Louis Marais and Partners Chartered Accountants (S.A.)

With employees struggling to make ends meet in these difficult times, an increased after-tax remuneration would be welcomed. The Income Tax Act (the Act) provides for certain employment-related benefits to be exempt from normal tax. These concessions (exemptions) are set out in s 10. But in the Seventh Schedule certain fringe benefits are given a ‘nil’ value.

The difference between an ‘exemption’ and a ‘nil’ value is important because if a fringe benefit were exempt in terms of the Seventh Schedule, the Commissioner could then ‘tax’ it under the provisions of para (c) of the definition of ‘gross income’. Paragraph (c) contains two provisos. Its first proviso reads as follows:

‘[T]he provisions of this paragraph shall not apply in respect of any benefit or advantage in respect of which the provisions of paragraph (i) apply.’

By giving the fringe benefit a ‘nil’ value in the Seventh Schedule the legislature has made this fringe benefit subject to the provisions of the para (i) of the definition of ‘gross income’. This, in turn, means that the Commissioner cannot tax this fringe benefit under para (c) of the definition of ‘gross income’. The overall result is that if a fringe benefit has a ‘nil’ value in the Seventh Schedule it becomes a tax-free benefit to its recipient.
It would seem that these so-called nil value provisions can be divided up into four groups, namely,

• provisions that prevent double or treble taxation of a fringe benefit,

• provisions that prevent ‘taxable’ fringe benefits that are difficult or almost impossible to value or administer,

• fringe benefits peculiar to a particular type of employment, or

• benefits (nil values) worth pursuing.

If a fringe benefit has a ‘nil’ value in the Seventh Schedule it becomes a tax-free benefit to its recipient.

Preventing double or treble taxation

Paragraph 5(3) of the Seventh Schedule gives a ‘nil’ value to fuel or lubricants supplied by an employer to his employee for use in a motor vehicle where the value of the private use of such vehicle has been determined under para 7.

Paragraph 7 places a value on the private use of a motor vehicle by multiplying 2,5%, and in certain circumstances 4%, by the ‘determined value’ of the motor vehicle.

Paragraph 5(3) therefore prevents the double taxing of a fringe benefit, namely, under para 2(a) read with para 5 and para 2(b) read with para 6.
When an employee has been granted the right to occupy residential accommodation owned by his employer and is entitled or obliged to acquire it at a future date at a price stated in an agreement, then no benefit arises under para 2(d) (residential accommodation). This is to prevent double taxation because the benefit is taxable under para 10A. Similarly, when the employer acquires the accommodation, no benefit arises under para 2(a) (free or cheep assets).

Preventing incidental ‘taxable’ fringe benefits

An employee is sometimes given the use of an asset but the benefit that arises is either negligible or too difficult to ascertain. Examples of these benefits include the use of the employer’s telephone to make or receive private calls and the use of the employer’s computer and internet to make or receive private e-mails.

Paragraph 6(4) of the Seventh Schedule gives a ‘nil’ value for the following benefits:

• When the private use by the employee of the asset is incidental to its business use by the employee (para 6(4)(a)).

• When the asset is a machine or equipment that employees in general are allowed to use for short periods of time, provided the private use of it by the employee is negligible (para 6(4)(b)).

• When the asset is a telephone or computer that the employee uses mainly for the employer’s business (para 6(4)(bA)).

• When the asset consists of books, literature, recordings, or works of art (para 6(4)(c)).

Peculiar to a particular type of employment

Occasionally an employee receives a benefit because of the type of work he does and the fringe benefit is given a ‘nil’ value.

Examples would include the following:

• The use of a company car, for example, by an engineer who is ‘on call’ for emergencies. This benefit is given a ‘nil value’ if
‘the nature of the employee’s duties are such that he . . . is regularly required to use the vehicle for the performance of such duties outside his . . . normal hours of work, and he is not permitted to use such vehicle for private purposes other than . . . travelling between his . . . place of residence and his place of work, . . . or private use of which is required or is merely incidental to its business use.’
(Emphasis added.)

• A salesman may be required to entertain customers on behalf of his employer. He enjoys a meal or refreshment in the course of entertaining this person. A ‘nil’ value is placed on his meal and refreshments (para 8(3)(c)).

• An employee who is given abroad or local travel facilities for himself, his spouse or minor child, by his employer whose business is passenger travel is not taxed as the fringe benefit is given a ‘nil’ value (para 10(2)(a)).

