencing his employment with the
Department he was offered employment by the CSIR who
undertook to settle his obligation to the Department. The amount
paid was held to be taxable benefit in terms of paragraph 13.
Therefore, there was an amendment to the paragraph with effect
from 28 February 1991 incorporating the exclusion of the benefit
from a taxpayer's income if some conditions were met (Meyerowitz
& Spiro, Permanent Volume:174).
The amendment that came into effect from 28 February 1991 were
only to be applied if the following have been met by the taxpayer:
45
In return for a bursary or a studyloan a person has assumed an
obligation to render services for a certain period (to the person who
has granted the burssary);
The employee becomes liable to pay an amount to his former
employer because he has terminated his services without fulfilling
his obligations, in order to take up employment with a new
employer;
The new employer has settled the obligation to the former
employer; and
The employee has in consideration for the payment assumed an
obligation to render services to the new employer for a period
which is not shorter than the unexpired portion of the service due to
the previous employer (Huxham & Haupt, 1997:413).
The last fringe benefit discussed in this chapter are normally used by
high networth individuals (executives of companies) and would
therefore be available to a selective group of people. The
consequences of the fringe benefits are discussed in the following
paragraph.
3.6 GAINS BY DIRECTORS OR EMPLOYEES IN RESPECT OF
MARKETABLE SECURITIES
The taxable benefit that could arise out of share options schemes relating
to marketable securities would only be available to a selected number of
taxpayers. This group of taxpayers would consist of these employees
46
working for companies with shares and in the most instances companies
that are listed on a stock exchange.
This possible taxable benefit arises from the following circumstance:
" ... Where the taxpayer obtains any right to acquire any marketable security, as a director or former director of any company or in respect of services rendered or to be rendered by him as an employee to an employer, any gain made on the exercise, cession or release of the option in whole or in part must be included in the taxpayer's taxable income for the year of assessment in which the stock option is exercised, ceded or released ..." (Section 8A(1)(a) of the Act).
The gain would be deemed to be made at the time that the option is
exercised, ceded or released (Section 8A(2)(c) of the Act).
For the purpose of this research and based on a court decision, the word
"option" would be used instead of "security" (SIR v Kirsch 1978 (3) SA 93
(T) 1978). The reason for this is that the right does not need to be in the
form of an option, but the only prerequisite is that the taxpayer should
have a right to acquire some shares in the employer's company.
In the case of a taxpayer dying or being insolvent before he becomes
entitled to dispose of the marketable security, the gain is then deemed to
have been made by him on the day before the date of his death or
insolvency and must be assessed accordingly (Section 8A(1)(b) of the
Act).
It is important to note that there must be a causal or necessary relation
between the grant of the option and the services rendered or to be
rendered (as an employee to an employer) - whether this is in place in a
particular case is a question of fact. The gain must be derived from' a
47
source within or deemed to be within the Republic (SIR v Kirsch 1978 (3)
SA 93 (T) 1978).
The gain that will be included in the taxpayer's taxable income will be
computed according to a formula set out in section 8A (2) to (4) of the Act.
Any gain made by any person other than the taxpayer by the exercise,
cession or release of an option is deemed to be made by the taxpayer and
must be included in his income as though it were a gain made by him.
The transaction by which the option has been obtained by the other
person from the taxpayer needs to be a transaction at arm's length. This
means that each party is independent of the other and in striking the
bargain will strive to get the utmost possible advantage out of the
transaction for himself (Hicklin . v SIR 1980 (1) SA 481 (AD), 1980
Taxpayer 49).
The following descriptions of words need to be kept in mind when
determining whether the particular option of the taxpayer is a taxable
benefit in his hands (Meyerowitz & Spiro, Permanent Volume:182-183):
Marketable security:
. any security, stock, debenture share, option or other interest capable of being sold in share market or exchange or otherwise ...".
Market value of a marketable security at the time of exercise:
" ... deemed to be a sum which the person having the right freely to dispose of such security might reasonably expect to obtain from a sale of the security in the open market ...".
According to a leading author, Silke, schemes whereby employees or
directors purchase the shares outright and which do not involve the
48
acquisition of any rights to acquire any marketable securities in the future,
are not taxed by this section (Permanent Volume:112).
In addition to the information above, this subject was discussed several
times in one of the best known tax publications in South Africa, called
Information from Tax Planning, Corporate & Personal. A number of tax
planning schemes have been implemented in the past, but has been
successfully halted by changes in the relevant sections of the Act. In the
extracts of relevant articles below, are examples of these tax planning
schemes mentioned above:
Share-purchase schemes, a fiscal fatality:
"... When the legislature, in 1969, struck down on the then popular share-option scheme, it planted the seeds of the share-purchase scheme, which has since flourished as companies have desperately sought ways of rewarding their executives despite our harsh tax system and the deleterious effects of our often unchecked fiscal drag. Afterwards their had been numerous changes in the Act to stop further tax planning schemes ...." (Michael Stein, 1985:97).
Share options, back in vogue?:
"... To suggest that income tax is merely an instrument designed to extract money from the productive sector for spending by the public sector is to grossly underestimate its powerful effect. Nor is it merely a redistribute machine channeling funds from the acquiescent few who generate income and wealth to those favoured taxpayers who are able to manipulate the system to their own ends. It is also hugely influential in ordering the relations between companies and their staff Recent history provides irrefutable evidence of this last effect ...." (Michael Stein, 1986:126).
Share-incentive arrangements - I:
"... The traditional/conventional schemes; across the world share-incentive arrangements have proved to be an important and effective means of retaining and motivating those key executives and employees whose services contribute towards the profitability and
49
growth of the employer company. The philosophy is simple: give the employee a stake in any increase in market value of the company over time and he will thus have a vested interest in improving his productivity to the benefit of the company's performance and his own wealth. Issues that should be addressed by any proposed share-incentive arrangement, share option schemes & share purchase trusts ...." (Robin Lockhart-Ross, 1992:122).
• Share-incentive arrangements - II:
"... Some alternative/modified schemes; possible subjects consist of the following: Convertible debenture arrangement, Convertible preference share arrangement, Phantom share arrangement, Combination arrangements & Deferred purchase arrangement ...." (Robin Lockhart-Ross, 1993:2).
3.7 CONCLUSION
The fringe benefits described above are a comprehensive list of benefits
available to the taxpayer in the structuring of remuneration packages. It
need to be kept in mind that not all of these benefits could be used in all
situations due to the different circumstances of employees and employers.
The aim of the following chapter is different from the current one, in that
the focus is placed on the fringe benefits available in practice and in the
Act that is currently not taxable in the hands of the employee. It would be
noticeable that the list is not as extensive as the taxable fringe benefits,
because of legislation that has been introduced in reaction to the tax
planning opportunities that has been introduced by the taxpayer.
50
CHAPTER 4
THE FRINGE BENEFITS THAT ARE EXEMPT FROM THE
TAXABLE INCOME OF THE TAXPAYER
4.1 Introduction
4.2 Relocation Expenses of Employee
4.3 Education Grants to Employees' Children
4.4 Loans to Employee under Share Incentive Scheme
4.5 Employees' Share Incentive Schemes, Cancellation or Repurchase
4.6 Gratuity by Employer for Obtaining Degree or Diploma or Passing
Examination
4.7 Employees' Uniforms
4.8 Taxable Benefits Granted Prior to Part-time Re-employment
4.9 Bursaries and Scholarships
4.10 Conclusion
4.1 INTRODUCTION
Although the total amount of income, including any fringe benefit is
taxable in the hands of the employee - there is, however, certain
exceptions to the rule and that is what will be discussed in this chapter.
Excluding the exceptions that was listed under taxable fringe benefits in
the previous chapter, the need exists to discuss the fringe benefits that
will completely be exempted from the taxable income of a taxpayer
51
according to the Seventh Schedule of the Act and any other relevant
sections of the Act. The fringe benefits discussed hereafter would,
therefore, be classified as planning possibilities without any tax
implications to the taxpayer.
4.2 RELOCATION EXPENSES OF EMPLOYEE
The relocation of employees is something that could be the order of the
day at any big company. The tax implications and possible planning
situations arising from such a relocation is, unfortunately, not such
common knowledge. The following paragraph presents a summary of the
provisions of the Act, as well as the allowable tax-free fringe benefits.
The definition of this benefit could be summarised as follows:
" ... Where an employee is transferred from one place of employment to another or a person who takes up appointment of employment or whose employment is terminated will be exempt from tax on the benefit or advantage accruing to him ..." (Meyerowitz & Spiro, Permanent Volume:265).
The costs of relocation borne by the employer on behalf of an employee,
are specifically exempt from income tax in terms of section 10(1)(nB) of
the Act. The accrual that will not be taxed in the hands of the employee is
the following:
• Transportation of the employee, members of his household and
personal goods from his previous place of residence to his new place
of residence;
52
Expenses incurred by the employee in settling in permanent residential
accommodation at his new place of residence; and
The cost of hiring residential accommodation for the employee and
members of his household during a period of 183 days after transfer
took place or after the date of appointment ("Accommodation" could
refer to hotel accommodation or any other as needed according to the
circumstances of the relevant and individual cases.). According to
section 3(4) of the Act, the decision of the Commissioner in respect of
possible allowances granted to the taxpayer, is subject to objection
and appeal.
It has to be noted that relocation costs will include the payment of agent's
commission on the sale of the employer's home, bond registration costs
on the new home, as well as a relocation allowance to cover expenses
such as curtaining, school clothes, etc. Any loss on the sale of a property
will not, however, be covered by the exemption of the Act. The costs
referred to above, fall within the Commissioner's discretion and are not
subject to objection and appeal (Section 10(1)(nB) of the Act).
The exemption of being taxed on this fringe benefit could not be accepted
as a definite by the taxpayer:
"... The Income Tax Act exempts from tax any benefit or advantage enjoyed by an employee arising because his employer has borne certain expenses in consequence of the employee's transfer from one place of employment to another or as a result of his appointment to or termination of employment. But all of this are still subject to the practice of the Commissioner ..." (Information from Tax Planning, Corporate & Personal, Robin Lockhart-Ross, 1987:41).
The next fringe benefit that could also be exempted from taxation, is the
granting of education benefits to the employees' children.
53
4.3 EDUCATION GRANTS TO EMPLOYEES' CHILDREN
The fringe benefit described here, relates to a group of tax free benefits
that was introduced by the Act in the early 1990, but was only available
until 1 March 1992.
This exemption is only applicable to a benefit or an advantage accrued to
an employee before 1 March 1992 in respect of expenses relating to the
education of his children. Some limiting conditions that the employee had
to keep in mind are stated in section 10(1)(nC) of the Act. The wording of
the exemption reads that:
"... if the total grants by an employer to his employee during any year of assessment exceed R750, no portion of this total qualifies for the exemption ..." (Meyerowitz & Spiro, Permanent Volume:266).
4.4 LOANS TO EMPLOYEE UNDER SHARE INCENTIVE SCHEME
This fringe benefit is characterized by the employer providing a loan to the
employee to enable him to participate in the "share incentive scheme".
The share incentive scheme is discussed in detail in Chapter 3, paragraph
3.6.
The general rule relating to loans granted to employees is that where a
loan is granted to an employee at a lower rate than the official rate, as
stated in the Seventh Schedule of the Act, the difference between these
two rates should be included in the employee's taxable income in respect
of the relevant taxyear. Section 10(1)(nH) of the Act provides a partial
exemption to the taxpayer in the instance of receiving a low interest loan
54
from the employer, where 50% of the taxable benefit is exempted if the
following conditions are met:
The loan or any portion of it, was utilised before 15 March 1990,
For the purpose of acquiring shares under share incentive scheme
operated by the employer; and
The employee is prohibited from disposing of the shares in terms of
the scheme.
This exemption was applicable until the end of the 28 February 1995
taxyear, or until the employee is no longer prohibited to sell the shares (if
earlier).
4.5 EMPLOYEES' SHARE INCENTIVE SCHEMES, CANCELLATION OR
REPURCHASE
The benefit referred to, is one of the tax planning schemes used by the
taxpayer in the past to reduce the tax liability that would arise from a
share incentive scheme.
As stated in section 10(1)(nE) of the Act the following is exempted from
tax:
"... Any amount (including any taxable benefit) received by or accrued to an employee or office-holder under a share incentive scheme operated for the benefit of employees which was derived -
upon the cancellation of the transaction under which the taxpayer purchased the shares under the scheme; or upon the repurchase from him, at a price not exceeding the selling price to him, of shares purchased by him under the scheme,
55
is exempt from tax if in consequence of the cancellation or repurchase the taxpayer has not received or become entitled to receive any compensation or consideration other than repayment of any portion of the purchase price actually paid ...".
The reason for the inclusion of this section in the Act, is to cover the so-
called "stop-loss" provisions that are normally part of incentive schemes to
ensure that, in the event of cancellation or repurchase, the employee
participating in the scheme will only be relieved from any liability
remaining at the time of the cancellation or .repurchase. The exemption
will not be restricted because of the specific section which it is included
under normal circumstances.
The fringe benefit described in paragraph 4.4 and 4.5 specifically relates
to the share incentive scheme, whereas the following paragraph is
relevant to the employee who is still in the process of obtaining higher
qualification.
4.6 GRATUITY BY EMPLOYER FOR OBTAINING DEGREE OR DIPLOMA
OR PASSING EXAMINATION
This benefit is one of the fringe benefits that was available to the
employee before, but has expired since.
This exemption refers to a grant that could have been made to an
employee because of the success for. obtaining of a degree or diploma, or
in the passing of any significant examination, but was subject to the
discretion of the Commissioner. From 1 March 1992 this option was,
however, no longer available as a possible exemption for the taxpayer.
56
One of the earlier fringe benefits that is still currently available to the
taxpayer, is that of allowances for employees required to wear special
distinctive uniforms as described below.
