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MODULE 12 : FRINGE BENEFIT (Seventh Schedule Benefits (fringe benefits…
MODULE 12 : FRINGE BENEFIT
Intro
Work <-> Payment
Shares
Cash
Other employment benefits (allowances and advances)
Fringe benefits
s8 allowances
included in taxable income per s8
s8(1)(c)
Subsistence allowance
s8(1)(d)
Public officer allowances
s8(1)(b)
Travel Allowances
Fringe benefit (7th schedule)
included in gross income under par (i) of the def of GI
Employee share scheme
included in income under s8B and s8C
Employers deduction for broad based share plans
Timing of variable remuneration
s7B
in practice
e.g. bonuses and overtime pay
in 1 period
employer will often raise an accrual for variable remuneration
and only pay out the amounts in the next
deals with the timing of variable remuneration in order to benefit the employee ito cash flow as to eliminate any uncertainty as to when these transactions are taxable or deductible
def
travel allowance or advance paid ito s8(1)(b)(ii) OR
leave pay
overtime pay, bonus or commission
N.B! accrued leave pay is NOT treated as a severance benefit
provides that
is incurred by the employer
in the YOA that the amount is paid to the employee by the employer
accrues to the employee OR
Travel Allowances s8(1)(b)
to cover costs of a motor vehicle used for business purposes
home - office travel is not considered to be business travel
employer - employee
only NET amount of travel allowance is included in taxable income
LESS business costs
travel allowance received
EQUALS net amount
for net amount, distinguish between 2 types of travel allowance
Fixed travel allowance
Reimbursive travel allowance
how to get business costs
actual kilometers
log book
actual costs
accurate records
if TP did NOT keep
actual kilometers travelled
can't use actual or deemed costs as a deduction against travel allowance received
accurate records of actual travel costs incurred
deemed cost
deemed cost per kilometer
page 367 of leg
calculation
PLUS fuel cost component
PLUS maintenance cost component
fixed cost component
STEPS
1) determine "value" of vehicle
held under lease par (b) ICA or par (a)
cash value per s1 of VAT Act
other cases
MV (including VAT)
at acquisition date
or date when right of use was first obtained
bona fide agreement of sale/exchange
original cost (incl VAT)
EXCLUDING finance charges
sliding scale
2) fixed cost from table/ total km travelled for BOTH private and business use (apportioned per day (x/365) if travel allowance received < 1 year)
3) PLUS fuel cost component per table (only if recipient bore the FULL cost of fuel)
4) PLUS maintenance cost component per table (only if recipient bore the FULL cost of maintenance)
actual cost per kilometer
calculation
N.B! travel costs includes
insurance
finance costs
maintenance
license costs
other similar costs
fuel
PLUS lease payments (if leased) [the total payments for the year may NOT exceed the appropriate category's "fixed costs" in the Appendix C table
travel costs/ total km travelled
or wear and tear (if owned) [over a period of 7 years from date of acquisition. The total cost is limited to R595000 and the finance charges are limited to an amount as if the total debt had not exceeded R595000]
Reimbursive travel allowance
simplified method IF (3rd option)
total business km do NOT exceed 12 000km during the YOA and
no other travel allowance or reimbursement is paid by the principal to the employee
then the TP may ELECT to use 355 cents per km as the cost per km
same principle as a fixed travel allowance
N.B! where more than 1 vehicle was used during the YOA the distance travelled for both in total may NOT exceed 12 000km for business purposes
N.B! if both fixed and reimbursive travel allowances are received, both amounts will be combined on assessment and treated as a fixed travel allowance. The simplified method CANNOT be used in this case
s8(1)(a)(i)(aa)
if an employee receives a TA and enjoys ROU of an employer provided vehicle
no deductions are allowed against the allowance
the fringe benefit is taxed ito par 7 of the 7th Schedule
FULL allowance is included in income (not net)
s8(1)B)(IV)
Anti-avoidance
the rentals paid are treated as a travel allowance
employee will be able to offset this allowance with expenditure incurred using one of the methods above
if a vehicle has been acquired/hired by the TP/spouse/child and is then let to the employer who gives the ROU to the employee
result
no fringe benefit results
no tax on rental income
no deduction for rent paid on vehicle (if leased)
amount treated as normal travel allowance
Seventh Schedule Benefits
par 2
list of taxable benefits
par 5-13
how "cash equivalent" of benefits are determined
value (7th Schedule) LESS consideration given by employee
EXCLUDES any services rendered by the employee
which benefits have no value
par 1
definitions
fringe benefits
services provided by the employer
par 2(e) and 10
air ticket of employee, or their phone line
EXCLUDING
Payment to insurers for the benefit of employees (subpar(k))