• An employee’s work may require him to work at a place other than the office provided by his employer, but he still needs access to the internet. The communication service provided to the employee if it is used mainly for the purposes of the employer’s business is given a ‘nil’ value (para 10(2)(bA)).3

• An employee may be required to be a member of a professional body as a condition of his employment. For example, an accountant or auditor may be required by his employer to be a member of the South African Institute of Chartered Accountants (SAICA) or the Independent Regulatory Board for Auditors (IRBA). If the employer pays the employee’s subscription to a professional body, the fringe benefit is given a ‘nil value’ (para 13(2)(b)).

Worth pursuing

In addition to the abovementioned ‘nil’ value fringe benefits, there are other ‘nil’ value benefits that an employer could provide to an employee that would assist him financially without increasing his tax burden.

These benefits are as follows:

• Bravery awards given by an employer to an employee, provided the cost to the employer of the asset awarded (provided cash is not awarded) does not exceed R5 000 (para 5(2)(a)).

• Long-service awards provided the cost of the assets awarded (provided cash is not awarded) does not exceed R5 000 (para 5(2)(b)). Long service is defined as ‘an initial unbroken period of service of not less than fifteen years or any subsequent unbroken period of service of not less than ten years’.

• Assets provided by an employer as an amenity to be enjoyed by the employee at his place of work (para 6(4)(a)). For example, an employee may be given the use of a swimming pool or gym at his employer’s premises.

• Assets provided by an employer for recreational purposes at a place of recreation, or at work, provided by the employer for the use of his employees in general (para 6(4)(a)). For example, an employee could have access and free use of a sports field or club.

• The use of a company ‘pool car’ to run personal errands. This benefit is given a ‘nil’ value only if the vehicle is available and is in fact used by employees in general and the private use is infrequent or is merely incidental to its business use and the vehicle is not normally kept at or near the employee’s residence when not in use outside of business hours (para 7(10)(a)).

• Meals or refreshments supplied in a canteen, cafeteria or dining room operated by or on behalf of the employer, and patronized wholly or mainly by his employees, or on the business premises of the employer (para 8(3)(a)).

• Meals or refreshments supplied by an employer to an employee during business hours or extended working hours or on a special occasion (para 8(3)(b)).

• The provision of residential accommodation to ‘qualifying’ employees with a remuneration factor of R46 000 or less. This is because the formula in para 9(3)(a) will result in a ‘nil’ answer if ‘A’, the remuneration factor, is R46 000 or less. An employee is effectively exempted (he is not taxed) from normal taxation on the fringe benefit of being provided with residential accommodation. This accommodation must be owned by the employer or the employer must be letting it and together with the other expenses that the employer is defraying, the total amount incurred must not exceed R46 000 a year.

• The provision of a transport service from home to work and back home again (para 10(2)(b)).

• The provision of a service to employees at work for the better performance of their duties, as a benefit to be enjoyed at work or in the form of recreation at a place of recreation (para 10(2)(c)). Examples could include free hairdressing or free beauty treatments at work or free massages for stressed employees.

• Financial assistance in the form of low-interest or interest-free ‘casual’ loans provided the loans do not exceed R3 000 (para 11(4)(a)).

• Financial assistance in the form of low-interest or interest-free educational loans, being loans advanced for the purposes of enabling the employee to further his own studies (para 11(4)(b)).

• Contributions to benefit funds made by the employer on behalf of a person (or his dependants) who by reason of superannuation, ill-health or infirmity retired from the employment of the employer died and was in employment on the date of death or had retired as described above or has attained the age of sixty-five years (para 12A(5)(a) to (d)).

• The provision of medical treatment in the ‘qualifying’ situations described in para 12B(3)(a) to (c).
Occasionally an employee receives a benefit because of the type of work he does and the fringe benefit is given a ‘nil’ value.
There are ‘nil’ value benefits that an employer could provide to an employee that would assist him financially without increasing his tax burden.

Examples of these benefits include the use of the employer’s telephone to make or receive private calls

Conclusion

Under the ‘Worth Pursuing’ heading above, fourteen examples have been listed. An employer wanting to provide an employee with a tax-efficient remuneration package should investigate the cost of introducing some of these benefits.
Say, for example, an employee spends R30 a day on a lunchtime meal. At a marginal rate of 40%, the pre-tax earning to finance this meal would be R50. Now if his employer was to operate a canteen on his business premises, an employee enjoying a meal in this canteen would be receiving a nil-value fringe benefit.

The cost to the employer could be funded by a decrease in the employee’s remuneration. And a decrease not exceeding R50 would be tax efficient to both the employer and the employee.