4.7 EMPLOYEES' UNIFORMS
This benefit is only available to a group of employees with distinctive
requirements.
If an employee is required to wear a special uniform while on duty and he
is supplied with an uniform or an allowance is being paid to him in this
regard, the benefit arising from this situation is not regarded as being
taxable (sec 10(1)(nA)). The only provision for this exemption is that the
uniform is clearly distinguishable from ordinary clothing.
The tax planning situations arising from employees that is required to
retire at some stage, but is then at a later point in time required to assist
the previous employer will be described in paragraph 4.8 below.
4.8 TAXABLE BENEFITS GRANTED PRIOR TO PART-TIME RE-
EMPLOYMENT
This benefit would only be available under certain special circumstances
and if all of the requirements are met as explained below.
The taxable benefits as described in Chapter 3, paragraph 3.2 to 3.6 do
not apply to an employee who has retired as a result of superannuation,
ill-health or any other infirmity as described in the Act (Meyerowitz &
57
Spiro, Permanent Volume:267). In the case where the employee is re-
employed, the taxable benefits will be taxable in the hands of the
employee except where section 10(1)(nG) of the Act is applicable. This
section of the Act refers to an employee who after his retirement from full-
time service with the employer by whom the benefit or advantage has
been granted is re-employed on a part-time basis before 1 March 1992.
According to Meyerowitz & Spiro (Permanent Volume:268) this exemption
will only be applicable if the following is adhered to:
The cash remuneration received by or accrued to the employee in
respect of such part-time employment was payable at a rate not
exceeding R5 000 per annum;
The employee retired from such full-time employment on or after the
age of 60 years or as a result of ill-health or any other infirmity; and
The benefit or advantage was granted before the employee retired.
The R5 000 referred to above, applies to an annual rate and has to be
calculated proportionally in the instance of a period less than a year. It
also refers to the cash - remuneration and excludes the value of all taxable
benefits (Meyerowitz & Spiro, Permanent Volume:268).
The last fringe benefit mentioned in this chapter relates to bursaries and
scholarship which could possibly be exempted from tax if all the
requirements of the Act are met by the employer and the employee.
58
4.9 BURSARIES AND SCHOLARSHIPS
Section 10(1)(q) and section 23(j) of the Act regulates the fringe benefit
concerning bursaries and scholarships whereby some employers still
provide assistance to their employees.
Section 10(1)(q) of the Act exempts any bona fide scholarship or bursary
granted to enable or assist any person to study at a recognised
educational or research institution. If the grant has been made to an
employee or to a relative of an employee in circumstances indicating that
the grant would not have been made had the employee not been an
employee of that employer, the exemption will only apply if the following
conditions are met:
If the employee's present or future remuneration was not reduced or
forfeited in any way;
In the case of a bursary to a relative if the employee's remuneration
does not exceed R36 000 for the year; and
If the bursary that was granted to an employee's relative does not
exceeds R1 200 for the year.
Section 23(j) of the Act prohibits any salary sacrifices in the instance
where an employee's present or future remuneration was reduced or
forfeited to accommodate a bursary or scholarship. Should this be the
case, would the employer not be allowed to deduct bursary costs from his
taxable income.
Due to the controversy surrounding this benefit over the past few years,
an additional Practice Note had to be added to sections 10(1)(q) and 23(j)
59
of the Act, in order to assist the employer and employee in the application
thereof (Practice Note 17 of the Act).
4.10 CONCLUSION
All the fringe benefits described and discussed in paragraphs 4.1 to 4.9
above, present a summary of the benefits currently available to the
taxpayer free of any tax liability. The list of such fringe benefits is,
unfortunately, decreasing periodically because of the misuse of the
available benefits by the taxpayer.
The next chapter deals with the tax planning of fringe benefits according
to current practice, where every taxpayer attempts to structure his or her
remuneration package in such a way as to decrease the monthly and
annual tax liability.
60
CHAPTER 5
FRINGE BENEFITS AND TAX PLANNING
5.1 Introduction
5.2 Tax Planning Opportunities Identified by the Legislator
5.2.1 Holiday accommodation
5.2.2 Employee occupying more than one residential unit
5.2.3 Hire of employee's (or associated persons) house
5.2.4 Employee, spouse or minor child entitled or obliged to buy
accommodation after a period
5.3 Tax Planning Opportunities Identified by Practicing Tax Consultants
5.4 Conclusion
5.1 INTRODUCTION
In order to do an adequate study of fringe benefits, one needs to consider
legislation already in place and tax cases originating thereof, as well as
new tax planning possibilities. It is essential to concentrate on tax
planning possibilities identified in this chapter.
This chapter presents two different viewpoints on possible tax planning
opportunities, namely that of the legislator and that of current practicing
tax consultants.
61
5.2 TAX PLANNING OPPORTUNITIES IDENTIFIED BY THE LEGISLATOR
One of the first instances where tax planning opportunities had been
identified by the legislator, was in the case of residential accommodation
(Seventh Schedule, paragraph 2(d) of the Act). The following
opportunities was identified:
Holiday accommodation;
Employee occupying more than one residential unit;
Hire of employee's (or associated persons) house; and
Employee, spouse or minor child entitled or obliged to buy
accommodation after a period.
This tax planning will now be discussed in detail below.
5.2.1 Holiday accommodation
This benefit was originally introduced to executives of companies,
where the employer offered them a vacation at the coast in
accommodation owned by the employer. The legislator reacted on this
benefit by placing some taxable value on the free holiday
accommodation.
The rental value is determined on two grounds: If the employer hires
the accommodation from an independent third party the value of the
benefit would amount to the cost of hiring; and where the employer
owns the holiday accommodation a value would be determined using
R35 per day per person for the period that the person would be staying
at the accommodation (Seventh Schedule, paragraph 9(4) of the Act).
62
There is currently still some tax planning available in this regard,
because of the low taxable value in the case of the property being
owned by the employer, namely R35 per day whereas the market
related value could be as high as R350 per day. Employees would,
therefore, still make use of this taxable benefit because of the effective
low tax rate charged.
5.2.2 Employee occupying more than one residential unit
In the case where the employee is provided with accommodation
consisting of two or more residential units situated at different places
which he is entitled to occupy from time to time while performing his
duties, such units will be deemed to be one residential unit. The cash
equivalent of the value of the benefit would be determined as for one
unit (Seventh Schedule, paragraph 9(6) of the Act).
5.2.3 Hire of employee's (or associated persons) house
The general rule, or formula, as described in Chapter 3 paragraph
3.5.5, will not be used in the case where the employee has an interest
in the accommodation and the accommodation is let to the employer or
an associated institution (Seventh Schedule, paragraph 9(9) of the
Act). The value would then be deemed to be the sum of the rental
payable by the lessee and any other expenditure defrayed by the
lessee (such as rates, taxes and repairs) in respect of the
accommodation. The rental payable would not be taxable in the hands
of the lessor (employee) to avoid the situation of double taxation
(Seventh Schedule, paragraph 9(9) of the Act). The legislator even
went further and defined when the employee would be deemed to
63
have an interest in accommodation (Seventh Schedule, paragraph
9(10) of the Act).
5.2.4 Employee, spouse or minor child entitled or obliged to buy
accommodation after a period
This tax planning would only be applicable if the following is in place:
The accommodation is owned by the employer or associated
institution;
The employee, his spouse or minor child is, under an arrangement
with the owner, entitled or obliged to acquire the property at a
future date at a price stated in the agreement; and
The employee is required to pay in respect of his occupation a
rental fee calculated wholly or partially as a percentage of the
stated price.
The provisions of the Act that normally relate to the residential
accommodation fringe benefit would fall away and the employer or the
associated institution is deemed to have granted the employee a
housing loan (as described in Chapter 3, paragraph 3.5.4) equal to the
stated price and the interest payable thereon is deemed to be at a rate
equal to the percentage whereon the rental (referred to above) is
calculated (Seventh Schedule, paragraph 10A of the Act).
The next paragraph is a summary of some of the tax planning
alternatives that has been identified by practicing tax consultants.
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5.3 TAX PLANNING OPPORTUNITIES IDENTIFIED BY PRACTICING TAX
CONSULTANTS
During research performed for the purposes of this thesis, an article
consisting of two parts was identified which relates to the use of benefit
funds in the structuring of remuneration packages for the employee.
These funds could be used by the employee or even by the employer for
such structuring. These articles were published in 1994 and show the
direction followed by practicing consultants to enable a decrease in the
taxable income for the individual taxpayer.
The articles could be summarised as follows:
• Benefit funds I
The consultant refers to the possibility of using benefit funds to confer
benefits to the employee by the employer. If the employer is able to
make use of a benefit fund and to accumulate certain benefits in such
a fund, the benefit fund would be exempt from normal tax as per
Section 10(1)(d) of the Act. Such a benefit fund's tax status is
unfortunately not automatically tax free, but has to undergo a
registration process. The possible benefits available to a employee
from the benefit fund, varies from some medical benefits or lump sum
benefits payable to the employee based on the individual requirements
and circumstances. This amounts that will be received by the
employee should be of such a nature, that it would not be included in
the taxable income of a taxpayer under the paragraph (c), (d) and (I) of
the definition of Gross Income in Section 1 of the Act and also
paragraph 4 of the Seventh Schedule of the Act (Lockhart-Ross,
1994:60).
65
• Benefit funds II
Whether this use of benefit funds by the employer is allowable, has not
been confirmed by GA Urquhart in Taxation of Employees (1994:108):
"... It may be possible to use this mechanism (the friendly society) to pass tax free to employees what would otherwise be taxable benefits ...".
The consultant goes on further to discuss whether any lump sum
payments from these benefit funds would be regarded as taxable by
the Commissioner. Some possibilities that is mentioned by the
consultant in the use of benefit funds relates to the use of a benefit
fund to carry the insurance of employee-owned vehicles. The
possibility of bursary schemes in the form of some benefit funds is
lastly mentioned as a possibility to either the employees personally or
their dependents.
From the above it is quite clear that there definitely exist some tax
planning alternatives that can be used by the employer in conjunction with
the employee to provide some tax free benefits to the employee. Anti-
avoidance legislation are, however, put in place by the legislator to ensure
that no tax free fringe benefits will be enjoyed by the employee without the
Commissioner consent.
5.4 CONCLUSION
The fringe benefits that has been discussed in this chapter relates not to
the ordinary fringe benefit legislation, but rather to the more re-active
66
legislation that has been put in place in reaction to the aggressive tax
planning opportunities utilized by tax consultants. The last part of the
chapter is a summary of further tax planning alternatives of the future that
may be used by the employer to provide the employee with some tax free
benefits.
The following two chapters in the thesis have got a different objective than
the previous chapters. These chapters discusses the legislation that is
currently in place in respect of the employer. The two components
applicable to the employer are the deductibility of the costs of fringe
benefits from the employer's taxable income and the Value Added Tax
implications of fringe benefits.
67
CHAPTER 6
THE DEDUCTIBILITY OF THE COST OF FRINGE BENEFITS FOR
THE EMPLOYER
6.1 Introduction
6.2 Principles Regarding the Deductibility of Costs in General
6.2.1 Carrying on a trade in the Republic
6.2.2 Expenditure or loss
6.2.3 Actually incurred
6.2.4 During the year of assessment
6.2.5 In the production of income
6.2.6 Application to fringe benefits
6.3 Deductibility of Specific Costs Related to Fringe Benefits
6.3.1 Costs related to services provided to the employees of an employer
6.3.2 Travelling expenses _
6.3.3 Entertainment expenses
6.3.4 Expenditure on housing for employees
6.4 Conclusion
6.1 INTRODUCTION
Within the current economic situation, the deductibility of the cost of fringe
benefits is of utmost importance to the employer. The provision of fringe
benefits to the employee also requires to be of some benefit to the
employer. The employer will be unlikely to structure a package of any
68
employee, where some of the costs is not deductible from the employer's
taxable income. The benefit of an enthusiastic workforce, because of
structured packages, has to be compared to the actual cost of this to the
employer and the possible deductibility of these costs. To determine the
deductibility of these costs, certain sources need to be investigated:
Possible tax cases regarding the deductibility of costs in general;
The deductibility of the costs of fringe benefits in particular; and
The relevant sections of the Act.
Tax cases relating to the deductibility of costs are specifically referred to in
a decision of an income tax case held in the special court (ITC 575 (13
SATC 476)), stating that in the case where a person pays an allowance or
an advance payment to a director, manager or an employee regarding
travel or entertainment, the deductibility of these costs will be determined
by means of the general principles laid down by the Act and previous
court cases. These general principles is discussed in the following
paragraph.
6.2 PRINCIPLES REGARDING THE DEDUCTIBILITY OF COSTS IN
GENERAL
The principles governing the deductibility of the costs is divided into two
groups, namely the relevant sections of the Act and the relevant court
cases that has been decided on this. The well known term in respect of
the deductibility of costs in general is referred to as the "general deduction
formula".
69
The provisions of the Act is divided into the following:
The so-called 'general deduction formula' consisting of section 11(a)
which has to be read with section 23 of the Act; and
Various deductions which are specifically authorised by the Act.
Section 23B of the Act lays down a restriction regarding the possibility of
the deduction of costs more than once:
a... prevents an amount of qualifying more than once as a deduction or allowance ...".
As per two distinct decisions by the Appellate Division, Sub Nigel Ltd v
CIR (1948 (4) SA:580 (AD) (15 SATC 381)) and Joffe & Co. Ltd v CIR
(1946 AD:157 (13 SATC 154)), is the deductibility of expenditure or losses
determined in accordance with the Income Tax Act. Rules laid down by
accountancy principles or sound practice are therefore irrelevant.