holiday accommodation (par 9(4)(a))
medical services (subpar(j))
employer provides services to an employee and is utilised for private purposes at no cost or a cost which is < value thereof
value of benefit
any other case
cost to the employer
Value LESS consideration paid by the employee to get cash equivalent
if employer is engaged in the business of transporting passengers for reward by sea/air and allows the employee/relatives to travel outside SA for private purposes
lowest fare payable
no value
any communication service provided to an employee, if the service is used mainly for the purposes of the employer's business
services rendered at a place of work for the better performance of their duties as a benefit to be enjoyed by them or for recreational purposes
employer provides transport services to employees in general to convey them to and from their place of work
travel facilities given to spouse/minor child to visit employee > 250 km away from home where he is required to stay for > 183 days in the year
travel facility granted by an employer in the business of conveying passengers by land/air/sea to an employee/spouse/minor child
overland to any destination outside the Republic OR
any destination outside the Republic on a normal flight and no advance reservation of the seat could be made
any destination in the Republic OR
Loans
par 2(f), 11, 10A
EXCLUDING
debts to enable employees to buy qualifying shares ito s8B or to pay stamp duties or securities transfer tax thereon
debts iro which a par 2(gA) subsidy is payable
cash equivalent
interest at the official rate of interest
LESS interest payable by employee
NB!
on each date that the interest becomes payable (in the case where interest is payable at regular intervals) OR
on the last day of each period iro which remuneration is payable to the employee (if no interest or irregular payment intervals) [so typically every month]
cash equivalent is deemed to accrue to the employee:
par 11(5)
where the amount of the cash equivalent included in the taxpayer's income, had it been incurred by the TP as interest, would have been incurred in the production of their income, that amount will be deemed to be interest actually incurred for the purposes of s11(a)
loans provided to employees at a rate lower than the official rate of interest gives rise to a fringe benefit ito par 2(f)
official rate of interest
ZAR loan
SA repo rate + 100 base points (1%)
foreign currency
equivalent of SA repo rate + 100 basis points (1%)
page 368 of legislation or page 43 of slides
par 10A Deemed loan
then value of benefit is
LESS rent paid by employee
EQUALS taxable benefit
interest at the official rate on the stated price
N.B!
the benefit is thus treated as a low interest rate loan and not as the right to use residential accommodation. The formula in par 9 is thus not used
if the actual amount paid for the purchase of the property at the end of the agreement is < MV at the date of the agreement, an additional fringe benefit under par 2(a) arises (acquisition of asset < MV)
where
the employee/spouse/minor child are entitled or obliged to acquire the accommodation at a future date at a stated price
rent is payable on the accommodation calculated wholly or partly as a percentage of the stated price
an employee has been granted the use of residential accommodation owned by the employer
no value
casual loans (short-term at irregular intervals) or loan of which the value does not exceed R3 000 at any time
loans to enable employees to further their studies
residential accommodation
par 2(d) and 9
cash equivalent
LESS consideration paid
N.B!
rental value is determined either with reference to a formula or as the costs incurred by the employer
rental value
rental value
full ownership does not vest in the employer and the accommodation was obtained by the employer at arm's length from a non-connected person
LOWER of
formula OR
expenditure incurred by employee
any other case
formula
FB arises if an employee has been provided with residential accommodation
with or without board, meals, fuel, power or water
furnished or unfurnished
formula
(A-B) x C/100 x D/12
B
is an amount of R75750
UNLESS
employee/spouse/minor child has any right if option to become the owner of the property
then B is zero
employer is a private Co and the employee/his spouse is a controlling shareholder of the employer Co OR
C
18
at least 4 rooms and either furniture or power supplied (NOT BOTH)
17
in any other case
19
at least 4 rooms, furniture and power supplied by employer
A
remuneration proxy (s1)
remuneration for preceding year of assessment excluding the value of the ROU of residential accommodation
if employed for only part of the preceding year, then the remuneration in those months must be annualised (use 365)
defined in 4th schedule
if not at all employed during the prior year, then the first month's remuneration in the current year must be annualised (use 365)
D
no of months that the employee had ROU of the accommodation in the current YOA
N.B!
