EMPLOYEES’ TAX
1938. Company Incentive Trip
A Binding Class Ruling (BCR 018) released in May 2010 instilled fear in a number of employers.
Those that reward performance with fabulous overseas or even local trips may find themselves on the
wrong side of SARS and facing interest and penalties for failure to deduct PAYE.
The ruling covered the following scheme:
• The employer provides an overseas trip as a reward for services rendered.
• The goal of the trip is to encourage performance and to reward employees with an unforgettable
experience.
• Employees will be accompanied by executives of the company and NOT spouses or other family
members.
• The trip will encompass both learning and development through teamwork and group activities in
special programmes as well as reward programmes.
• Attendance at the structured programs is compulsory.
• Employees must travel together and should they not be able to travel, the reward is forfeited.
• Tickets are economy class and cannot be transferred, exchanged for cash or upgraded.
• Only employees still employed by the employer at the time of the trip are eligible to travel.
• No annual leave will be used and the trip will take place during company time.
• The employer will bear all costs including transport, accommodation, meals and other services.
While it may seem that this trip is clearly business related, given the limited personal time afforded to
the employees, the BCR 018 issued by SARS paints a different picture.
SARS determined that the meals, refreshments, accommodation and services supplied by the
employer were, in fact, taxable benefits under the Seventh Schedule of the Income Tax Act No. 58 of
1962. The employer is therefore required to determine which portion of the business day (14 hours)
was spent on business activities, and using that percentage to determine which portion of these
expenses were private and therefore taxable. The ruling provides no guidance on how to make this
determination.
The ruling goes on further to state that air travel time must be excluded from the apportionment of
time calculation. In terms of the cost of the flights, these are regarded as fully taxable and no
percentage calculation was therefore applicable. SARS therefore regards the airline costs as 100%
private.
The concern with this ruling is its practical implications for other employers that award incentive trips
to employees, in terms of understanding the extent to which SARS will seek to implement this
approach in determining the taxable value of such trips.
Further, in terms of this ruling, employers will be required to identify affected expenses and perform
an apportionment of these to arrive at a taxable benefit for the employee. However, as noted above,
the ruling provides no guidance on how this apportionment should be approached, in terms of what
activities may be regarded as business and what activities are therefore private in nature. This will
result in practical difficulties as well as an administrative burden for the employer.
To illustrate this with an example:
On day one of the incentive trip, the team arrives at its destination, freshens up and meets for
pre-dinner drinks. The CEO gives a small welcoming speech and congratulates the team on its
performance. The team meets for dinner and then retires for the evening.
Day two begins with breakfast, a round of golf (team building) followed by a two hour seminar on
“Improving Sales Performance”. The afternoon comprises a short sight-seeing tour of the surrounding
area with a question and answer session. The team then meets for dinner and thereafter gathers for an
evening to play a board game called “30 Seconds” (team building).
Given the circumstances set out above, how would an employer determine what is business and what
is private within this two day programme? Would the golf and the board games, used by the company
as teambuilding activities, be regarded as business or private by SARS? And what would SARS’
attitude be if employees were accompanied by their spouses/partners as is so often the case?
The difficulty with a ruling such as this is that, once issued, one has no knowledge of what was in fact
submitted to SARS for consideration. There is therefore no way of knowing on what the employer
actually requested SARS to rule. As such, comment can only be made based on what is finally
published by SARS. It must be borne in mind that this ruling is only binding on SARS and on the
class of taxpayers party thereto. It is not binding on employers in general. However, it does provide an
indication of SARS’ prevailing view, which cannot be ignored.
Ernst & Young
IT Act: Seventh Schedule
Binding Class Ruling No. 018