The general deduction formula consists of some positive requirements
(which must be fulfilled in order for an amount to be deductible) and some
negative requirements (which, if present, are a bar to deductibility). The
following conditions must be met in order for an amount to qualify for
deduction under section 11(a) of the Act:
The taxpayer must be carrying on a trade in the Republic;
An expenditure or loss must have been;
Actually incurred;
In the Republic;
In the production of income; and
Not of a capital nature.
70
These particular requirements are discussed by means of listing the most
important court cases relating to this and include a discussion of the rules
that normally have to be applied in respect of the laid down requirements.
6.2.1 Carrying on a trade in the Republic
The carrying on of a trade within the Republic is a precondition for
deductibility of all the items in sub paragraphs (a) to (n) of section 11 of
the Act.
Preliminary or pre-production expenditure (that is expenditure incurred
before the taxpayer has commenced trading) is not deductible in terms
of section 11 of the Act (Borstlap v SIR 1981 (4) SA:836 (AD) (43
SATC 195); Reef Estates Ltd v CIR 1954 (2) SA:593 (T), 1954
Taxp:127 (19 SATC 153) & Practice Note 31: 3 October 1994).
One of the requirements of the general deduction formula is that the
cost need to be a expenditure or loss as discussed in the following
paragraph.
6.2.2 Expenditure or loss
Whether a cost is an expenditure or a loss could be regarded as a
unnecessary requirement, but this has been proved by the court to be
some factor that the taxpayer need to'consider. In the, case of Stone v
SIR (1974 (3) SA:584 (AD) (36 SATC 117) it was stated that a loss
incurred through an irrecoverable loan or in terms of a liability as a
surety, is of capital nature unless it is incurred in the course of a trade
as a money-lender.
71
The requirement that all costs should actually been incurred by the
taxpayer before the cost could qualify as a deduction should be
understood. The result of this is that the taxpayer does not have to
pay for the cost, but that there should exist some liability as described
in the following paragraph.
6.2.3 Actually incurred
The deductibility of expenditure or losses is determined in accordance
with the Income Tax Act - rules laid down by accountancy principles or
sound practice are irrelevant (Pyott Ltd v CIR 1945 AD:128 (13 SATC
121)). It seems, however, that section 11(a) of the Act does not
require that the expenditure or losses be 'necessarily' incurred, but if it
were 'actually' incurred it seems to be sufficient (Port Elizabeth Electric
Tramway Company Ltd v CIR 1936 CPD:241 (8 SATC 13) and
Nasionale Pers Bpk v KBI (1986 (3) SA:549 (A))).
It is significant to note that the expenditure is 'actually incurred' for the
purposes of section - 11(a) of the Act in the tax year in which the liability
for the expenditure is incurred, and not in the tax year in which it is
actually paid (if in a subsequent year) (Caltex Oil (SA) Ltd v SIR (1975
(1) SA:665(A)); CIR v Felix .Schuh (SA) (Pty) Ltd (1994 (2) SA:801
(A)) & Edgars Stores Ltd v CIR 1988 (3) SA:876 (AD) 1988 Taxp: 173
(50 SATC 81)). Where the employer have incurred costs in the
providing of fringe benefits to his employees, the only requirement for
these costs to be deductible, is that there is a liability to pay for these
costs. In the case where the employer is paying the employee a travel
allowance on a monthly basis, he would need to proof to the
Commissioner that there exist some liability for the employer in
72
regards to some employment contract or some other agreement
regarding this expenditure.
Where the taxpayer genuinely disputes liability for an amount and the
dispute is the subject of litigation, the expenditure in respect of that
amount is not 'actually incurred' until the court declares that the
taxpayer is indeed liable for the amount (CIR v Golden Dumps (Pty)
Ltd 1993 (4) SA:110 (A) (55 SATC 198)). This requirement of liability
as stated above has also been confirmed by Henry Vorster in a article
called, Unquantified and Defeasable Expenses Incurred in the
Production of Income (Henry Vorster, 1985:1).
The requirement of the general deduction formula, that the cost should
be incurred in the year of assessment, agrees with the whole objective
of the Act. This object can be defined, as that for income to be taxed
or for expenditure to be deducted both should be happening in the
year of assessment. The following paragraph explains this objective of
the Act.
6.2.4 During the year of assessment
The deduction of expenditure or loss must be claimed in the year of
assessment in which the expenditure or loss was 'actually incurred'.
There will be no element of choice for the taxpayer or the
Commissioner and if the expenditure is not claimed in the tax year, it
will then be forfeited (Sub Nigel Ltd v CIR 1948 (4) SA:580 (AD) (15
SATC 381) and Caltex Oil (SA) Ltd v SIR (1975 (1) SA 665(A))).
73
An essential factor of the formula is that expenditure has to be incurred
in the production of income. The next paragraph explains the
requirements of such production of income.
6.2.5 In the production of income
An amount is deductible in terms of section 11(a) of the Act if the
purpose of the taxpayer performing the act, was to produce income,
and if the expenditure was so closely linked to that act that it could be
regarded as part of the cost of performing it (Port Elizabeth Electric
Tramway Company Ltd v CIR 1936 CPD:241 (8 SATC 13)).
Expenditure is sufficiently closely linked to an income-earning
operation if it would be proper, natural or reasonable to regard the
expenses as part of the cost of performing it, having regard both to the
purpose of the expenditure and to what it actually effects (CIR v Genn
& Co (Pty) Ltd 1955 (3) SA:293 (AD) 1955 Taxp:122 (20 SATC 113)).
Section 11(a) of the Act does not require the expenditure, which is
claimed as a deduction, to have produced income in the same year of
assessment, or indeed at all. There is no requirement that the
expenditure be 'matched' to income (Sub Nigel Ltd v CIR 1948 (4)
SA:580 (AD) (15 SATC 381)).
Where a salaried taxpayer asserts that expenditure was incurred 'in
the production of income' in the form of salary, it is not necessary for
the employer to prove that he was under a contractual obligation to
incur the expenditure. Nor is it necessary for him to demonstrate that
the expenditure had a demonstrable effect on his income (KBI v Van
Der Walt (1986 (4) SA 303 (T))).
74
For expenditure to be incurred 'in the production of income', it does not
have to be expenditure which the taxpayer is obliged to incur.
Voluntary expenditure incurred in order to induce an employee to enter
and remain in the taxpayer's service is incurred 'in the production of
income' (Provider v COT 1950 (4) SA:289 (SR) (17 SATC 40)).
However it is important to note that ex gratia payments to employees
or their dependents, purely as consideration for past services, are not
incurred in the production of income' and are, therefore, not deductible
under section 11(a) of the Act (W.F. Johnstone & Co Ltd v CIR 1951
(2) AD:283 (17 SATC 235)).
Damages or compensation payable by the taxpayer will only be
deductible if the requirements of section 11(a) of the Act are met (Port
Elizabeth Electric Tramway Company Ltd v CIR 1936 CPD:241 (8
SATC 13); Joffe & Co. (Pty) Ltd v CIR 1946 AD:157 (13 SATC 354);
COT v Cathcart 1965 (1) SA:507 (SR,AD) 1965 Taxp:28 (27 SATC 1)).
All of the above requirements of the general deduction formula is
applicable to fringe benefits. The reason for this is because of the
nature of the costs incurred in respect of fringe benefits as can be
seen in the next paragraph.
6.2.6 Application to fringe benefits
The application of the general deduction formula to the costs normally
incurred by the employer would be based on the requirements as set
out by the Act. The main requirement of the deductibility of fringe
benefits costs would be relating to whether there exists some
employment contract between the employer and the employee. If that
75
is not the case, then the employer could have the situation where
costs has been incurred and the deductibility of it is in question by the
Commissioner because of the lack of a liability on the side of the
employer. There is some definite examples of costs and the
application of the Act to these costs as summarised below.
6.3 PRINCIPLES REGARDING THE DEDUCTIBILITY OF SPECIFIC COSTS
RELATED TO FRINGE BENEFITS
The following paragraph deals with the costs normally incurred by the
employer in an employer - employee relationship and whether these costs
would be deductible under the general deduction formula.
Where a fringe benefit is the use of a capital asset, the cost of acquiring
the asset is capital and is not deductible, the possibility is that these costs
could be subject to a wear and tear allowance depending on the
circumstances. Note that the fringe benefits are normally used for private
purposes by the employee but that this does not affect the deduction in
the hands of the employer. The consequences of Value Added Tax
(hereafter called VAT) will be discussed in Chapter 7.
The following paragraph is in respect of an employer who is in a servicing
business and the employee is receiving the benefit of these services.
Whether the Commissioner will allow the deduction of the costs that was
incurred in these providing of such services, has to be decided on the
requirement of the practice as described below.
6.3.1 Costs related to services provided to the employees of an
employer
76
All payments regarding services provided by an employee in terms of a
service contract are deductible. These costs are not only related to
the salaries and wages, but also to leave payments, cash related
fringe benefits and certain ex gratia payments at the retirement stage.
In the case where no actual payments were made, but goods or
service were given to the employee, the costs of these goods or
services are deductible. Should payments be in excess of the services
provided, the costs of these payments will be restricted by the
Commissioner as it does not relate to the service contract (Tobacco
Father v COT 1951 (1) SA:150 (SR) (17 SATC 395); Huxham &
Haupt,1995:76). It should be noted that the general principle, of the
deductibility of costs, which largely depends on the fact that the costs
should have been incurred in the production of income, also applies to
the current facts.
Travelling expenses are certainly the most recurring expense in any
kind of business, whether the costs incurred in this expenses are
always deductible is a different question.
6.3.2 Travelling expenses
The deductibility of travelling expenses depends on whether the
expenses are incurred in the production of income, i.e. whether it is so
closely linked to the earning of income as to be regarded as part of the
costs of income-earning operations. The important fact that should not
be left out of sight, is that the cost can not be of a capital nature.
Where travelling expenses has been incurred outside the Republic,
different provisions of the Act applies as described in section 17 of the
Act.
77
According to the court case, CIR v de Villiers (1962 (1) SA:581 (AD)
1962 Taxp:111 (24 SATC 385)) travelling costs incurred by the
taxpayer when travelling from his place of residence to the place
where he conducts his business, are not deductible. In the court case
Earl of Verulam v COT (9 SATC 107), which was quoted with approval
in the De Villiers (Ibid.) case, the following has been said on the
deductibility of travelling costs:
"... if a taxpayer chooses to live at a place of business he cannot deduct the expenses of travelling between his home and his business. These expenses are not regarded as being incurred in the production of the income. Even where the taxpayer conducts two businesses at different places he cannot deduct the expense of travelling between the one and the other. On the other hand, if his business requires him to move from point to point, for example as jockey seeking employment in different towns, or as a commercial traveller going from one town to another in search of business, in those cases his travelling expenses may be deducted ...".
If the taxpayer conducts his business from his home, his home should,
in respect of his travels there from, be treated as his place of business
in determining the deductibility of the travelling expenses (ITC 1206
(36 SATC 56) & Norton v Young, (1971) 3 All ER 412).
The above paragraph shed some light on the employee's situation
when considering the deductibility of travelling expenses, showing
which of these costs could be deductible if the employer has refunded
these travelling costs to the employee. See Chapter 3, paragraph 3.3
for more detail regarding the deductibility of travelling costs for the
employee in the case of a fringe benefit granted to him.
78
In the case of an employer who engages an employee and is paying
the cost of transportation of the employee and his family to the place of
employment, the employer will be entitled to deduct the cost thereof
(ITC 876 (23 SATC 221)). The cost to the employer of transferring an
employee from one branch to another is also allowed as a deduction
(See Chapter 4, paragraph 4.2, relocation expenses.).
The term travelling expenses is not confined to the employee's
personal expenses, but may also inclUde the expenses of other
persons whom the employee requires for the actual assignment. In
the court case, CIR v Hickson (1960 (1) SA:746 (AD) 1960 Taxp:49
(23 SATC 243)), the taxpayer was allowed to deduct his wife's
travelling expenses due to the fact that she had to accompany him
because of his physical condition. It is, therefore, usually in the case
of overseas travel that the question of dual or mixed purposes arises.
Where the trip was for business and holiday purposes, the costs have
to be apportioned between these two purposes (Meyerowitz & Spiro,
Permanent Volume:316).
Entertainment expenses are normally incurred by most businesses in
either the case of marketing or in the instance of showing some
gratitude to their employees. In most of these cases, the costs are
incurred by the employee and then reimbursed by the employer.
Whether these costs are deductible from the employer's taxable
income is discussed in the next paragraph.
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6.3.3 Entertainment expenses
The deductibility of entertainment expenses has to be decided on the
basis of the requirements of the Act and also by some relevant Court
cases.
Section 11(u) of the Act sets out the principles regarding the
deductibility of entertainment expenses together with entertainment
allowances received by the employee (See Chapter 3, paragraph 3.2,
entertainment allowances).
In any instance, the general principle will always apply that expenditure
on entertainment is only deductible where it is so closely connected
with the production of income earned by the employer that it can be
said that the expenditure properly, naturally or reasonably formed part
of the costs of earning the income. In two court cases, ITC 818 (20
SATC 507) and CIR v Hickson (1960 (1) SA:746 (AD) 1960 Taxp:49
(23 SATC 243)), it has been noted that the expenditure related to
entertainment was closely connected to the production of income, and
the fact that there was an element of hospitality or "guest-host"
relationship did not change the situation that the costs were laid out
wholly and exclusively for the purposes of trade; nor did it mean that
the expenditure became of a private, social or domestic nature.
Claims for expenditure on entertainment would have to be supported
be adequate records. In the case where the keeping of such account
will not be practical, has the court set out the following:
"... it is open to the taxpayer to submit the alternative evidence on the point: at the same time a mere estimate of such expenditure
80
unsupported by the particular facts relating thereto is insufficient ..." (ITC 679 (16 SATC 349); ITC 680 (16 SATC 355)).