where >2 residential units situated at different places, are provided to the employee to be used from time to time in the performance of his duties, the cash value is determined using the unit that yields the greatest rental value par 9(6)
where the employee has an interest (as defined in par 9(10)) in the accommodation provided to him, which has been let to the employer, the rent will be deemed to not have been received by or accrued to the employer (par 9(9))
holiday accommodation
any other case
fair market price per day that the employer would receive if the accommodation was let to any person who is not an employee
the rental value is reduced by any consideration given to get the cash equivalent
hired (other than from an associated institution)
rental value is determined at the amount actually incurred for rent and any services/meals that have been charged to the employer
no value
usual place of residence in SA
work purposes
outside SA
inside SA not exceeding 2 years
provision doesn't if physically present >90 days in the YOA preceding the date of arrival in SA or to the extent that the cash equivalent > R250 000 per month
from date of arrival of employee in SA to perform work
physically present in SA
less than 90 days during the year in which the accommodation is provided
Subsidies
par 2(g), (gA), 12
this only applies where the sum of the subsidy and interest paid by the employee is > the amount of the interest calculated at the official rate of interest
if not, it is a low interest rate loan under par 2(f)
a fringe benefit arises where an employer pays a subsidy iro interest or capital payable by an employee on a debt to a 3rd party
cash equivalent = amount of subsidy
no value = NONE
apply
par 2(g), 12
if interest paid by employee + interest paid by employer > official rate of interest
par 2(f), 11
if interest paid by employee + interest paid by employer < or equal to official rate of interest
meals and refreshments
par 2C and 8
employee provided with any meal/ refreshment for consideration < value thereof
meals provided together with residential accommodation
value
EQUAL to cost to the employer for such meal/refreshment
no value
b) during business hours, extended hours or special occasion
c) in the course of providing a meal to any person whom employee is required to entertain in behalf of employer
a) canteen, dining room, business premises
Release of debt
par 2(h), 13
cash equivalent = amount of debt discharged or paid
N.B!
a debt is deemed to be discharged if owed by the employee to the employer and the debt is extinguished by way if prescription (after 3 years) and the employer could have recovered the debt or could have caused the running of the prescription to be interrupted, UNLESS the employer did not have any intention to confer a benefit on the employee
EXCLUDING
contributions made by an employer to a benefit fund par 2(i)
medical costs paid by the employer par 2(j)
no value
insurance premiums paid by the employer indemnifying an employee solely against claims arising from negligent acts or omissions on the part of the employee in rendering services to the employer
former member of a non-statutory force or service to the Government Employees' Pension Fund
for membership to professional bodies as a requirement of employment
an obligation to a first employer arising from the non-compliance of the conditions of a bursary or study loan which has been paid by the 2nd employer and the employee has undertaken to work for the 2nd employer for a period at least equal to the unexpired period of the 1st employer
a fringe benefit arises where a debt owed by the employee to the employer is discharged, or where the employer pays a debt on behalf of the employee to a 3rd party
right of use of a motor vehicle
employer transfers his rights and obligations under a lease
deemed ROU for remainder of lease period
any rentals that become payable by the employee
deemed consideration payable
determined value determined per subpar 1(b)
par 7
cash equivalent of the taxable benefit
value of private use per par 7
3.5% or 3.25% or actual cost
determined value
reduced by 15% pa (reducing balance method)
either cash value or MV
for every 12 month period between the date of acquisition and ROU granted
associated institution
par 7(7) and par 7(8) reductions
LESS any consideration given by the employee to the employer
(other than consideration iro cost of license, insurance, maintenance and fuel)
determined value
vehicle obtained by employer
lease under par(b) of ICA
cash value (s1 VAT Act)
any other case
retail MV (given)
interest or finance charges
s23C
includes VAT
employer could not claim VAT input at acquisition
excludes VAT
could claim
value of private use
rules
3.25% of determined value
motor vehicle has maintenance plan at time of acquisition by employer (or when ROU obtained by employer)
provider underwrites the costs of maintenance of vehicle
par 7(11)
top-up fluids, tyres or abuse of vehicle
period not less than 3 years
distance of not less than 60 000 km
3.5% of determined value
general
actual cost to employer PLUS fuel costs
operating lease as defined in s23A(1) at arms length between non-connected persons
N.B!
