 13 - 19 December 2000 |
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Income tax on fringe benefits – how it works This week The Business Times explores the inner workings of taxation on fringe benefits, as viewed by the Department of Inland Revenue. The Income Tax Act makes provisions for the treatment of 'benefits in kind', such as the use of company cars or company assets as 'income', which is now taxable as ordinary income. This aspect of the legislation is expected to be strongly enforced as of the beginning of next year. Definition of a fringe benefit A fringe benefit is defined as a benefit, which is provided in respect of employment. A benefit includes any right, privilege, service or facility. Employment in this context includes employees, directors and others associated with them. In terms of the Income Tax Act, all 'benefits in kind' are taxable. These 'fringe benefits' have a value to the employee, just like a salary or cash benefit. Following are guidelines, which will be used to value these benefits and 'convert them to salary' for FSS purposes. Application of rules These rules apply to all those in employment. In this context employment includes: employees, directors and certain other persons in control-ling positions as well as those associated with them who benefit from their position. Definition of remuneration The word "remuneration" or "emoluments" signifies any kind of pay for a job. It includes salaries, fees, pay, wages, overtime pay, leave pay, bonus, commission, perquisites, tips, gratuities, benefits in kind, expenses payments and allowances. Benefits provided for the family or household of an employee Any benefit provided for the members of the family or household of an employee/director ranks as if it were provided for the employee/director personally. The term "family" or "household" covers the employee's: spouse, children, spouses parents, servants, dependants and guests. Collection of income tax on fringe benefits Income Tax on fringe benefits is collected by: 1. converting the value to the employee of the fringe benefit into fringe benefit salary value for that pay period in accordance with the guidelines issued by the Commissioner; 2. adding the fringe benefit salary value for that pay period to the salary and wages earned for that pay period; and 3. applying FSS tax deductions to the gross (fringe benefit salary value plus salary/wages) amount. Employers must keep all the necessary records pertaining to the valuation of the fringe benefit/s as the Commissioner of Inland Revenue may request to view such records on demand. Income tax on fringe benefits, like other personal income tax payable, is collected through the FSS for the following reasons: 1. Fringe benefits are considered as another form of "remuneration" or "emoluments" and as such are governed by the FSS regulations 2. Income tax on fringe benefits is only the regulated enforcement of an existing tax. 3. Although there will necessarily be changes required to payroll software to differentiate the tax these are not seen as being major changes. Fringe benefits categories Fringe benefits have been categorised under three headings. Employers must account and report on the value of the fringe benefits under each of these headings. There is no requirement to account for the tax on the fringe benefits under the three headings. 1. Company Cars This includes: The use of company cars "owned", "leased" or "hired" by the com-pany and made available to employees for their private use. "Cash Allowances" paid to employees in respect of the use of their "own" cars will also be included under this category. 2. Use of an asset or accommodation The use of an asset owned or leased by the Employer and made available for the private use of the Employee. This excludes the use of company cars, which fall under Category 1, but includes the private use of residences, boats, aeroplanes, furniture, machinery etc. 3. Other benefits and services These are all other services and benefits provided to the employee. Examples include low interest rate loans, reimbursement of bills (utilities, school fees etc), travel, entertainment, discounted goods, insurance, meals, domestic services, handymen, gardeners, professional advice, chauffeurs etc. Value of the fringe benefit Currently FSS tax deductions are made against all emoluments, including allowances, paid to the employee i.e. Taxable emoluments = Salary + Allowances With the inclusion of fringe benefits Taxable emoluments = Salary + Allowances + Value of Fringe Benefits FSS deductions will be applied against the Taxable Emoluments but deducted from the Salary + Allowances portion of the emoluments. For obvious reasons tax cannot be deducted from the Fringe Benefit Value. Although the FSS deduction is applied against the gross amount, it is still important that the categorised