There are a number of employers that are obliged to provide housing
to their employees, especially those that are in the remote parts of
South Africa. The costs that are incurred in this housing amounts to
millions and the deductibility of these costs are as essential as any
other cost. The importance has been set out in the following
paragraph.
6.3.4 Expenditure on housing for employees
The deductibility of expenditure incurred by the employers in providing
housing to the employees, would depend on the nature and extent of
the housing provided to the employees. The requirements as set out
by the Act is summarised below.
The deductibility of expenditure on housing for employees will only be
justified in the following instances:
When expenditure is incurred in the erection of any dwelling; or
Who for the purpose of financing in whole or in part the erection by
any person during a year of assessment of any dwelling, advances
or donates to any person any amount during this year of
assessment; and
Who satisfies the Commissioner that the dwelling will be occupied
exclusively by employees, or the household of the employee, and
are employed by the taxpayer for the purpose of his trade, will be
entitled to an allowance equal to 50% of the expenditure incurred
81
or of the amount advanced or donated during the year of
assessment (section 11(t) of the Act).
This allowance will not apply to:
An employer who derives income from the sale of immovable
property to persons not employed by him;
Employers engaged in mining;
Farmers; or
Dwellings occupied by:
Relatives of the employer (relative as defined in section 1 of the
Act);
Shareholders of the company who acts as the employer;
Relatives of such shareholders as referred to above; or
Shareholders (or their relatives) of a company which is
associated with the company that acts as the employer "by
virtue of their shareholding".
A housing company will qualify for the allowance, if it builds houses for
the employees of a company wholly owned by its own sole or principle
shareholder, or for the employees of its own sole or principle
shareholder.
A recoupment will be calculated in the case where the dwelling -
becomes occupied by a person who is not an employee. Where the
house has been sold to a third party or to the employee, will the
recoupment not be calculated under section 11(t) but section 8(4)(a) of
the Act.
82
The deductibility of the expenses incurred by the employer in the case
of housing provided to the employee was the subject of a few court
cases in the past. One of the disputes in the cases was whether the
legislation in respect of the costs incurred actually grants the authority
to deduct such costs. It was decided in the cases that the facts of
each individual taxpayer need to be scrutinized before the actual
application of the Act (ITC 889 (23 SATC 347); ITC 932 (24 SATC
341); SIR v Wispeco Housing (Pty) Ltd (35 SATC 14); ITC 1511 (54
SATC 39); ITC 1566 (56 SATC 34)).
6.4 CONCLUSION
The deductibility of the costs relating to fringe benefit is a relevant issue to
most of the employers in the market. The costs incurred by the employer
in salaries and remuneration packages becomes more and more a
material item in the financial statements. The next chapter and also
relating to the employer, deals with the Value Added Tax (hereafter called
VAT) implications of fringe benefits provided to employees. It seems that
this is currently not a subject that is being understood by the employer,
with the result that some employers can face material penalties and
interest in the case of an underpayment of VAT.
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CHAPTER 7
IMPLICATIONS OF THE VALUE ADDED TAX ACT ON THE
GRANTING OF FRINGE BENEFITS
7.1 Introduction
7.2 Employee's Remuneration
7.3 Fringe Benefits Subject to Value Added Tax
7.3.1 The time implications for Value Added Tax as discussed
7.3.2 The reason for the provisions of fringe benefits in the Value Added
Tax Act
7.3.3 Fringe benefits being affected by the Value Added Tax Act
7.3.4 Published article about the Value Added Tax implications on the
travel allowance and company car fringe benefits
7.4 Conclusion
7.1 INTRODUCTION
The purpose of the research in previous chapters was to concentrate on
the implications of the Income Tax Act on fringe benefits used as part of
the structuring of remuneration packages by employees. In chapter 6,
however, there came a shift in the focus of the study, namely towards the
employer and the deductibility of costs incurred in the providing of fringe
benefits to the employees. However, it has also to be mentioned that the
granting of fringe benefits by the employer to the employee has certain
Value Added Tax (hereafter referred to as VAT) implications in terms of
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the VAT Act, Act 89 of 1991 (hereafter referred to as the VAT Act). In the
following paragraphs is a discussion of the reasons of the inclusion of
fringe benefits in the VAT Act and the implications thereof.
7.2 EMPLOYEE'S REMUNERATION
VAT would only be charged in the case of the carrying on of an enterprise.
In the carrying of an enterprise their would be input and output tax. Input
tax would arise from the obtaining of goods bought by the enterprise,
where output tax would arise from the rendering of services or the sale of
goods by the enterprise.
The rendering of services by an employee or holder of the office is not
deemed to be the carrying on of an enterprise to the extent that
remuneration as contemplated in the definition of remuneration in the Act
(Income Tax Act) is paid or payable.
The definition of remuneration as set out in Schedule 4, paragraph 1 of
the Act read as follows:
"... any amount of income which is paid or is payable to any person by way of any salary, leave pay, allowance, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retirement allowance or stipend, whether in cash or -otherwise, and whether or not in respect of services rendered, ...".
Based on the definition provided in the Act, the following list of items can
be regarded to constitute remuneration:
• Any amount received as an annuity;
85
For services rendered;
For the termination or loss of office or employment;
As a lump sum benefit from a pension, provident and retirement
annuity fund;
In commutation of amounts due under any contract of employment;
and
Fringe benefits.
It is necessary that the definition of remuneration is read in conjunction
with the VAT Act, to enable the understanding of which fringe benefits will
be subject to VAT.
Where services are rendered by any person in the course of any trade
carried on by him independently and such a person receives an amount
for these services, it will be excluded from the definition of remuneration
(Silke, Permanent Volume:4-16). These amounts will, therefore, be
subject to VAT where such a person is registered for VAT. A person will
not be deemed to carry on a trade independently if:
He is subject to the control or supervision of any other person as to the
manner in which his duties are performed or as to his hours of work;
or
The amounts paid for his services consist of earnings which are paid at
regular daily, weekly, monthly or other intervals (Silke, Permanent
Volume:4-17).
In the instance where the services are not rendered independently, will
they be regarded as remuneration and not be subject to VAT (Silke,
Permanent Volume:4-17).
86
The next paragraph will deal with the VAT that should be charged on
fringe benefits provided by the employer.
7.3 FRINGE BENEFITS SUBJECT TO VAT
The taxable value of the fringe benefits referred to in this chapter is being
calculated based on the provisions of the Income Tax Act and in particular
by the Seventh Schedule of the Income Tax Act. The value on which the
VAT will be charged will be on the same value as per the Income Tax Act
with the result that the taxable value will equal the cash equivalent of the
supply.
Where an employer provides certain benefits to his employee which will
be taxable under the Income Tax Act in normal circumstances, it is
regarded for VAT purposes that a supply is deemed to have occurred.
However, VAT will not be payable in the following instances:
Provision of fringe benefits that are exempted (travel and
entertainment allowances) or zero-rated; or
On fringe benefits provided in the course of an employer making
exempt supplies in normal conditions; or
To the extent to which the employee has paid for the fringe benefit; or
Where the employer claims the VAT portion of the supply from the
employee (Silke, Permanent Volume:14-15).
Where an employer, therefore, provides an employee with a fringe benefit
which constitutes a taxable supply, he will be required to make an output
87
tax adjustment. It is important to understand the essential elements of
VAT before calculating VAT on fringe benefits. The next paragraph
describes such elements of VAT.
7.3.1 The time implications for VAT as discussed
The first important element in applying VAT to fringe benefit, is the
time implications and when it "will be regarded that a deemed supply
has been made in the carrying of an enterprise.
A fringe benefit is deemed to be supplied at the end of the month in
which the employee or office-holder becomes liable for fringe benefits
tax. The liability for VAT will arise in the supplying of fringe benefits to
the employee as part of his remuneration package (Silke, Permanent
Volume:7-16).
When a fringe benefit is not required to be included as remuneration
for the employee, the time of supply will then, in terms of the VAT Act,
be the last day of- the year of assessment in which the benefit or
advantage has been granted. The employer could, however, still
recover from the employee the amount of VAT paid after the actual
payment of the output tax has taken place (Strauss,J. & Brettenny,A.,
1992:20).
The following paragraph deals with the background the legislator had
when it was decided to include fringe benefits as a deemed supply in
the VAT Act.
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7.3.2 The reason for the provisions of fringe benefits in the VAT Act
The rationale behind the fringe benefit provision that was included in
the VAT Act, is to ensure that a vendor effectively only claims an input
tax credit for goods and services which are used, consumed or
supplied in the course of his enterprise and not also on goods and
services which are granted to an employee as a fringe benefit. The
possibility arises that an employee can obtain certain services free of
VAT and be in a better position than the person who does not receive
such a service from his employer.
Another possible way of dealing with fringe benefits granted to
employees, is that for VAT purposes, credit could be disallowed for
any input tax on inputs relating to fringe benefits. There would,
therefore, be a neutrality between purchases by employers on behalf
of employees and purchases by any other persons. If this route was
followed, difficulties could have arised from the valuation of the benefit
enjoyed by the employee when the goods and services are used partly
for the employer's business and partly for the employee's benefit. In
order to reduce the compliance costs to the employer, it was decided
to use the same valuation provisions and methods already set out by
the Income Tax Act and described in previous chapters.
The effect of these provisions is that an input tax credit could be
claimed by employers for expenditure that was incurred to provide
these fringe benefits, which can consist of the supply of certain goods
or services. The valuation of these fringe benefits will be determined
according to the Seventh Schedule of the Act and must be accounted
for as a deemed supply of goods and services on which output tax is
payable. Where the value of the benefit for the Act's purposes is the
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same as the cost of providing the benefit, the output tax will be
neutralising the input credit allowed to the employer. It should,
however, be noted that the same effect will be achieved if the input
credit is disallowed in the hands of the employer.
It is essential to provide a list of the fringe benefits that will be subject
to VAT, as identified in the VAT Act. The following paragraph provides
such a list.
7.3.3 Fringe benefits affected by the VAT Act
The folloWing discussion is dealing with the fringe benefits that has
been affected by the inclusion - of fringe benefits in the VAT Act.
In terms of the Seventh Schedule of the Act, an employee will be liable
for income tax on the following benefits:
Assets provided at less than full value;
The right of use of assets;
The right of use of motor vehicle;
Meals, refreshments and vouchers for meals and refreshments;
Residential accommodation;
Free or cheap services;
Low-interest loans and subsidies;
Debts paid or waived by employers;
Housing subsidies; and
International travel.
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For a detailed discussion on the Income Tac implications of the fringe
benefits listed above, refer to chapter 3, paragraph 3.5
The Vat Act does not include all of the above as actual supplies made
by the employer in the course of the enterprise. The reason for these
exemptions are that some of these fringe benefits are exempt or zero-
rated supplies for VAT purposes. These kind of supplies are dealt with
by the VAT Act as follows: an output tax adjustment need not be
made if the supply of goods or services' is an exempt or zero-rated
supply or a supply of entertainment. The conclusion to be drawn from
the facts as stated above, is that the employer is exempt of paying
VAT on certain fringe benefits (Silke, Permanent Volume:14-17).
If the fringe benefit were supplied in the course of making both taxable
and exempt supplies, an apportionment for VAT purposes will have to
be made to account only for the extent to which the fringe benefit
relates to the making of taxable supplies.
The following is a detailed list of fringe benefits based on the facts as
described above:
• Fringe benefits exempted from VAT due to reasons as discussed
above:
Residential accommodation;
Low-interest loans and subsidies;
Housing subsidies;
Profit gained from share-option schemes;
Debts paid or waived by employers;
Entertainment allowances;
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Travel allowances; and
Subsistence allowances.
• The provisions as laid down by the VAT Act, that would normally be
applied in the case of the use of a company car is as follows:
If the employer is not claiming the VAT input tax in his VAT
return on this particular vehicle, will it be required to calculate
the VAT output tax at 0.3% of the determined value per month;
and
In the instance of the employer being able to claim the VAT
input on the vehicle, will the calculation of the VAT output tax be
based on 0.6% of the determined value per month.
(Refer to the Chapter 3, paragraph 3.5.3 for the definition of
determined value.)
In the instance where the employer will be selling a motor vehicle to
an employee at value less than current value:
If the employer was not able to claim the VAT input tax with the
original purchase of the vehicle, will there be deemed to be no
VAT output tax on that fringe benefit; or
Where the employer was able to claim the VAT input tax with
the original purchase of the vehicle, will there be VAT output tax
payable on the value of such fringe benefit.
The last paragraph dealing with the VAT implications of fringe benefits,
is concentrating on the VAT provisions applicable to the travel
allowance and the company car.
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7.3.4 Published article about the VAT implications on the travel
allowance and company car fringe benefits.
The discussion in the following paragraph is based on an article
published in a well-known tax publication, Information from Tax
Planning, Corporate & Personal, where important factors were
mentioned regarding the effect of VAT on the motor vehicle related
fringe benefits.
The VAT implications of the company car scheme can be summarised
as follows:
The employer-company will incur VAT on acquisition of the car
(method of the acquisition does not affect the VAT that will be
incurred in total), with the further effect that the VAT input credit
could not be claimed; the reason why this input credit will not be
able to be claimed by the employer relates to the provisions of the
VAT Act specifying that in the case of a motor vehicle as defined,
no input credits can be claimed (Section 12 of the VAT Act);
Most of the running costs expended by the employer on the car will
attract VAT, but for these expenses the employer is able to claim
an input tax credit; and
On the output tax side, the employer's provision of the company car
to the employee constitutes a fringe benefit and is, therefore,
deemed to be a taxable supply for VAT purposes.
At the other end of the scale lies the fixed travel allowance scheme,
under which the employer awards to the employee a monthly cash
allowance to cover his costs of owning (or leasing) and running his car.