monthly value
MULTIPLIED by no of months employee had ROU
no of days
ROU < 1 month
par 7(5)
temporary non-use
no reduction in the value
if vehicle in question during any period
not used by employee for private purposes
for any reason temporarily
par 7(6)
ROU > 1 vehicle
calculation of cash equivalent done separately for each vehicle
UNLESS par 7(6) applies
1 motor vehicle at same time
all used primarily for business purposes (>50% per log book)
taxable value is calculated wrt vehicle with the HIGHEST determined value
N.B!
provision does NOT apply if either par 7(7) or 7(8) are applied
par 7(7) and par 7(8) Reductions
par 7(7)
actual km travelled
actual business km travelled
value of private use reduced in proportion of business km to total km
logbook kept
par 7(8)
actual expenditure
actual private km travelled
employee bears full cost of any of the following
license, insurance, maintenance or
fuel (private use)
logbook kept
then reduce private use as follows
cost of license, insurance, maintenance
cost x private km / total km
cost of fuel for private use
private km x Appendix C tariff per km iro fuel (Travel allowance table)
not applicable to a vehicle obtained under an operating lease as defined in s23A(1)
s23A(1) Operating lease
in the ordinary course of business
not being banking, financial services or insurance
lease of movable property
if
cost of R&M borne by lessor
risk of destruction is not assumed by lessee (unless negligent)
can be hired by general public for < 1 month
non-connected persons at arms length
value of private use par 7(4)
cost to the employee PLUS cost of fuel
par 7(8) reduction does not apply
no value
nature of the employee's duties are such that he is regularly required to use the vehicle outside of his normal hours for work and it is used only for travel between his residence and place of work or private use that is infrequent or merely incidental to business use
vehicle is used by employees in general; private use thereof is infrequent or merely incidental to its business use and the vehicle is not kept at or near the residence of the employee concerned outside business hours
Medical contributions
par 2(l), 12A
if contribution cannot be specifically attributed to each employee then it must be attributed to all employees that are provided with the medical benefit using the following ratio: total contribution/no of employees
N.B!
contributions paid by the employer of a person which have been treated as a taxable benefit ito the 7th schedule are deemed to have been paid by that person (s6A(3)(b))
the employee will therefore be entitled to the s6A credit in that case
cash equivalent = amount of contributions paid on behalf of the employee
no value
the dependant of a deceased employee who was in the employment of such employer at the date of death
the dependants of a former employee after his death, if the employee had retired from the employment of that employer by reason of old age/ill health/infirmity
a person who has retired from the employment of the employer by reason of old age/ill health/infirmity
a fringe benefit arises ito par(l) where an employer pays contributions to a medical fund on behalf of an employee or his dependants
10.Medical, dental and similar services provided by the employer
par 2(j), 12B
use proportional amount based on ratio if costs CANNOT be directly attributed to the specific employee
full expenses incurred by employer/ no of employees
N.B!
