The South African Revenue Service ("SARS") recently published four draft Interpretation Notes dealing with the taxation of allowances and fringe benefits. These draft interpretation notes are as follows:
- Issue 3 of Interpretation Note No. 14 on allowances, advances and reimbursements;
- A draft Interpretation Note on the right of use of a motor vehicle;
- A draft Interpretation Note on long service awards; and
- A draft Interpretation Note on the use of employer-provided cellular phones or computer equipment and employer-funded telecommunications services.
Although these interpretation notes are not law, they do provide taxpayers with useful guidance as to the tax treatment of such benefits and allowances, and include examples illustrating the practical application thereof. Some of the guidelines which may be useful to employers are highlighted below.
allowances, advances and reimbursements
The previous version of Interpretation Note No. 14 dealt with allowances, advances and reimbursements in general, but did not provide any specific guidance in relation to travel allowances. Issue 3 includes commentary and examples of the calculation of the deduction from subsistence allowances, as well as a new section dealing with travel allowances.
In regard to subsistence allowances, the draft Interpretation Note deals with the meaning of the phrase "obliged to spend at least one night away from his or her usual place of residence in the Republic" in the context of subsistence allowances (section 8(1)(a) of the Income Tax Act, 1962 ("the Act"). The Interpretation Note refers to ITC 1668 in which the court distinguished between employees who lived far away from their place of employment and were given an accommodation allowance, and the situation where performing the duties of employment required the employee to spend nights away from home. In the first situation, the new accommodation would become the employee's new usual place of residence and no deduction would be available against the subsistence allowance provided in those circumstances.
In respect of travel allowances, the draft interpretation note gives examples of what constitutes business travel and private travel for purposes of the deduction for business travel expenses and states that the location of a recipient's place of employment or place of business is a factual enquiry. The examples distinguish between business and private travel as follows:
- An employee who is employed to work as a shop assistant in his employer's V&A Waterfront store for 2 days a week and the Canal Walk store for 3 days a week – travel between home and either of the stores is regarded as private travel.
- Where the employee normally works at the V&A Waterfront store but travels from his home to his employer's store in Pretoria to assist with an annual stock counts, that would be regarded as business travel.
In terms of employees' tax, with effect from 1 March 2010, 80% of a travel allowance or advance must be included in remuneration. However, in the event that an employer is satisfied that at least 80% of the use of the motor vehicle for a year of assessment will be for business purposes, only 20% of the travel allowance or advance is included in remuneration and is subject to employees' tax.
The draft Interpretation Note states that the word "satisfied" suggests that the employer must actively look into the fact of each employee's circumstances and objectively weigh up and apply his or her mind to whether or not the employee should qualify. Employers must satisfy themselves that employees will use their vehicles for at least 80% business use and this can be done by regularly reviewing employees' logbooks which detail business and private travel and taking into consideration changes in the role or function of the employee. The draft Interpretation Note refers to the logbook for the previous tax year, but states that there may be other acceptable methods that employers can use to satisfy themselves of the 80% requirement based on the particular employee's circumstances.
This new draft interpretation note sets out the tax treatment of
company cars in detail.
With effect from 1 March 2011, any VAT borne by an employer (that is, the employer was not entitled to claim an input tax credit) must be included in the determined value of the motor vehicle. This applies even where the vehicle was purchased before 1 March 2011.
With regard to maintenance plans, the draft interpretation note states that in order for the fixed percentage (3.5% per month) to be reduced to 3.25%, the maintenance plan must commence at the same time that the motor vehicle is acquired by the employer. It states further that a motor vehicle is not the subject of a maintenance plan in circumstances where the maintenance plan is either a top-up or add-on plan which was taken out after the acquisition of the vehicle and in this case the rate of 3.5% must be used.
The draft interpretation note also deals with circumstances in which the determined value of the vehicle may be reduced where the employee only had the use of the motor vehicle for part of a month. The taxable benefit may be apportioned for part of a month, except where the vehicle is "temporarily not used by the employee for private purposes". The examples given illustrate SARS' view which distinguishes the situation where the vehicle was being repaired and the employee was recovering from injuries after a car accident (no reduction in taxable value), from the situation where the employee was assigned to work abroad for 2 months and had to return the car to his employer while he was away (no fringe benefit for the 2-month period).