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Travel allowances in general are not subject to VAT, because, if
anything, they would constitute a supply of money, which amounts to
an exempt financial service. This type of travel allowance scheme,
therefore, has no direct VAT implications for the employer. Under this
fixed travel allowance scheme, is it the employee as owner (or lessee)
of the vehicle who incurs the expenditure, and consequently the VAT,
on buying (or leasing) the car. This situation resulted in the more
flexible allowance scheme where there will be a fixed portion for
owning the car and a flexible portion (financed by a credit card) for the
running costs of the vehicle (or known as the fleet management
option) As the comment was made by Lockhart-Ross this could be
argued as follows:
"... It may be said that it is effectively the employer who funds the VAT by having to build into the allowance an amount to cover the employee's exposure to VAT ..." (Lockhart-Ross, 1992:85).
It is clear that there is some argument that is overlooked by the
consultants in favour of this. The running expenses on an employee-
owned car has to be the employee's responsibility and the fact that it is
being paid by the employer through his fleet management does not
affect this factor. This is even further stressed by Lockhart-Ross when
he makes the following comments:
"... I believe it to be dangerous to allege that the employer is entitled to an input tax credit on running costs ..." (Lockhart-Ross, 1992:86); "... There is a very real possibility of its being attacked by Inland Revenue under the general anti-avoidance provisions ..." (Lockhart-Ross, 1992:87); and "... It attempts to secure for the employer an input tax credit without exposing it to a corresponding output tax liability ..." and "... Despite the established existence of its hybrid car scheme, even the
94
employer in this situation might well not survive the attack on its scheme ..."(Lockhart-Ross, 1992:88).
This warning is equally true for VAT and each employer should
critically examine from all tax angles the treatment of its current travel
allowance scheme and the consequences of any switch to an
alternative arrangement.
7.4 CONCLUSION
The discussion of the possible VAT implications on the fringe benefits as
used in the structuring of a remuneration package has been limited to the
actual provisions of the VAT Act. The reason for not having a more
extensive discussion is due to the whole purpose of this research, namely
the fringe benefits available in the structuring of package by the
employee. It has, however, been identified that the VAT implications of
fringe benefits need to be understood by the employer and was therefore
included.
In the following chapter, there is a final shift in the focus of the research.
The chapter is set to identify the fringe benefits available to the taxpayer
in the international tax world. The research is limited to eight countries
and is discussed from the viewpoint of the employer, employee and the
foreign national seconded for a limited period.
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CHAPTER 8
THE TAXATION OF FRINGE BENEFITS IN OTHER
COUNTRIES
8.1 Introduction
8.2 Australia
8.3 Canada
8.4 Japan
8.5 The Netherlands
8.6 New Zealand
8.7 Switzerland
8.8 United Kingdom
8.9 United States of America
8.10 Conclusion
8.1 INTRODUCTION
To ensure an adequate description of fringe benefits, it is essential that a
description of selected countries' legislation of fringe benefits is included.
The most important source of the investigation was the current legislation
that is in place and in practice all over the world. It was, however, decided
to restrict the research to the following eight countries:
Australia;
Canada;
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Japan;
The Netherlands;
New Zealand;
Switzerland;
United Kingdom; and
United States of America.
The discussion has been done under the following headings for each
country:
Employee: possible fringe benefits in place for the employee to enable
the structuring of salary package;
Employer: the costs of fringe benefits and the deductibility of the
costs; and
Tax legislation for individuals (residents and non-residents) with
emphasis on the situation where there are either taxpayers emigrating
or taxpayers on secondment from their employers.
8.2 AUSTRALIA
The first country investigated is Australia. It is most probably the country
with the most recent tax legislation in place, with the result that the
legislation governing the fringe benefits, is regarded as a different and
new way of thinking.
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8.2. .1 Employee
A detail discussion of the fringe benefits available to the employee in
the structuring of remuneration packages, has been included in
paragraph 8.2.2
8.2.2 Employer
A separate federal tax is imposed on all employers, whether resident
or non-resident in Australia (except public benevolent institutions), with
respect to the total taxable values of specified fringe benefits provided
to employees (or associates), including employer-provided cars, free
or low interest loans, residential accommodations, expenses paid on
behalf of employees, certain types of employer-provided entertainment
and travel, and goods and services provided by employers (Coopers &
Lybrand, 1996:A-39).
The tax that is applied relates to benefits provided in relation to
employees who are residents of Australia (except where the relevant
salary or wages of the employee is exempt from Australian income tax)
and to non-resident employees whose salary or wages from the
employment have an Australian source (Coopers & Lybrand, 1996:A-
39).
The rate of tax on the "tax-inclusive amount" of the taxable value of
benefits is 48.475% for the year ending March, 31, 1996, and 48.5% in
the following years. The amount of fringe benefits tax due and
payable is an allowable deduction to employers effective April 1, 1994.
Fringe benefit tax is self-assessed, without need for any notice of
assessment from the taxation authorities. Each employer must
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calculate the amount of tax that is due and pay that amount and file a
return no later than the 28th day of the following month after the end of
the fringe benefits tax year (i.e., by April 28). Quarterly installments
are payable in most cases during the course of the year (Coopers &
Lybrand, 1996:A-39).
Special provisions are in place in respect of entertainment expenses.
Income tax deductions are not allowed for most entertainment
expenses, however, certain entertainment expenses provided to
employees are tax deductible effective April 1, 1994, but subject to
fringe benefits tax. It should be noted that provisions for employee
benefits (annual leave, sick leave, long service leave , etc.) are not
deductible. Deductions for these expenses generally are allowable
only when payments are made to the employee (Coopers & Lybrand,
1996:A-43).
8.2.3 Tax legislation for individuals (residents and non-residents)
Salary and wages - earned overseas by an Australian resident and
subject to tax in the country of source are fully exempt from Australian
income tax where derived in performing services overseas for a
continuous period of at least three months. "Tax sparing" relief (i.e.,
the granting of credits for taxes forgone by the foreign country) may be
provided under a tax treaty between Australia and the country
concerned or granted under regulations on a country-by-country basis.
Australian residents are subject to tax on their world-wide income and
world-wide capital gains, whereas non-residents are subject to tax only
on their Australian-source income and their capital gains on certain
Australian-related assets. The Australian-source income of a non-
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resident individual is not taxed at the same rates that apply to a
resident (Coopers & Lybrand, 1996:A-43).
The legislation in place regarding fringe benefits in Australia, does not
effect the employee as such but rather requires the employer to pay a
tax on the fringe benefits provided to the employees. This is then also
the difference between Australia and South Africa, where the shift in
the tax liability has been moved from the employee to the employer.
The next country that is discussed, is Canada with a more
conventional approach to the taxation of fringe benefits.
8.3 CANADA
The following country, Canada, has legislation on fringe benefits that can
be regarded as not complex and also easier to administrate. This is
shown by the discussion set out below.
8.3.1 Employee
Tax is imposed at graduated rates upon taxable income of individuals.
The following fringe benefits could be identified from the practice as
being taxable (Price Waterhouse:87):
Board and lodging (subject to exemption for special work sites);
Housing allowances or subsidised rental arrangements;
Employer premiums paid to a provincial health services plan;
Interest-free or low interest loans;
Tax equalisation payments;
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Automobile provided by employer;
Travelling expenses of the employee's spouse; and
Stock options.
There are also certain fringe benefits that are not subject to tax and
could be regarded as non-taxable (Price Waterhouse:214):
Moving expenses within limits;
Uniforms and special clothing;
Group term life insurance coverage to $25 000 (except for Quebec
residents);
Employer premiums to private health services plans (except for
Quebec residents);
Reimbursement of loss on sale of home due to employment
transfer; and
Certain employee counseling services provided or paid for by the
employer.
In respect of interest-free or low-interest loans the following details
have been identified from legislation. The taxable benefit is calculated
as the difference between imputed interest on loans, determined by
reference to the yield on Government of Canada Treasury bills, and
actual interest paid on the loan. The interest must be paid within 30
days after the end of the year in question to be taken into account for
the purpose of computing the benefit (Price Waterhouse:214).
If such a benefit is included in the income of a taxpayer in respect of
an employee or shareholder debt, that benefit is regarded as an
interest expense of the debtor and this may also give rise to an interest
101
deduction, by the employee, where the loan is used to earn income or
to acquire income-producing property. Where the employee needs to
relocate within Canada and moves 40 kilometers closer to his work
location, no interest benefit arises with respect to the first $25 000 for
the first 5 years of the loan only (Price Waterhouse:214).
Certain details in respect of automobile benefits have been identified
from legislation. An employee is deemed to receive a taxable benefit if
a company-owned or company-leased automobile is made available
for the use of the employee or related person (The amount of the
taxable benefit is determined in relation to the value of the particular
automobile). The taxable benefit is reduced by the amount that the
employee or related person reimburses the employer for the use of the
automobile (Price Waterhouse:214).
If employees use their own automobiles for business purposes, any
reimbursement by the employer of the operating expenses or a
reasonable allowance based on the distance travelled is generally
excluded from the employees' income. If the employer pays for the
personal-use portion of operating costs of an automobile, the
employee is considered to have received a taxable benefit (Price
Waterhouse:214).
Under the heading Stock option and stock purchase plan benefits,
certain additional legislation was put in place by the Commissioner of
Revenue for Canada. Where an employee purchases shares of the
employer-corporation (or a related corporation) from the employer at a
price below market value, the excess of the market value of the shares
at the date of purchase over the price paid to acquire options and the
shares themselves are considered to be a taxable benefit. That
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taxable benefit must be included in the employee's taxable income in
the year that the option or right is exercised. The employee includes
only three-quarters of this benefit in income if the option price for the
shares less their fair market value at the time of the option price for the
shares is not less than their fair market value at the time the option is
granted and if certain other conditions are met. The cost of the shares
to the employee for capital gains purposes is the market value of the
shares on the day that the option or right is exercised. Accordingly,
any capital gain or loss accruing after the date of exercise of the
options will arise only on the ultimate disposal of the shares (Spicer &
Oppenheim, 1989:26).
Stock options granted by Canadian-controlled private corporations to
employees who deal at arm's length with the company get special
treatment. Basically, employees who are granted stock options in
such circumstances are not considered to have received a taxable
benefit until the option shares are sold, provided they hold the shares
for two years after the date of exercise of the option. Upon sale of the
shares the individual would include in income the same amounts
described (Spicer & Oppenheim, 1989:26).
An individual holding options to purchase shares of the employer
corporation may gain an advantage by exercising them before moving
to Canada because Canada will seek to tax the whole option benefit
when the options are exercised. The individual's home country may
tax the benefits at a different time, at a lower effective tax rate or not at
all. However, the timing of a disposition of option shares should not be
based primarily on tax considerations (Spicer & Oppenheim, 1989:26).
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Allowances generally must be included in income. Allowances must
be distinguished from reimbursements. A reimbursement is a payment
by an employer to repay the employee for amounts spent on the
employer's business. An allowance is a payment an employee
receives from the employer in addition to salary or wages without
having to account for its use (Spicer & Oppenheim, 1989:27).
Two allowances pertaining to travelling expenses that need to be
included in income, if they are reasonable, are those paid to an
employee for the following (Spicer & Oppenheim, 1989:27):
Expenses in connection with selling property or negotiating
contracts for the employer; and
Those for an employee who does not sell property or negotiating
contracts but who must travel away from the municipality and
metropolitan area of the employer's establishment.
For the fringe benefit, moving expenses, certain rules will apply to the
taxpayer. A taxpayer starting new employment and moving from one
residence in Canada to another residence in Canada that is at least 40
kilometers closer to the new work location may deduct eligible moving
expenses. The deduction for moving expenses cannot be greater than
the income for the year from the new employment. Accordingly, the
taxpayer should avoid moving at the very end of a tax year if the
moving expenses will be greater than the income for the year from the
new location. Amounts not deductible in one year may be carried
forward to the next year and deducted from income earned at the new
location (Spicer & Oppenheim, 1989:27).
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Moving expenses may also be reimbursed to the employee by the
employer. While reasonable moving costs reimbursed by an employer
are not considered to be taxable benefits, they cannot be deducted by
the employee.
8.3.2 Employer
Looking from the perspective of the employer the following fringe
benefits can be identified (Spicer & Oppenheim, 1989:28):
Canada pension plan, Quebec pension plan;
Additional benefits through private pension plans; and
Maternity leave.
Group benefits normally applied by major group companies in Canada,
includes (Spicer & Oppenheim, 1989:28):
Group life insurance with death benefits;
Payment of the employee's share of government hospital and
medical plan premiums; and
Extended health insurance, providing additional coverage for
semiprivate or private hospital accommodation and the cost of
prescription drugs.
Other benefits provided by the employers in the primary and goods-
producing industries and in remote areas (no statues requiring that
from employers) (Spicer & Oppenheim, 1989:27):
Canteens;
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Subsidised housing;
Meals; and
Transportation.
Costs of fringe benefits that the employer would be willing to incur
could add up to: (Spicer & Oppenheim, 1989:27G)
30 to 35% of the payroll; and
Such package would include: compulsory unemployment
insurance, Canada Pension Plan payments, cost of statutory
holidays, four weeks' vacation pay, company pension plan.
8.3.3 Tax legislation for individuals (residents and non-residents)
Residents of Canada must include all income in their world-wide
taxable income, whereas non-residents only include their income from
carrying on a business or from providing personal services in Canada,
plus certain capital gains on the disposal of Canadian property. Non-
residents who sojourn in Canada for 183 days or more in a calendar
year, however, are deemed to be residents for the entire year and as
such are taxed in Canada on their world-wide income. Where a non-
resident individual is employed in Canada, the income reasonably
attributable to that activity is subject to tax. In the case of an entity
resident in a country with which Canada has a tax treaty, the right to
tax is generally modified so that Canadian tax may be *vied on profits
only if the non-resident is carrying on a trade or business through a
permanent establishment in Canada. Certain treaties also provide a
limited exemption for income of a non-resident individual from
106
employment or personal services performed in Canada (Spicer &
Oppenheim, 1989:26).