qualifying medical expenses paid by the employer of a person which have been treated as a taxable benefit ito the 7th schedule are deemed to have been paid by that person (s6B(4)(b)
employee will therefore be entitled to the s6B credit in that case
cash equivalent = cost to employer LESS consideration paid by employee
no value
services rendered in general to employees at their place of work for the better performance of their duties
services rendered or medicine supplied in order to comply with any law of the Republic
treatments listed by the Minister of Health as prescribed minimum benefits
benefits derived by
the dependents of a deceased employee who was in the employment of such employer at the date of death
the dependents of a former employee after his death, if the employee had retired from the employment of that employer
a person who has retired from the employment of the employer by reason of old age/ill health/infirmity
a person entitled to the over 65 rebate
a taxable benefit arises when an employer pays any medical, dental or similar service as well as hospital services, nursing services or for medicines for the employee/spouse/child/relatives/dependants
right of use of an asset
par 2B and 6
for a consideration < value of asset
EXCLUDING
ROU of motor vehicle
ROU of residential accommodation
fringe benefit arises if an employee is granted the ROU of an asset
rules
asset is owned by employer
15% pa on the LOWER of
cost to the employer OR
MV
proviso to b)
where employee has the sole right of use of the asset over a major portion of the assets useful life
value is cost of the asset to the employer
a) asset is leased by employer
amount of rental payable for the period that the employee has the ROU of the asset
employee may deduct costs incurred on the maintenance or repairs of the asset against the value of the fringe benefit (par 6(1))
no value
c) equipment or machine that can be used by employees in general for shorter periods and value of private use is negligible OR
d) telephone or computer used mainly (>50%) for business OR
b) asset is provided as an amenity to be enjoyed for recreational purposes at the employer's place of work OR
e) books, literature, recordings or works of art
a) Private use of asset is merely incidental to the use for business purposes OR
acquisition of an asset at less than MV
par 2A and 5
no value
fuel or lubricants for use in motor vehicle of which employee has ROU
immovable property
UNLESS
MV on date of acquisition > R450 000 OR
employer and employee are connected persons
remuneration proxy of employee > R250 000 OR
Benefits iro insurance policies
policies relating to an event arising solely in the course of employment
cash equivalent = cost to employer
a fringe benefit arises where an employer has during any period made any payment to any insurer under an insurance policy for the benefit or the employee/spouse/child/dependent/nominee
use proportional amount based on the ratio if costs cannot be directly attributable to the specific employee
full expenses incurred by the employer/ no of employees
N.B!
interaction between par 2(k) and s10(1)(gG) exemption
exemption only applies to the proceeds received once the insurance benefit pays out and NOT to the fringe benefit amount included
refer to module 11
Contributions to funds
par 2(l), 12D
cash equivalent
where
benefits payable to members iro a fund member category of a fund consists solely of a defined contribution components
amount contributed by the employer
benefits payable to members iro a fund member category of a fund consists of components other than only defined contribution components
X = (AxB) - C
A
1 more item...
B
1 more item...
X
1 more item...
C
1 more item...
fringe benefit arises where an employer makes any contributions for the benefit of an employee to any pension fund, provident fund or retirement annuity fund
N.B!
ito s11F(4), if an amount has been contributed to a fund by an employer on behalf of an employee, that amount is deemed to have been contributed by the employee themselves
the employee will therefore be entitled to a s11F deduction on such contributions
no value
contributions by an employer to a fund for the benefit of an employee who has retired from that fund
contributions by an employee to a fund iro the dependents/nominees of a deceased member of that fund
benefits other than a cash salary
employer - employee relationship
employer and employee are defined in the 4th schedule
employer
anyone who is liable to pay such remuneration
employee
anyone who receives remuneration from an employer
retired employee
liable for tax as they constitute remuneration as defined
par 16
benefit granted to other person
taxed in the hands of the employee who rendered the service
spouse/child/etc
as a result of the employee's services rendered to the employer
N.B!
taxable benefits exclude amounts that are exempt ito s10 (par 1 def of taxable benefit)
a partner in a partnership is deemed to be an employee of the partnership par 2A (Module 14)
par 17-18
employer obliged to do the following
provide both the employee and the Commissioner with a copy of this certificate
if employer fails to do this
fine of 10% of the cash equivalent of the benefits will be levied
issue a certificate
within 30 days of the end of the YOA or
from the date on which the benefit has been granted
indicating the nature of the benefit
and the value that has been attached to the benefit
if fringe benefit was included in the employees' tax calc
no certificate is required to be issued
determine the cash equivalent of the value of a taxable benefit
declare on their return that all taxable benefits granted to employees have been declared on their employees' tax certificate
STEPS
2) What is the value of the benefit?
3) When does it have no value?
1) Scope in or out?
Anti-Avoidance
Subsistence Allowance s8(1)(c)
employee required to be away from his normal place of residence in SA for at lease 1 night for business purposes
deduction may be claimed against such an allowance (choose 1)
valid supporting doc
expenditure actually incurred for accommodation, meals or other incidental costs
proof of expenditure CANNOT be provided
amount based on the rates approved by the Commissioner (page 370)
travel within SA
R122 incidental costs ONLY
R397 meals and incidental costs
rate per day covering
travel OUTSIDE SA
if the allowance is granted to cover the cost of meals and incidental costs
then the amount allowable as a deduction is determined ito a table providing the different rates based on the county of accommodation
only the NET amount of the allowance is included in taxable income
allowance can cover costs relating to accommodation or other incidental costs
the deduction allowed are limited to the amount of the allowance
granted to employee who is required to travel for business purposes (e.g. out of town audit)
calculation
LESS actual or deemed costs
EQUALS net amount
subsistence allowance received
net amount included in taxable income per s8
N.B!
