Fringe Benefits: Tax Implications

What are fringe benefits?

A fringe benefit is a benefit or advantage received by an employee or holder of office, whose value can be determined reliably and has been provided by the employer for free or at a reasonably low value than would have been provided in an open market, between unrelated parties.

Such a benefit would be an interest free loan, right of use of a motor vehicle or travel allowance. These benefits are provided to employees by virtue of employment or holding an office and these benefits can be valued, and the value must be included in the employee’s gross income as receipts in the year of assessment in which they were granted to the employee.

The value of the benefit to be included in gross income

In terms of subsection (i) to the gross income definition under section 1 of the Income Tax Act, the cash equivalent as determined under the provisions of the Seventh Schedule to the same Act, the value thereon shall be included in the taxpayer’s income in terms of section 8A.

Seventh Schedule provisions identify the various types of benefits or advantages that can be granted to the employees and how the cash equivalent can be determined that will be included in the employee’s gross income. The employee may be liable to pay a certain amount for the benefit, this amount so paid by the employee shall be off set against the cash equivalent to determine the amount to be included in the employee’s remuneration.

An example, an employer secures cell phone contracts for its employees at a cost of R350 p/m for each employee. In turn, an employee pays R 100 as part of their contribution to the cell phone. The value that will be included in the employee's gross income will be the remaining R250 monthly and on the aggregate yearly amount the employee shall be taxed on.

An employee may also qualify for certain deductions against the received benefits or advantages, in terms of specific provisions of the act. An employer may be contributing on a rand on rand towards the employee’s retirement, provident or pension fund. The final contribution paid shall be allowed as a deduction from the employee’s gross income in terms of section 11(F) of the Income Tax Act.

Furthermore, the employee may get relief as the benefit or advantage can be proven to have been utilised for the purpose of the employer’s trade. An employee provided with a travel allowance to use their personal vehicle, or an employee granted a right to use a company vehicle, and the employee uses the benefit to perform his employment duties, the determined business usage can be allowed as a deduction against the received benefit or advantage.

Conclusion

Therefore, a benefit that has been received and cannot accurately be appropriated for business usage shall be deemed to be received for personal usage of the employee and as such no deductions shall be granted in terms of section 23 of the Income Tax Act. The value of all received benefits shall be included as determined in the employee’s gross income for the relevant year of assessment and taxed by the revenue authority accordingly.