In view of these general principles, the areas of compensation which
are of particular concern to foreign nationals working in Canada are as
follows Spicer & Oppenheim, 1989:27):
Base salary and wages are, of course, taxable;
Cost of living allowances, expatriate premiums for working in
Canada, home leave reimbursements, school tuition
reimbursements and tax equalisation payments (reimbursements of
foreign and/or home country taxes) are fully taxable in Canada as
income form employment;
Benefits in kind are generally considered to be taxable
compensation;
Moving expenses which are paid or reimbursed by an employer do
not have to be included in taxable income. However, where an
employee moving to or leaving for Canada incurs expenses over
and above the amounts reimbursed, the excess will not be allowed
as a deduction against Canadian taxable income. As a result,
added care must be taken in designing policies to compensate
employees for their moving expenses;
Subsidising an employee's living accommodation is taxable as
. income from employment;
Stock option benefits are taxable when the option is exercised, and
there are no exceptions for foreign plans; and
All remuneration received in Canada will be taxed as Canadian
compensation, even if it pertains to the pre-Canadian period of
employment.
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The only material difference between Canada and South Africa in the
type of fringe benefits available to the taxpayer, relate to the difference
in circumstances between the two countries. It seems that the
administration of the Canadian legislation regarding fringe benefits is
more basic than that of South Africa. The next country that has been
investigated, is that of Japan with a different background and view
regarding the providing of fringe benefits to employees.
8.4 JAPAN
The culture of Japan create a number of differences between the fringe
benefits available to the taxpayers in Japan and those taxpayers in the
western countries. The differences in legislation is highlighted below.
8.4.1 Employee
National individual income tax is payable by resident individuals on
income less various deductions. The term "employment income"
includes salaries, wages, pensions, bonuses and other allowances of
a similar nature. Employment income is generally paid in cash.
However, it is not limited to straightforward payments. Payments in
kind or economic benefits are also included in employment income.
Therefore, no matter how the compensation is composed, the total is
subject to income tax, unless specifically exempted. The following
items of a typical compensation package are exempted from income
tax or special treatment will be applicable (The reference to expatriates
does not exclude the residents of Japan because there is not much
difference between the legislation applicable to the expatriates or the
residents of Japan) (Price Waterhouse:77):
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The payment of rent on a house or apartment occupied by an
expatriate will usually result in a certain amount of taxable
compensation. For employees who are not directors of the
company from which they receive the housing, the amount of
income attributable to this benefit is equal to the assessed rental
value. The assessed rental value is computed in accordance with
the income tax regulations and is usually equal to 5 to 10% of the
actual rent. In the case of company directors, the amount of
assessed rental is generally 35% of the actual rent. If the non-
director expatriate repays to the company one-half of the assessed
rental amount, no income tax will accrue to the expatriate;
Tuition fees paid by the employer for children of expatriates are
taxable income. However, an exception to this taxable treatment
was established by a private tax ruling after a objection has been
lodged against the Commissioner of the Japanese tax authorities,
with respect to the contribution plan of certain international schools
in Japan. According to this ruling, if employing companies
participate in such contribution plan the expatriates' dependents
may be exempted from tuition fees and the expatriates will not be
required to report the benefits as taxable income. The employing
companies' deduction for the cost of these benefits will be limited to
the total 1.25% of taxable income and 0.125% of paid-in-capital;
A company car used primarily for the employer's business is not
treated as a taxable economic benefit, even if the expatriate
occasionally uses such car for private purposes;
It has been established that home leave transportation should not
be subject to income taxes provided the expatriates are not taking
home leave more than once a year, and are taking home leave in
their home country;
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Moving expenses are regarded as non-taxable income under the
Income Tax Act; and
The tax authorities of Japan have not yet expressed their views as
to whether or not furniture storage should be treated as taxable
income.
Taxable income is assessed on an accrual basis. Items not paid on a
regular basis are regarded as accruing when paid by employers to or
on behalf of the expatriates (Price Waterhouse:77).
8.4.2 Employer
The following can be recorded as normal practice for the employer in
Japan to use for the structuring of remuneration packages (Spicer &
Oppenheim, 1989:126):
Employees' public commutating costs are generally paid;
Most large industrial enterprises have workers' canteens that
provide a free or subsidised midday meal;
It is common for large enterprises to lease housing facilities to
employees at a nominal rent or to grant housing loans to
employees at interest rates lower than those prevailing;
Other benefits normally provided: savings plans, sports clubs, etc.;
and
Additional vacation days are provided for marriages, funerals, etc.
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8.4.3 Tax legislation for individuals (residents and non-residents)
An individual whose employment requires that he or she remain in
Japan for less than one year usually qualifies as a non-resident
taxpayer. As such, the individual is subject to tax on his or her salary,
wherever paid, at a flat rate of 20%. If such individual is subject to tax
as a resident in his or her home country, he or she may be exempt
form this 20% tax, provided the home country and Japan have a tax
treaty, his or her stay in Japan was not more than 183 days during the
tax (calendar) year, his or her employer is a non-resident or foreign
corporation, and his or her salary is not charged to a permanent
establishment in Japan (Spicer & Oppenheim, 1989:127). Refer to
paragraph 8.4.1 for more information.
As it was stated earlier, the difference in culture between Japan and
South Africa is clear in the fringe benefit legislation. Except for this
difference, it is clear that the basis of the legislation is similiar. The
following country, the Netherlands, is the first European country that is
discussed in the chapter. It is clear that the historical background of
taxation in Europe had its effect in South Africa, as can be seen from
the following.
8.5 THE NETHERLANDS
The close relationship between South Africa and the Netherlands is easily
identified below. The only clear difference between the two countries,
relates to their social security tax basis.
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8.5.1 Employee
Salaries and wages are subject to wage withholding tax (or as it is
being called in South Africa, PAYE or SITE). Provisional income tax
assessments can be issued in the course of the fiscal year. If the
wage withholding tax and/or provisional assessments are higher
(lower) than the ultimate income tax liability, refund is made (or
additional tax is payable) on receipt of a final income tax assessment.
In certain cases, the wages withholding tax is a final tax, and no further
income tax assessment is issued (Coopers & Lybrand, 1996:N-12).
8.5.2 Employer
No definite and relevant information on the implications of fringe
benefits used in remuneration packages by the employer could be
obtained. It should, however, be noted that the normal deduction
rulings would also apply to the calculation of the taxable income of the
employer. Therefore, it would be appropriate to assume that the costs
relating to salaries; wages and the structuring of the remuneration
package of the employee be deductible from taxable income as it is
calculated under normal circumstances (Coopers & Lybrand, 1996:N-
19).
8.5.3 Tax legislation for individuals (residents and non-residents)
Individuals resident in the Netherlands are taxed on their world-wide
income. The 35% ruling is a tax facility for individuals temporarily
working in the Netherlands. If the ruling is obtained, the employer can
pay tax-free reimbursements as compensation for extra expenses
incurred by the employee up to 35% of a certain base calculation. As
112
a result, the top marginal tax rate amounts to 39% instead of 60%. To
qualify for this beneficial tax facility, a number of conditions have to be
met (Spicer & Oppenheim, 1989:130):
Salary should be subject to the Dutch wage withholding tax
(PAYE);
Employment should be of a temporary nature; and
Employee should have specific professional expertise necessary
for the job and not readily available in the Dutch labour market.
The ruling may be granted for a maximum period of 120 months.
Earlier periods of stay in the Netherlands are deducted from the
maximum period the ruling can be granted. No such discount applies
if the individual has not stayed in the Netherlands at any time during
the ten years prior to the arrival date in the Netherlands. For a period
between 48 and 60 months, the employer should demonstrate that the
circumstances have not changed and that the expatriate still meets the
conditions (Spicer & Oppenheim, 1989:131).
The requirement that the individual must live or stay in the Netherlands
during his or her assignment is not included in the 35% ruling. As a
result, the facility is in principle also applicable to individuals residing
outside the Netherlands who work in the Netherlands one or more
days per week, provided that all other requirements are met (Spicer &
Oppenheim, 1989:130).
The 35% ruling permits an individual to elect for a deemed non-
resident status. The employee is then taxable in the Netherlands only
113
on employment income and on specific Dutch-source income (Spicer &
Oppenheim, 1989:130).
The above paragraphs is just a confirmation of the similarity between
South Africa and the Netherlands. The next country, New Zealand is
as in the case of Australia the country with the most recent tax
legislation in place. The result of this is that both these countries have
up to date methods of collecting tax effectively. This fact is illustrated
below.
8.6 NEW ZEALAND
The legislation in regards to fringe benefits in New Zealand agrees to a
certain point with the legislation that is in place in Australia. Set out below
is a summary of the New Zealand legislation and the few differences
between Australia and New Zealand appears out of this.
8.6.1 Employee
A resident is taxed on salary, wages, bonuses, tax reimbursements
and allowances received in cash (but not on retirement gratuities)
regardless of where payment is made. Allowances paid in cash that
are no more than a reimbursement of expenses incurred in respect of
employment are not taxable. The benefit arising from the use of an
employer-provided automobile, a low-interest loan or discounted goods
or services is not taxable to the employee, but the value of a benefit
from the provision of shares and options, lodging or housing by an
employer is taxable to the employee. Other benefits provided to an
114
employee in a non-monetary form are generally not taxable in the
employee's hands (Price Waterhouse:74).
The following income is exempt from normal taxable income (Price
Waterhouse:74):
Accident or sickness;
Alimony or maintenance;
Superannuation payments;
Premiums on redemption of an inflation-adjusted savings bond;
First NZ$ 500 interest from Post Office National Development
Bonds or New Zealand Savings Certificates;
Compensation for criminal injuries; and
Stakes (prize money).
8.6.2 Employer
National and local awards and collective agreements are still in force
effectively defining minimum basic entitlements for most employees.
The agreements provide for up to two weeks of fully paid sick leave in
each year and many provide for extra compassionate and long-service
leaves. Many companies operate employer-subsidized
superannuation or pension plans for salaried employees. These
schemes are not encouraged through tax incentives of any sort.
Executive personnel may receive additional benefits by way of tax-free
entertainment allowances, medical insurance, use of company car and
reimbursement of certain work-related expenses, for example home
telephone and club membership. However, an employer may be liable
for fringe benefit tax in relation to such benefits (Price Waterhouse:74).
115
Fringe Benefit Tax is imposed on employers at a flat rate of 49% on
the taxable value of fringe benefits provided to employees or their
associates. Fringe Benefits Tax applies to non-cash fringe benefits
such as employer-provided cars, low-interest loans, subsidised
transport, discounted or free goods or services, and other benefits,
subject to a limited range of exemptions. Where an employee is also a
shareholder any non-cash benefit derived will usually be attributed to
the employment relationship and subject to Fringe Benefits Tax
accordingly. Fringfe Benefits Tax is a deductible expense for the
employer for income tax purposes (Coopers & Lybrand, 1996:N-46).
8.6.3 Tax legislation for individuals (residents and non-residents)
Income tax rates are the same for residents and non-residents.
Salaries, wages, and certain types of contract or commission
payments are subject to tax deductions at source. As a rule, all
monetary compensation provided by an employer for an employee is
regarded as taxable. Most items of an expatriate compensation
package are fully taxable, although there are some exceptions,
indicated below (Spicer & Oppenheim, 1989:178):
The provision of accommodation is taxable as remuneration in the
hands of the employee. However, in determining the assessable
value of any such accommodation, the value may be taken at fair
value to the employee rather than the full market value;
Most non-monetary benefits provided by the employer to the
employee for services rendered are not taxable in the hands of the
employee;
116
Cash allowances which are intended merely to reimburse the
employee for expenditure incurred on behalf of an employer are not
taxable in the hands of the employee; and
When an employer requires an employee to transfer to a new
location, the costs of relocation, if reimbursed by the employer, are
generally exempt from tax. This exemption only extends to direct
costs associated with an employee's transferring, i.e. reasonable
moving costs, solicitor's and land agent's fees on buying and
selling a home. It does not extend to additional interest and capital
costs associated with the purchase of a new home.
Non-residents Contractors Withholding Tax is deductible at the rate of
15% (or 30%) from contract payments made to non-resident
contractors unless a certificate of exemption is obtained from the
Inland Revenue Department. Non-residents Contractors Withholding
Tax is a payment on account of the non-resident's ultimate liability to
New Zealand tax to be determined from returns filed. Notwithstanding
the fact that a tax treaty may apply to exempt the non-resident
recipient from New Zealand tax, the payer is obliged to make
deductions, thus obligating non-resident recipients to determine their
liability for submission to the New Zealand Tax Authorities (Spicer &
Oppenheim, 1989:179).
The fringe benefits legislation that is in place in New Zealand differs
substantially from that in South Africa. The biggest difference relates
to the shift in the responsibility of the tax liability in respect of fringe
benefits. In New Zealand the employer will be liable for Fringe
Benefits Tax where as in South Africa the employee will be liable for
the tax payable on the fringe benefits received. The following country,
117
Switzerland, has an exceptional government system and infrastructure
which is clear in the fringe benefit legislation.
8.7 SWITZERLAND
The legislation that is in place in Switzerland is dominated by the cantons
that the country is divided into. The result of that is that there will be a
federal tax legislation and then also a canton tax legislation. The different
cantons in Switzerland will then in some instances also have different tax
legislation. For the purpose of the discussion, the focus was placed on
the federal tax legislation.