the deemed rates apply for each day or part of a day that the employee is required to be away from his usual place of residence in SA (1 night rule)
employee will choose the most beneficial of the actual cost vs the deemed rates
there is no "deemed rate" for accommodation. If employee cannot prove the expense, no deduction can be claimed against the SA
if employee is not required to spend at least 1 night away from his usual place of residence in SA, the GROSS amount of the allowance will be included in gross income
costs in the table for travel outside SA are included per day and denominated in foreign currency. Translate to rand using the principles in s25D
if the employee has not, by the last day of the month following the payment of a SA, either spent a night away from his usual residence or paid the allowance back to the employer, the amount will be deemed to be an amount received for services rendered and included in gross income under par (c) of the def. Proviso to subpar (ii) of par (bA) of the def of 'remuneration' in the 4th Schedule)
allowances granted to employees are NOT fringe benefits. The tax treatment of allowances are dealt with in s8, whereas fringe benefits are dealt with under the 7th Schedule
Broad based employee share plans and vesting of equity instruments
Exemptions relating to share plans
General rule s8(1)
of the following allowances
travel allowance
subsistence allowance
public officer allowance
must be included in taxable income
net amount
amount of the allowance LESS allowable expenditure for business purposes
in the case of any other allowance
gross amount will be included in taxable income
s8(1)(a) exception to rule
reimbursements or
advances
not included in the taxable income in the case where
the amount is reimbursed or an advance is given for the expense and
the individual has to provide proof to the principal that the expense was so incurred
the expense is to be or was incurred at the instruction of the principal for the furtherance of his TRADE
Associated institution
par 1 def
Co managed/controlled by substantially the same persons
par 4
deemed to be granted by the employer themselves
fringe benefits
par 2F, 11, 10A
Loans
par 2G, GA, 12
Subsidies
par 2E, 10
Services provided by the employer
par 2H, 13
Release of debt
par 2D, 9
Residential accommodation
par 2(l), 12A
Medical contributions
par 2C, 8
Meals and refreshments
par 2(j), 12B
Medical, dental and similar services provided by the employer
par 2B, 7, s23A(1)
ROU of a motor vehicle
par 2(k), 12C
Benefits iro insurance policies
par 2B, 6
ROU of an asset
par 2(l), 12D
Contributions to funds
par 2A, 5
Acquisition of an asset < MV
VAT on Fringe benefits
VAT implications
arises
s18(3) of VAT Act
no VAT
benefit constitutes entertainment
benefit is cash, s8 allowance or s8A, 8B, 8C instrument
the supply is zero-rated or an exempt supply
fringe benefits as per 7th schedule
deemed supply and therefore subject to VAT
N.B!
output tax to be accounted for by the employer (vendor) is intended to reverse that portion of the input tax that was previously claimed on those goods/services by that vendor
certain employment benefits are not fringe benefits and no output tax is thus payable
s8(1) - all allowances
s8B - broad-based employee share scheme
cash salaries
s8C - other share schemes
no output tax is payable on fringe benefit
zero rated supplies
supply of entertainment
exempt supplies
deemed supply
fringe benefit subject to VAT
ROU given to an employee
services made available by the employer to the employee for private purposes
assets given to employees
free of charge
or at a low rate
N.B! entertainment, zero rated, exempt or motor vehicle
fringe benefit NOT subject to VAT
long service awards in cash
supply of meals/refreshments (entertainment)
subsidies (supply of money)
free/cheap holiday accommodation (accommodation is defined as part of entertainment)
residential accommodation (exempt supply)
interest free and low interest loans (financial services - exempt supply)
paying a debt on behalf of an employee (financial service - exempt)
pension/provident/RAF and medical aid fund contributions (financial service - exempt)
bursary schemes (supply of money/educational services - exempt)
international transport (zero rated)
supply of motor car < MV, if the employer was denied a deduction of input tax on the acquisition of the motor vehicle
any fringe benefit to the extent that it is granted in the course of making exempt supplies
time and value of supply
time
benefit becomes subject to employees' tax
typically at the end of the month that the benefit is received or for every month that it is received where it is not a once-off benefit
value
other than use of a motor vehicle
deemed to be the cash equivalent of the benefit MULTIPLIED by tax fraction
fringe benefit subject to VAT
Employee share schemes
s8B
important dates
day 1: acquisition of shares
subsequent disposal of shares
on initial acquisition of qualifying equity shares