value of fringe benefits be retained and accounted for. The 50% rule There is currently a rule that limits the amount of tax that can be deducted from a pay packet to 50% of the emoluments made in that period. The rule states: "where the tax deduction, as a result of FSS and Arrears, exceeds 50% of the remuneration paid then the arrears deduction will be reduced such that no more than 50% of the remuneration will be deducted for tax purposes." This rule will be retained and extended as follows: "where the tax deduction, as a result of FSS, Arrears and value of Fringe Benefits, exceeds 50% of the remuneration paid then first the tax on Fringe Benefits, then the Arrears Tax will be reduced such that no more than 50% of the remuneration will be deducted for tax purposes." The situations where this will happen are rare. It will occur when there are hefty arrears payments being made or when the value of fringe benefits far outstrips the 'cash value' of salary paid. In these cases, especially the latter, the tax shortfall will be accounted for as part of the self-assessment and falls due with the lodgement of the return or with the subsequent issue of the Tax Statement following lodgement of a Declaration. Impact on reporting systems The impact on reporting systems will be to introduce the new categorised 'value of fringe benefits' amount. The change will require: 1. The introduction of the three categories of fringe benefits against employee records together with indicators to show recurrence or input values. 2. Changes to the calculation of FSS to extend the 'taxable emoluments' amount and limit the effect of the 50% rule to the 'cash portion of emoluments'. 3. Changes to the FS3, FS5 & FS7 to report the values of fringe benefits. 4. Changes to the electronic lodgement layout to include the categorised value of fringe benefits. 5.Changes to the payslip to print the value of fringe benefits. Reporting of fringe benefits Value Employers have to separately identify the categorised Value of Fringe Benefits on: 1. The FS3 to identify the fringe benefits paid through the year to the employee. 2. The FS5 remitted with the monthly FSS payment (gross not individual employee amounts). 3. The FS7 (annual FSS return for the Employer) - amounts to be categorised. Employers are also obliged to show the gross value of the fringe benefits to which FSS deductions have been applied on the Employee pay slip. There is no obligation to separately identify the value of the fringe ben-efits by category on the pay slip. This categorisation is required to enable the department to check the relationship between corporate deductions and fringe benefits to employees. It will be required to control the deductions claimed at cor-porate level against the tax paid at employee level. The actual tax on the value of fringe benefits will not be separately accounted for on the FS3, FS5 or FS7. As with all tax matters - all fringe benefits, calculations and tax paid are to be supported by comprehensive records and fiscal receipts/tax invoices which may be inspected by the Department from time to time. Valuations Following is a brief outline of the Inland Revenue Department's guidelines for the valuation of fringe benefits. Detailed guidelines for the correct application of fringe benefit tax will be issued by the Department of Inland Revenue at a later date. Basic valuation As a general rule the fringe benefit salary value is calculated, unless otherwise provided, either: on the value of the fringe benefit in accordance with the valuation criteria given, or the expense actually incurred by the employer in providing the benefit less any amount made good by the employee to those providing the benefit. Category 1 Use of Company Car This category of fringe benefit includes the use of any car (or any mechanically propelled road vehicle) made available for private use (this includes travel to and from the place of work). Cars exclude: 1. a vehicle whose construction is primarily suited for the conveyance of goods or burden of any description, for example a lorry or pick up truck (estate cars and 'off-road' recreational vehicles are considered as cars); 2. a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used; 3. motorcycles and invalid carriages. Value of fringe benefit The value of this fringe benefit is based on: 1. The annual car benefit value For an owned car it is the higher of 17% of the car’s value or the actual cost paid for the car. For a leased car it is the actual annual repayment value (including VAT) subject to a minimum of: •if the car value is less than or equal to Lml2,000 then it is 20%, otherwise •if the car value is more than Lml2,000 then it is 22%. •if the car is owned by the employer and is older than 6 years this value is reduced by 40%. 