8.7.1 Employee
The federal direct tax on world-wide income is imposed at graduate
rates. The cantonal and municipal tax burden on world-wide income of
an individual varies substantially. Residents must include in Gross
Income all compensation received (regardless of source, currency paid
or residence of payer), including salary, living and housing allowances,
tax reimbursements, and the fair market value of any benefits in kind,
such as free house and cars. Any benefits received from employment-
related stock-purchase plans and on exercising stock options or the
like, which would in the absence of an employment contract with the
corporation in question or one of its affiliates not be available to a third
party, are to be included in Gross Income (Price Waterhouse:78).
Benefits that are tax exempt or taxed on a favourable basis include the
following (Price Waterhouse:79):
118
Employer contributions to an approved pension plan. These are
not taxable to the employees, but pensions payable by the plan
are;
Generally no tax is payable on the benefit of interest-free or low-
interest loans, provided such loans are within reasonable limits;
Employees with company cars are taxed to the extent of private
use. In general, tax on this benefit is rather small when compared
with the savings to the employee of not having to provide the car
himself;
Service anniversary gifts up to a certain limit (depending on canton
of residence);
Termination or severance payments on cessation of employment
can receive favourable tax treatment in specific circumstances;
Employer's reimbursement of international school fees may
constitute taxable income in most cases. However, in some
cantons a company can sign a co-operation agreement with an
international school for providing education to children of company
employees. Direct contributions in lieu of school fees are still tax
deductible in determining the company's taxable income, but have
no tax effect on the individual;
Lunch allowance (reasonable amounts up to SFr10 to 15); and
Refunds of disbursements incurred in connection with the
taxpayer's employment are not taxable. Likewise, lump-sum
allowances covering additional representation expenses of
executives and sales personnel are not taxable.
For gross employment income it is allowable that all expenses
necessarily incurred to earn it, may be deducted This includes the
following (Price Waterhouse:78):
119
Travel cost between place of home and place of business;
Added cost of food and lodging away from home and shiftwork
expenses; and
Other employment-related expenses such as outlays for special
clothing, professional literature and training.
8.7.2 Employer
An employer is required to pay part of the contributions to the
compulsory pension scheme. Many pension schemes provide higher
benefits to the employees than the compulsory pension scheme.
Fringe benefits provided by the employer consist of the following
(Spicer & Oppenheim, 1989:248):
Continuance of remuneration for short periods (1 week to 3
months, depending on length of service) in case of sickness, etc.;
Canteen facilities or subsidised meals; and
Upper management benefits in the form of company cars which
may also be used for private purposes.
8.7.3 Tax legislation for individuals (residents and non-residents
A non-resident individual is liable for federal direct tax on certain types
of Swiss-source income only, those including the types of income that
are subject to tax in the case of a non-resident company and, in
addition, fees received as a director of a Swiss company and income
from the exercise of a profession in Switzerland. Liability for cantonal
taxes is based on similar principles to those described above for the
federal direct tax. An individual is regarded as resident in Switzerland
120
for federal tax purposes if he or she lives there with the intention of
staying permanently. Mere physical presence can also result in
residence. An individual employed in Switzerland becomes resident
upon arrival (The same is taken into account for cantonal tax
purposes.) (Coopers & Lybrand, 1996:S-143).
In general all amounts paid to, or on behalf of, an employee are
considered taxable income in his hands. The treatment of various
elements of a typical expatriate compensation package have already
been discussed in paragraph 8.7.1 (Coopers & Lybrand, 1996:S-143).
The federal legislation in place regarding fringe benefits, has a
different focus than that of South Africa. The tax legislation in general
in Europe, especially Switzerland, focuses rather on the social
responsibility with higher social taxes levied. The legislation, however,
regarding fringe benefits seems to be focused on the current trend of
the employer's involvement in the structuring of employees' packages.
The United Kingdom tax legislation also has some relation to that of
South Africa as can - be seen below.
8.8 UNITED KINGDOM
The tax legislation of the United Kingdom can be regarded to be one of
the oldest, if not the oldest tax legislation in the history of tax. It is then
also noticeable that the focus of the structuring of packages is rather on
the cash portion of the remuneration than on all the possible non-cash
benefits. The reason for this, could be found in the lower tax rates in
place in the United Kingdom. Set out below is a summary of the fringe
benefit legislation.
121
8.8.1 Employee
An individual's assessable earned income will include his or her salary
and other remuneration plus the value of any benefits in kind or
expenses received as a result of his or her employment. Expenses
incurred wholly, exclusively and necessarily in the course of
performing the duties of employment are deductible. This does not
include the cost of home to work travel. Tax on employment income is
primarily deducted at source under the Pay as you Earn (PAYE)
system (Coopers & Lybrand, 1996:U-13).
Employees (other than directors) earning at a rate less than £ 8 500
per annum (including all benefits) are not taxed on certain benefits, for
example company cars, beneficial loans, benefits not convertible into
cash, and benefits not involving tickets or vouchers (Price
Waterhouse: 241).
Most benefits are taxed on the basis of the marginal cost to the person
providing them, for example school fees, medical fees, holidays, etc.
Special rules apply to the provision of company cars and living
accommodation, with additional taxable amounts where expensive
housing is provided. In cases where the employer operates any form
of tax equalisation, the employee's Gross Income on which tax is
payable is the amount which, after tax, produces the employee's net
after tax pay plus the value of taxable benefits (Price
Waterhouse:242).
Benefits that are exempt or taxed on a favourable basis include the
following (Price Waterhouse:243):
122
Employer contributions to an approved pension scheme. These
are not taxable on the employees, but pensions payable by the
scheme are. The same applies to contributions to an overseas
pension scheme which the United Kingdom accepts as
"corresponding to" a United Kingdom approved scheme.
Otherwise, employer contributions to an overseas pension scheme
count as a taxable benefit;
Employer contributions via trustees to an approved employee
profit-sharing scheme involving the issue of the employing
company's shares to the employees. The employees are not taxed
on the value of the shares appropriated to them if the trustees hold
them on their behalf for at least five years;
Neither the grant of options nor the issue of shares where options
are exercised is a taxable event where this is done under an
approved share option scheme. Gains made by employees on
disposing of scheme shares are taxed as capital gains and not as
income. Various conditions have to be met for scheme approval:
The option price must not be manifestly less than the market
value of the shares at the time when the option is granted.
However, if the company has an approved share scheme in
which all employees can participate it can grant selected
employees an option to acquire shares at a discount of up to
15% of market value, at the time of grant, under an approved
discretionary share option scheme; and
The option must not be exercisable earlier than three years or
later than ten years after being obtained.
As from 5 April 1994 no tax is payable on the benefit of interest-
free or low-interest loans of up to £ 5 000 made by an employer to
an employee for any purpose;
123
Employees with company cars have in the past been taxed by
reference to a fixed scale benefit. For those with significant
business use tax on this benefit was modest when compared to the
saving to the employees for not having to provide the car
themselves. With effect from 6 April 1994 the benefit in respect of
company cars will be calculated by reference to the list price of the
car. The basic taxable benefit will be equal to 35% of the list price
of the car, together with any extras provided. This will be
discounted by one third if the employee drives more than 2500
business miles in the tax year and by two thirds for more than 18
000 business miles;
Provision of company-owned living accommodation. Where the
cost of the accommodation does not exceed £ 75 000, the taxable
benefit is based on the valuation of the property for rating
purposes, a system which applied up to March 1990. This is
usually modest in comparison with the current rental value of the
property, although inflation in house prices in the late 1980s has
resulted in fewer homes costing less than £ 75 000. Where the
company rents the living accommodation the full rental payments is
a taxable benefit;
Termination payments on cessation of employment receive
relatively favourable tax treatment provided there is no contractual
obligation to make them. The first £ 30 000 is tax-free, but the
excess over this figure is taxed as ordinary income. However,
termination payments made on • cessation of employment at the
time of the person's retirement do not normally qualify for the first £
30 000 tax-free exemption;
124
Employees are not assessed under the benefits legislation in
respect of the cost of child care provided by employers, but only if
all the qualifying conditions are met; and
For 1993/4 onwards the provision for in-house sports facilities for
employees is exempt from the charge on benefits in kind.
8.8.2 Employer
No definite and relevant information concentrating on the use of fringe
benefits by the employer could be obtained. It should, however, be
noted that the normal deduction rulings would also apply to the
calculation of the taxable income of the employer. Therefore, it would
be appropriate to assume that the costs relating to salaries, wages and
the structuring of the remuneration package of the employee are
deductible from taxable income as calculated under normal
circumstances.
8.8.3 Tax legislation for individuals (residents and non-residents)
In general, individuals resident and ordinarily resident in the United
Kingdom are liable for tax on their world-wide employment income.
Individuals who are resident and ordinarily resident but not domiciled in
the United Kingdom and who are employed by a non-resident
employer (except an employer resident in the Republic of Ireland) and
who perform no duties in the United Kingdom are liable for tax on
earnings from that employment only if they are remitted to the United
Kingdom (Spicer & Oppenheim, 1989:258).
125
Individuals resident but not ordinarily resident in the United Kingdom
(generally those persons whose stay is for less than three years and
who do not own, or lease for three or more years, property in the
United Kingdom) who perform duties in the United Kingdom are liable
for tax on earnings in respect of those duties (Spicer & Oppenheim;
1989:259).
Typical items of an expatriate compensation package set out below
are fully taxable unless otherwise indicated (Spicer & Oppenheim,
1989:260):
Reimbursements of foreign an/or home country taxes;
School tuition reimbursements;
Home leave reimbursement for the employee is not taxable if the
payment is for a trip to the individual's home country;
Cost of living allowances;
Expatriation premiums for working in the United Kingdom;
Housing allowances and the imputed value of housing provided
directly by the employer are normally fully taxable;
Moving expense reimbursements are generally not taxable and
(lump sum) relocation allowances for unsubstantiated expenses
may be tax-free;
Benefits in kind form part of taxable compensation; .
Business expenses reimbursed by an employer or paid by him
directly to third parties;
If certain holding periods are met, stock acquired under United
Kingdom qualified stock option plans does not give rise to tax
liabilities until the stock is sold, when the gain is treated as capital
gain;
126
Employers' contribution to a foreign pension plan (as discussed
paragraph 8.8.1); and
• A deferred compensation scheme may result in reduced United
Kingdom tax if the deferred payment is paid in a subsequent year
after departure from the United Kingdom, since lower tax rates
might apply.
The legislation in the United Kingdom governing the tax liability of
fringe benefits, is divided between the resident and non-resident
taxpayers in the United Kingdom. In South Africa, except for a few
exceptions, there is no such distinction between the legislation
applicable to residents and non-residents. The next and also the last
country that is discussed below is that of United States. The United
States has a different approach to the taxation of remuneration
packages and fringe benefits as discussed below.
8.9 UNITED STATES
The last country that is discussed in this chapter is the United States. The
tax legislation of the United States can be regarded as one the most
complicated tax systems in the world. The reason for this relates to the
number of states in the country and over and above that there is also
three different tax regimes in the United States. The regimes consist of
the federal tax, state tax and in the big cities there also the tax levied by
the city. The legislation governing fringe benefits, as discussed below, is
focused on the federal taxes that could be levied on fringe benefits
received by the employee.
127
8.9.1 Employee
No definite and relevant information on the use of fringe benefits by
the employee for the structuring of remuneration packages could be
obtained. It would be accurate to make the assumption that due to the
strong economy of the United States, the employees would definitely
be allowed to make use of fringe benefits for tax planning purposes.
The legislation of the tax authorities is probably more complex than
that of any other country in the world, merely because of the legislation
of the different states and the federal legislation A definite and
important factor for American's is their health and that of their families.
Therefore, the allowance to employees for contributions to insurance
for possible visual and dental plans is deductible from their monthly
salary cheques before the calculation of federal taxation. Keeping that
in mind it is also important to remember that due to much stricter rules
and legislation in place by the federal tax authorities it would be hardly
impossible to make use of fringe benefits to escape the paying of tax
on taxable income (Coopers & Lybrand, 1996:U-33).
8.9.2 Employer
No definite and relevant information on the use of fringe benefits by
the employer could be obtained. It should, however, be noted that the
normal deduction rulings would also apply to the calculation of the
taxable income of the employer. Therefore, it would be appropriate to
assume that the costs relating to salaries, wages and the structuring of
the remuneration package of the employee, are deductible from
taxable income as calculated under normal circumstances.
128
In the research performed, two articles were identified which were
written from the view of the employer in respect of the cost element of
fringe benefits. Both these articles appeared in Management
Accounting, January 1989. Unfortunately, these were not written from
a tax viewpoint, but from a management and cost accounting view, but
it nevertheless incorporated the employer's view on which kind of
fringe benefit could be applied and what costs the employer would be
prepared to incur.
The first article had the following heading: Employee Fringe Benefit
Expense (Better teamwork with the corporate benefits department can
help prevent cost surprises.) The components of employee costs
relating to fringe benefits consist of the following available options:
statutory benefit plans (6-9% of wages), supplemental labour cost, for
example vacation pay (10-20% of wages) and formal employee benefit
plans, for example pension, medical/dental insurance, group life
insurance, Medicare supplement plan, employee savings plans and
educational refunds (25-50% of wages) (Mcfadden, 1989:24). This list
of possible fringe benefits and their cost element enhance the view
that the South African employer could have the more international kind
of commitment by the employer.
The second article dealt with the possible employee benefits as
identified during an interview with Dallas Salisbury, president of the -
Employee Benefit Research Institute in America. The benefits were
discussed in respect of the following: accounting standards set by the
Financial Accounting Standards Board, possible tax-exempt status for
most of the employee benefits and the costs that companies are willing
to allocate to their employees (Randall, 1989:18). Unfortunately this
129
article concentrated on the political side of fringe benefits and not on
the actual fringe benefits and the tax implications thereof.