the shares are an amount for services rendered par (c) GI def
QES EXCLUDED from par 2(a) of the 7th schedule
N.B! employees who receive QES as defined in s8B are therefore not taxed on initial acquisition of these shares
s10(1)(nC) exemption for amounts received as QES
N.B! S8B must be understood in the context of par (c) of the def of gross income, s10(1)(nC), s9C, the 8th schedule and par 2(a) of the 7th schedule
on subsequent disposal of shares
(*) typically the gain will be capital in nature and treated in accordance with the principles of the 8th schedule (s9C must also be considered)
if employee is a share dealer
shares might be income in nature
if sold > 5 years
the normal principle of share sales will apply (*)
EITHER:
capital gain or
income
encourage sales after 5 years
if sold < 5 years
from grant date the gain on disposal is included in income under s8B
s8B overrides s8C and s9C (until shares are no longer qualifying shares)
s8B(3) qualifying equity share
requirements of a QES
the person must acquire the share ito a 'broad-based employee share plan' [on/after 24/10/2004]
the MV of the total equity shares acquired by the person under the plan may NOT in total be > R50 000 in the current year and the four preceding years
share must be an equity share (s1)
introduced to encourage long-term empowerment of employees through the receipt of shares at < MV without adverse tax consequences
'broad-based employee share plan'
at least 80% of all employees that are employed by that employer on a permanent basis (and who have been continuously so employed on a full-time basis for > 1 year) and entitled to participate. Employees who participate in any other equity scheme of the employer may not participate
the holders are entitled to all dividends and full voting rights in relation to those equity shares and
equity shares in that employer are acquired by the employee for a consideration that does NOT exceed the minimum consideration required by the Co's Act (the nominal value of unissued shares)
no restrictions have been imposed iro the disposal of those equity shares
OTHER THAN
a right retained by another person to acquire the shares from the employee or former employee at the MV on the date of acquisition by that person or
a right retained by any person to acquire the equity shares from the employee at the lower of MV on the date of the grant or the date of acquisition by the employer, if the employee was guilty of misconduct or
a restriction imposed by legislation
a restriction that the employee/former employee is NOT permitted to dispose of the share for a period which may not extend beyond 5 years from the date of the grant
tax consequences for employer
s11(IA)
LESS any consideration paid by that employee for the shares
LIMITED to a maximum of R10 000 per year per employee (for up to 5 years). Any excess can be carried forward
deduction by an employer of the MV of any QES granted to employee
in the absence of s8B
employee who receives shares from an employer < MV
taxable fringe benefit under par2(a) of 7th
ENTIRE amount would be taxed in the hands of the employee
tax consequence for employee
at acquisition
LESS s10(1)(nC) exemption [amounts received/accrued ito a QES in s8B]
EQUALS effect on taxable income
gross income par (c) [MV LESS any nominal payments]
N.B! if the transaction in which the employee purchased the shares is cancelled and the employer repays the amount paid by the employee, the amount is exempted by s10(1)(nE) in the hands of the employee
disposal
within 5 years from date of grant
included in his income (amount received/accrued - consideration paid)
AFTER 5 year period OR disposed off within 5 years from date of grant but due to death of the person or insolvency
proceeds = selling price
base cost = consideration paid
capital in nature
s8B(2) and 2A
then the new equity share is deemed to be a QES acquired on the date of the grant of the original QES disposed and for the same consideration s8B(2)
where additional shares are received by virtue of QES held (i.e. capitalisation issue) the MV of these shares is not taken into consideration when determining the R50 000 limit s8B(2A) and IN62
if a person disposes a QES solely in exchange for any other equity share in that employer
s8B(2B)
Disposal of rights
the cost attributable to disposal
MULTIPLIED by (consideration received for disposal of right/ MV of all shares before sale)
N.B! the proceeds on sale LESS the cost calculated above is included in income
acquisition cost of shares
any disposal of a right or interest in QES (i.e. the right to receive dividends or voting rights) < 5 years constitutes a gain that must be included in income
s8C
aimed at equity based incentives for top level management
on/after 26 October 2004
applies to
equity instruments (restricted/unrestricted)
acquired by virtue of his/her employment/office of director of any Co
by arrangement with the taxpayer's employer
does NOT apply to
a qualifying equity share ito s8B
N.B! first apply s8B, if not applicable, apply s8C
N.B!
