A recent case heard in the Gauteng Tax Court has highlighted the nature of an employee's entitlement to amounts allocated towards a company car fringe benefit in terms of a total cost to company remuneration structure, and the employees' tax implications thereof.
The South African Revenue Service ("SARS") assessed the taxpayer for employees' tax for the period 1 March 2003 to 29 February 2008 in terms of the provisions of the Fourth Schedule to the Income Tax Act No. 58 of 1962 ("Act"). The taxpayer objected to these assessments, but its objection was disallowed and the taxpayer approached the Gauteng Income Tax Court (the "Court") on appeal against the assessments.
The main issue in the appeal was whether, in the circumstances, the taxpayer's employees had elected to receive the benefit of a company motor vehicle as part of their remuneration package, what accrued to each of the taxpayer's employees who had so elected, was the taxable value of such benefit determined in accordance with the Seventh Schedule to the Act (as the taxpayer argued) or the amount expended by the taxpayer in order to provide such benefit to the employee concerned (as was argued by SARS).
The taxpayer operated a flexible remuneration package structure in terms of which it indicated to its employees that it was prepared to expend a certain amount (referred to as the "costs of employment") in providing employment benefits and that, with regard to company motor vehicle benefits, the employee could elect either to receive the right of use of a company motor vehicle or to receive a motor vehicle allowance. In both cases, the amount expended by the taxpayer in providing the benefit/allowance would be deducted from the costs of employment, the balance being available for the provision of other remuneration benefits. An employee's total package remained the same irrespective of the election made by the employee.
In terms of the flexible remuneration package structure, an employee was required to complete an allocation form indicating the chosen combination of the components of his flexible package. The employer and the employee then concluded a written agreement detailing the terms and conditions of employment. Where an employee elected to receive the right of use of a company motor vehicle, an amount was allocated towards the motor vehicle benefit. The taxpayer purchased the vehicle and retained the ownership of the vehicle, but it was registered in the name of the employee. A notional account was created for the running costs of the vehicle, the employee was given a fleet card and any costs incurred were debited to the notional account. Importantly, if there was a credit balance in the notional account, the employee was entitled to reclaim such credit balance.
SARS assessed the taxpayer on the basis that the amounts allocated to the company motor vehicle scheme i.e. the "sacrificed portion" of the total package constituted remuneration which accrued to the employees, and were accordingly taxable in terms of the paragraph (c) of the definition of "gross income" in section 1 of the Act and subject to employees' tax. In other words, the amount of the allocation to the company car benefit constituted taxable remuneration, as opposed to the right of use of the company car being taxed in terms of the Seventh Schedule to the Act.
The taxpayer argued that a valid salary sacrifice agreement between the taxpayer and its employee came into existence, and that no accrual of "sacrificed" amounts in respect of the employees' remuneration package took place. The taxpayer argued further that the costs of employment was an amount which, from the employee's point of view, was subject to a contingency in that an employee first had to make an election before he or she was entitled to anything. Only once the employee had made such an election,was he or she entitled to the benefit chosen. Prior to the election being made, both the employee's entitlement to employment benefits and the taxpayer's obligation towards the employees (although the quantum thereof was certain) was contingent on an election being made by the employee.
However, SARS argued that the benefit paid by the taxpayer in terms of the company car scheme remained as part of the accrued income of the employee, and that the "sacrifice", if any, was not a genuine diminution in the remuneration package arising from the costs to the taxpayer. SARS argued further that such "sacrifice portion" was income because the divestment in favour of the motor vehicle scheme was not an antecedent divestment of the right to the money making up the sacrificed portion. In substance, the employees were entitled to an amount equal to the sacrificed portion in that the unused or credit balance in the suspense account was not forfeited in favour of the taxpayer, but accrued to the employees as a right to claim such monies, and that the employees were in fact paid such monies upon demand.
The Court stated that in the present case, once the employee had made a choice, he became entitled to the use of the car subject to the payment of an amount to be administered on his behalf towards defraying the expenses incurred. Debits were made against his allocation and he had the right to claim payment of any credit balance remaining. The Court stated that the employer made no contribution at all. The Court agreed with the submission made on behalf of SARS that the employee was entitled to the monies he agreed to allocate to the motor vehicle scheme as part of his gross income, and stated that this right accrued to the employee.
The Court accepted as factually correct the SARS assertion that the employees became entitled to the income and did not antecedently divest themselves of the right to the money allocated to the vehicle scheme since entitlement on the motor vehicle scheme account credit balance was not forfeited, but awarded and paid out to them on request.
The finding of the Court was that the taxpayer had not discharged the onus of proving that the conclusion on the facts and in law reached by SARS in assessing the taxpayer was incorrect. The appeal was therefore dismissed with costs.
In light of this decision, employers with a company car scheme would be well advised to consider the terms and conditions of the scheme in relation to the employees' entitlement to the amounts allocated towards the motor vehicle benefit.
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