Where the employee makes a contribution towards the cost of the motor vehicle, the draft interpretation note states that when determining the "original cost to the employer", the employer may deduct the employee's contribution from the full cost price of the vehicle. However, the "cost to the employer" is only relevant where the employer acquired the vehicle under an agreement of sale or exchange. In all other cases, the determined value is equal to the "retail market value", the "cash value" or the "market value" of the motor vehicle and may not be reduced by any contribution paid by the employee towards the cost of the vehicle.
The draft interpretation note also provides some guidance on how the exemption for employees who are regularly required to use the motor vehicle for the performance of their duties outside their normal hours of work should be interpreted. It comments on the meaning of private use which is infrequent or is merely incidental to the business use of the vehicle, using the example of a lift engineer who is on call after hours for emergency lift repairs, has another vehicle for other private travel and keeps a logbook for travel in the company car.
long service awards
This is a new interpretation note dealing with long service awards in the form of assets. The draft interpretation note deals, inter alia, with gift vouchers and confirms that a gift voucher is a form of property, as it represents a right to acquire goods or services from a merchant, and is an asset for the purposes of paragraph 2(a) of the Seventh Schedule. Accordingly, gift vouchers (other than meal vouchers) granted for long service fall within the scope of paragraph 2(a) and qualify for a reduction in value of the asset provided the length of service requirements are met. In our recent experience, SARS has argued that gift vouchers are cash and do not qualify for the exemption for long service awards, so this clarification is to be welcomed.
For an award to qualify as a long service award and for the R5 000 reduction in value to apply, the asset must have been given by an employer to an employee for being in employment with the same employer for an initial unbroken period of service of at least 15 years, or a subsequent unbroken period of service of not less than 10 years. For example, employees who receive an initial long service award at, for example, 20 years must wait for a further 10 years, in other words until he or she has worked for the same employer for 30 years, before the R5 000 reduction in the value of the asset may be applied again.
company cell phones, computer equipment and telecommunications services
This new draft interpretation note deals with the following benefits:
- Private use by an employee of employer-provided telecommunications equipment (for example, cell phones) or computer equipment (for example, a laptop), that is, right of use of an asset, or employer-funded telecommunications services, that is, free/cheap services ; and
- Any allowance or reimbursement granted by the employer in respect of the employee's privately owned equipment or service contract which is used for business purposes.
In terms of the Seventh Schedule to the Act, no value is placed on the private or domestic use of an asset consisting of telephone or computer equipment which the employee uses mainly for the purposes of the employer's business. The word "mainly" has been interpreted by the courts to mean a quantitative measure of more than 50%. Therefore, if more than 50% of the total use of the asset is for business purposes then no value will be placed on the private or domestic use of that asset.
It is important to note that SARS will assess whether or not the asset is used mainly for business purposes on a case by case basis taking all the facts and circumstances of the particular employee into account. This will include a consideration of, amongst other factors, the nature of the employee's work and official duties, qualifying criteria for entitlement to the use of the asset or service and the conditions of use/terms of the grant. There must be a close link between the grant of use of the asset and the employee's job responsibilities. The employer and the employee bear the onus of proving that, based on the facts and circumstances, the particular asset is required due to the nature of the employee's job and the associated responsibilities and that it will be used mainly for business purposes.
The same considerations apply to communication services provided by an employer in terms of whether the service is used mainly for business purposes.
If an employee is reimbursed for actual business expenditure incurred on the instruction of the employer and for which proof was provided to the employer, such amounts are excluded from the taxable income of the employee. However, if the employee receives an allowance, such an allowance will be included in the taxable income of the employee and generally no deduction may be claimed against this allowance.
In this regard, the draft interpretation note states that where an employer pays a "predetermined reimbursement" based on expected business usage, this would not constitute a reimbursement within the true meaning of the word. Payments based on expected or anticipated business usage and not linked to actual expenditure are treated as allowances and not as reimbursements.
The draft interpretation note sets out a formula which SARS will accept to determine the cost of free minutes where the contract includes a free cellular phone and deals with the tax treatment of split billing arrangements.
The draft interpretation note emphasises that employers are responsible for ensuring that the assets/services are used mainly for business purposes, failing which they will be required to include a taxable fringe benefit in the employee's gross income and remuneration for purposes of calculating employees' tax.
The draft Interpretation Notes are available on the SARS website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.