a fringe benefit does arise where an employee is granted a low interest rate loan to acquire a s8C instrument
provisions of s8C overrides s9C
par 2(a)(iv) of the 7th schedule EXCLUDES s8C as a fringe benefit
Taxation of directors and employees on vesting of equity instruments
3 important events
vesting - inclusion of gain/loss
normal rule
s8C inclusion in income [MV at date of vesting LESS any consideration paid]
exception
if an option or convertible instrument is abandoned/lapsed/relapsed or where a restricted instrument is disposed of to an employer for an amount < MV, the amount to be included in income is the amount received LESS consideration paid
disposal CGT
proceeds (par 35 of 8th schedule)
LESS base cost [MV used in determining gain/loss upon vesting par20(1)(h)(i) 8th schedule]
disposal of EI - capital in nature
EQUALS capital gain/loss
apply normal principles to determine whether shares are now capital or revenue in nature
initial acquisition - GI and 10(1)(nD)
tax consequence for the employee
LESS s10(1)(nD) exemption [exempt provided the equity instrument has not yet vested]
EQUALS effect on taxable income
gross income par (c) [MV LESS any consideration paid]
N.B! Effectively the tax consequences are deferred until vesting date
equity instrument
a share or a member's interest in a Co
includes
b) any financial instrument that is convertible to a share or member's interest and
c) any contractual right or obligation the value of which is determined directly or indirectly with reference to a share or member's interest
a) an option to acquire such as a share, part of a share or member's interest
s8C vesting as the tax event
unrestricted s8C(3)(a), def s8C(7)
vests on acquisition of the instrument
restricted s8C(3)(b), def s8C(7)
EARLIEST of: vests..
immediately before disposal (other than disposal in s8C(4) or (5))
restricted option terminates (other than by way of exercise or conversion)
all restrictions cease to have effect
immediately before death (if restrictions lift after death)
a disposal of a restricted instrument < MV ito s8C(5)(c) or by way of lapse, abandonment or release of an option ito s8C(2)(a)(i)(bb) or s8C(2)(b)(i)(bb)
gain/loss on an equity instrument is only included in income in the year that the instrument vests
s8C(4)(a) and (b) exchanges
the disposal is not seen as a vesting event (s8C(3)(b)(ii))
the new instrument is deemed to have been acquired as a result of employment and is therefore taxable in the same way as the original instrument would have been s8C(4)(a)
if an employee exchanges a restricted EI with his employer for another restricted EI either in that employer or an associated institution
in effect, the new instruments will simply be taxed on vesting as if they were the instruments originally acquired
any capital gain/loss arising as a result of the exchange must be disregarded par 64C 8th Schedule
if the employer pays cash to balance the exchange of shares, a taxable gain arises in the hands of the employee s8C(4)(b)
s8C(5) Disposals to connected persons or not at arm's length
this provision does not apply where a taxpayer disposes of a restricted EI to his employer/associated institution/any other person by arrangement with the employer of an amount < MV s8C(5)(c)
if an EI was acquired by a person other than the taxpayer by virtue of the taxpayer's employment
EI deemed to have been acquired by the taxpayer and then disposed of to a connected person or not at arm's length
if an employee disposes of a restricted EI to a connected person or to any person not at arm's length price
any gain/loss which arises on the vesting of the instrument is deemed to arise in the hands of the original owner and not in the hands of the connected person or purchaser
any capital gain/loss arising as a result of the above mentioned disposal must be disregarded
the disposal is not seen as a vesting event
if a person who acquired a restricted EI in a manner contemplated in s8C(5)(a) disposes of that instrument to another connected person or not at arm's length, subsection 5 applies to that person as if he had acquired that instrument directly from the taxpayer s8C(6)
s8A
such gains are included in gross income under par (i) of the defintion
only applies to rights obtained by a director/former director/ employee before 26 October 2004
gains made by a director or former director by virtue of the exercise, cession or release of a right to acquire ANY marketable security
Before 26 October 2004