8.9.3 Tax legislation for individuals (residents and non-residents)
A foreign corporation or non-resident alien that is engaged in a United
States business, is taxed on income that is effectively connected with
that business in general, in the same manner and at the same rates as
applicable to domestic corporations and resident individuals (Coopers
& Lybrand, 1996:U-34).
8.10 CONCLUSION
The discussion of the fringe benefits applied to taxpayers in the major
countries of the world has given some perspective on the current
legislation that is in place in South Africa. The possibility of a shift in the
focus of who the responsible party should be in the paying of tax on fringe
benefits has been identified. There is also the countries with the
difference in culture and the change in focus accordingly. In most of the
European countries, it seems evident that the focus of the government
and the residents are more on the social taxes than on the income tax as
in South Africa. The result of this is that the taxpayer would be paying
more social taxes and that the income tax rates would be lower than the
rates of South Africa.
The following chapter contains a summary of the research with a
conclusion and recommendation of the research.
130
CHAPTER 9
CONCLUSION
9.1 Summary of the Research
9.2 Conclusion of the Research
9.3 Recommendation
9.1 SUMMARY OF THE RESEARCH
The content of this research was presented within the following
parameters:
History of fringe benefits;
Legislation in respect of fringe benefits;
Fringe benefits from the viewpoint of the employer and the
employee;
Possible changes in the future; and
Fringe benefits available in other countries
The research was done from the background of lecturing to honours
students at the Rand Afrikaans University and work experience as an
employee of Coopers & Lybrand.
The history of fringe benefits was investigated from 1914 until 1984. The
number of changes that has taken place during the 70 years, are
131
summarised under the headings of the possible definitions of fringe
benefits and the view point of the legislator over the last 83 years.
Several Commissions of Inquiry that investigated tax legislation on fringe
benefits, were also mentioned - especially since their reports led to the
transformation of fringe benefit legislation in South Africa.
The employer and the employee were found to have different viewpoints
and information needs regarding fringe benefits. As the employer's
objective is to minimise the cost of employment, yet have a . productive
workforce in place - he is, therefore, interested in the deductibility of the
cost of employment and the Value Added Tax implication of fringe benefit
legislation according to the Act. The employee's objective on the other
hand, is to decrease his tax liability by means of using fringe benefits in
the structuring of remuneration packages and, therefore, needs
information on fringe benefit legislation according to the Act as well as the
Seventh Schedule of the Act.
These viewpoints and needs were also elucidated by an investigation into
fringe benefits available in other countries around the world, as some of
these options might just as well be introduced to the South African
taxpayer in the near future.
9.2 CONCLUSION OF THE RESEARCH
The fringe benefit options currently available in South Africa, is the
product of years of research by various participants. Significant changes
in legislation emanated from investigations conducted by several
Commissions of Inquiry, but a number of changes resulted, however, from
the aggressive tax planning practiced by the taxpayer.
132
9.3 RECOMMENDATION
Fringe benefits is certainly one of the most spoken of subjects in the
employer-employee relationship. Whether the current legislation is
efficient to deal with the requirements of the labour market, is yet to be
known. An in-depth study by the South African Revenue Service in
respect of current legislation and legislation in place in other countries, is
a definite requirement. Such a study would hopefully result in the
implementation of more effective legislation necessary to levy the required
tax, in a productive manner, on all fringe benefits.
133
SOURCES
A. BOOKS
BROOMBERG, E.B. 1983 : Tax Strategy. Durban : Butterworths
COOPERS & LYBRAND. 1996 International Tax Summaries. USA :
Coopers & Lybrand International.
DIVARIS, C. & STEIN, M.L. 1989: Silke on South African Income Tax.
11th Memorial Edition. Cape Town : Juta & Company Ltd.
HUXHAM, K. & HUAPT, P. 1995: Notes on South African Income Tax
1995. Fourteenth Edition. Constantia : H & H Publications.
KPMG. Taxation of International Executives. USA : KPMG International.
MEYEROWITZ, D. & SPIRO, E. Replacement 1 ; 1995: The Taxpayer's
Permanent Volume on Income Tax in South Africa. Cape Town :
Pioneer Press (Pty) Ltd.
PRICE WATERHOUSE. Information Guide: Doing business in Canada.
Canada : Price Waterhouse.
PRICE WATERHOUSE. Information Guide: Doing business in Japan.
Japan : Price Waterhouse.
134
PRICE WATERHOUSE. Information Guide: New Zealand. New Zealand :
Price Waterhouse.
PRICE WATERHOUSE. Information Guide: Switzerland. Switzerland :
Price Waterhouse.
PRICE WATERHOUSE. Information Guide: United Kingdom. United
Kingdom : Price Waterhouse.
SPICER & OPPENHEIM. 1989 : The Spicer & Oppenheim Guide to
Personal taxes around the World. Spicer & Oppenheim
International
STRAUSS, J. & BRETTENNY, A. 1992: 'n Studentegids tot die Wet op
Belasting op Toegevoegde Waarde. Bloemfontein : Sentrum vir
Rekeningkunde UOVS.
VORSTER, D.D. & COETSEE, D. Permanente Volume; 1996:
Inkomstebelasting in Suid-Afrika. Durban : Butterworths.
WILLIAMS, R.C. 1995: Income Tax in South Africa. Cases & Materials.
Durban : Butterworts
B. COMMISSIONS
1. KATZ REPORT 1994: Report of the Commission of Inquiry into the Tax
Structure of the Republic of South Africa (MM Katz, Chairman).
Pretoria : Government Printer.
135
2. MARGO REPORT 1986: Report of the Commission of Inquiry into the
Tax Structure of the Republic of South Africa (CS Margo,
Chairman). Pretoria : Government Printer
ACTS
1 SOUTH AFRICA (Republic). Acts, statues etc. : Income Tax Act (Act 58 of
1962). Pretoria : Digma Publikasies (Edms.) Bpk
2. SOUTH AFRICA (Republic). Acts, statues etc, : Act on Value Added Tax
(Act 89 of 1991). Pretoria : Digma Publikasies (Edms.) Bpk
ARTICLES
DIVARIS, C 1985 : The great car dilemma. Tax Planning, Volume 1 1985 :
86.
DIVARIS, C 1987 : The low-income housing benefit. Tax Planning,
Volume 2 1987 : 60.
GEARY, D.M. 1991 : Employee Benefits - are we up to the challenge?
IPM Journal, February 1991 : 9.
KERBY-SMITH, B 1994 : An entertaining oppurtunity. Tax Planning,
Volume 8 1994: 115
136
LOCKHART-ROSS, R 1987: Relocation expenses. Tax Planning, Volume
3 1987 - : 41.
LOCKHART-ROSS, R 1987: Hybrid car schemes. Tax Planning, Volume
3 1987: 60.
LOCKHART-ROSS, R 1988: Fringe benefits in 1989. Tax Planning,
Volume 3 1988: 137.
LOCKHART-ROSS, R 1991 : Remuneration confusion. Tax Planning,
Volume 5 1991 : 7.
LOCKHART-ROSS, R 1991: Cafeteria remuneration packages. Tax
Planning, Volume 5 1991 : 122.
LOCKHART-ROSS, R 1992: Car allowance inno-VAT-ions. Tax Planning,
Volume 6 1992: 84.
LOCKHART-ROSS, R 1992: Share-incentive arrangements - I. Tax
Planning, Volume 6 1992: 122.
LOCKHART-ROSS, R 1993 : Share-incentive arrangements - II. Tax
Planning, Volume 7 1993: 2.
LOCKHART-ROSS, R 1994: Benefit funds I. Tax Planning, Volume 8
1994 : 60.
LOCKHART-ROSS, R 1994: Benefit funds II. Tax Planning, Volume 8
1994: 108.
137
LOCKHART-ROSS, R 1994: Benefit funds III. Tax Planning, Volume 8
1994: 137.
LOCKHART-ROSS, R 1995: Engine components or additives. Tax
Planning, Volume 9 1995 : 26.
MCFADDEN, D.W. 1989: Employee Fringe Benefits Expense.
Management Accounting, 7 January 1989 : 24.
MEYER, F 1995: Hoe wyd Jan Taks se byvoordeelnet strek. Sakebeeld -
Kolom: Jou geldsake, 30 Augustus 1995: S3.
RANDALL, R.F. 1989 : The coming crunch in - Employee Benefits.
Management Accounting, 7 January 1989: 18.
STEYN, M 1985 : Fringe benefits phase-in. Tax Planning, Volume 1 1985
. 4.
STEIN, M 1985: Share-purchase schemes. Tax Planning, Volume 1 1985
: 97.
STEIN, M 1985: Share options. Tax Planning, Volume 1 1986: 126.
VAN GRAAN, J.C. 1991 : Travelling expenses. Tax Planning, Volume 5
1991 : 29.
VORSTER, H 1985: Unquantified and Defeasable Expenses Incurred in
the Production of Income. South African Tax Journal 1, 1985: 1
138
E. TABLE OF CASES
1. Appellate, highcourt and provincial court cases
1.1 CIR v Butcher Bros (Pty) Ltd, 1945 AD:301 at 320 (13 SATC 21)
1.2 De Villiers v CIR, 1929 AD:227 (4 SATC 86))
1.3 CIR v De Villiers, 1962 (1) SA:581 (AD), 1962 Taxpayer:111 (24 SATC
385)
1.4 Edgars Stores Ltd v CIR, 1988 (3) SA:876 (AD) 1988 Taxp: 173 (50 SATC
81)
1.5 CIR v Felix Schuh (SA) (Pty) Ltd , 1994 (2) SA:801 (A)
1.6 CIR v Genn & Co (Pty) Ltd , 1955 (3) SA:293 (AD) 1955 Taxp:122 (20
SATC 113)
1.7 CIR v Golden Dumps (Pty) Ltd , 1993 (4) SA:110 (A) (55 SATC 198)
1.8 CIR v Hickson, 1960(1) SA:746 (AD), 1960 Taxpayer:49 (23 SATC 243)
1.9 Joffe & Co. Ltd v CIR, 1946 AD:157 (13 SATC 154)
1.10 Johnstone & Co Ltd v CIR, 1951 (2) AD:283 (17 SATC 235)
1.11 Lategan v CIR, 1926 CPD:203 (2 SATC 16)
139
1.12 CIR v Lunnon, 1924 AD:94 (1 SATC 7)
1.13 Ochberg v CIR, 1931 AD 215
1.14 Port Elizabeth Electric Tramway Co Ltd v CIR, 1936 CPD:241 (8 SATC
13)
1.15 Pyott Ltd v CIR, 1945 AD:128 (13 SATC 121))
1.16 Reef Estates Ltd v CIR, 1954 (2) SA:593 (T), 1954 Taxp:127 (19 SATC
153)
1.17 Sub Nigel Ltd v CIR, 1948 (4) SA:580 (AD) (15 SATC 381)
1.18 CIR v Widan ,1955 (1) SA 226 (A) (19 SATC 341)
1.19 COT v Cathcart , 1965 (1) SA:507 (SR,AD) 1965 Taxp:28 (27 SATC 1)
1.20 Earl of Verulam v COT; (9 SATC 107)
1.21 H v COT, 1957 (4) SA: 478 (SR), 1957 Taxpayer: 245 (21 SATC 346)
1.22 LW v COT, 1967 (3) SA 70 (High Court Rhodesia) (29 SATC 70)
1.23 Provider v COT, 1950 (4) SA:289 (SR) (17 SATC 40)
1.24 Tobacco Father v COT, 1951 (1) SA:150 (SR) (17 SATC 395)
1.25 Kotze v KBI, 1991 TPD (54 SATC 149)
140
1.26 Nasionale Pers Bpk v KBI, 1986 (3) SA:549 (A)
1.27 KBI v Van Der Walt , 1986 (4) SA 303 (T)
1.28 Norton v Young, (1971) 3 All ER 412
1.29 Pepper V Hart [1993] 1 AER 42 (HL)
1.30 Borstlap v SIR, 1981 (4) SA:836 (AD) (43 SATC 195)
1.31 Caltex Oil (SA) Ltd v SIR, 1975 (1) SA 665 (A) (37 SATC 1)
1.32 Colby v SIR, (31 SATC 59)
1.33 Hicklin v SIR, 1980 (1) SA 481 (AD), 1980 Taxpayer 49
1.34 SIR v Ineson , (42 SATC 125)
1.35 SIR v Kirsch , 1978 (3) -SA 93 (T) 1978
1.36 Stone v SIR, 1974 (3) SA:584 (AD) (36 SATC 117)
1.37 SIR v Wispeco Housing (Pty) Ltd , (35 SATC 14)
2. Special court cases
2.1 ITC 117 (4 SATC 70)
2.2 ITC 143 (4 SATC 220)
2.3 ITC 173 (5 SATC 174)
2.4 ITC 267 (7 SATC 156)
2.5 ITC 319 (8 SATC 176)
2.6 ITC 430 (10 SATC 424)
2.7 ITC 470 (11 SATC 263)
2.8 ITC 514 (12 SATC 253)
2.9 ITC 575 (13 SATC 476)
2.10 ITC 666 (16 SATC 130)
2.11 ITC 679 (16 SATC 349)
2.12 ITC 680 (16 SATC 355)
2.13 ITC 689 (16 SATC 501)
2.14 ITC 818 (20 SATC 507)
2.15 ITC 825 (21 SATC 188)
2.16 ITC 876 (23 SATC 221)
2.17 ITC 889 (23 SATC 347)
141
142
2.18 ITC 922, 1961 Taxpayer: 94 (24 SATC 244)
2.19 ITC 932 (24 SATC 341)
2.20 ITC 994, 1963 Taxpayer 228 (25 SATC 134)
2.21 ITC 1065 (27 SATC 111)
2.22 ITC 1206 (36 SATC 56)
2.23 ITC 1332 (43 SATC 87)
2.24 ITC 1511 (54 SATC 39)
2.25 ITC 1566 (56 SATC 34)