2. The annual maintenance value This represents the value of insurance, servicing, licence etc. It is a percentage of the car value: •if the car value is less than or equal to Lml2,000 it is 3% of the car value; •if the car value is more than Lml2,000 it is 5% of the car value. 3. The annual fuel benefit value This represents the value of fuel where it is paid by the Employer. It is a percentage of the car value: •if the car value is less than or equal to Lm l2,000 it is 3% of the car value; •if the car value is more than Lml2,000 it is 5% of the car value. The ‘annual fuel benefit value’ is only payable when the employer pays for fuel. The private use value The private use value' for each car is determined according to the car value in accordance with the table below. A reduction in the private use value' may apply if: •the car value is less than Lm7,000, and •the car is less than 6 years old, and •the car is heavily used by a salesman or support person. In this situation the employer may apply to the Commissioner of Inland Revenue, on the appropriate form, to reduce the private use percentage to 20%. Vehicles more than six years old If the car is owned and is more than 6 years old the annual fringe bene-fit value shall be reduced by 40%. This does not apply to vans. The equation Step 1 Determine the Annual Car Benefit Value Step 2 Add the Annual Maintenance Value (owned cars only) Step 3 Add the Annual Fuel Benefit Value, if applicable Step 4 Apply the Private Use Percentage Example 1 Owned car purchased in 1998 Car value Lm7,000 Fuel paid by employer. Step 1 – Calculate annual car benefit value: 17% of car value = 17% x 7,000 = 1,190 Step 2 – Add annual maintenance value 3% of car value = 3% x 7,000 = 210 Step 3– Add annual fuel benefit value: 3% of car value = 3% x 7,000 = 210 Step 4– Calculate private use value: Determine % from table, in this case 30% = 30% x (1,190 + 210 + 210) = 483 In this example the employee's annual salary is 'inflated' by Lm483 (i.e. Lm40.25 per month) before making FSS deductions. Example 2 Owned car purchased in 2000 Car value Lm13,000 Fuel paid by employer. Step 1– Calculate annual car benefit value: 17% of car value = 17% x 13,000 = 2,210 Step 2– Add annual maintenance value: 5% of car value = 5% x13,000 = 650 Step 3– add annual fuel benefit value: 5% of car value = 5% x13,000 = 650 Step 4– Calculate private use value: Determine % from table, in this case 50% = 50% x (2,210 + 650 + 650) = 1,755 In this example the employee's annual salary is 'inflated' by Lml,755 (i.e. Lml46.25 per month) before making FSS deductions. continues on page 16 Example 3 Leased car Car value lm 15,000 Lease payment of lm350 per month Fuel paid by employee. Step 1– Calculate annual car benefit value: Lease payment of Lm350 per month = 350x12 = 4,200 Step 2– Add annual fuel benefit value: No fuel benefit value as fuel paid by employee in this example Step 3– Calculate private use value: Determine % from table, in this case 65% = 65% x 4,200 = 2,730 In this example the employee's annual salary is 'inflated' by Lm2,730 (i.e. Lm227.50 per month) before making FSS deductions. Travel between home and a permanent workplace is considered private vehicle use. There will be no deduction from the fringe benefit value if the car is not available for use for less than 30 days. If a replacement car is made available, the original valuation will still apply. When a car fringe benefit is availed of for part of a year, (e.g. an employee who terminates his employment during the year) the yearly value of the fringe benefit will be reduced accordingly. If a car used for providing a fringe benefit is replaced during the year with a different model, except when the replacement is a temporary measure [e.g. when replacing a car which is being repaired], the original valuation will be termed as having been expended and a new valuation will have to be made based on the value of the new car as determined above. The new valuation will commence as from the start date of the use of the new car. A taxable benefit arises if a van is made available to an employee by reason of his or her employment and it is available for the employee's private use. A van, for the purpose of this benefit, is a vehicle built primarily to carry goods or other loads (but not people) with a design weight not exceeding 3500 kilograms. The annual fringe benefit value for vans is a standard amount of Lm200. Cash allowances fringe benefit Cash allowance in respect of car owned by employee If a cash allowance' or petrol allowance' is granted to an employee for the use of the employee's own car for business purposes, the allowance paid is understood as having a private use value' part upon which income tax will be due. The private use value is: •if the annual cash allowance is Lml,000 or less it is 50% of the allowance. •if the annual cash allowance exceeds Lml,000 it is the cash allowance less Lm500. This valuation rule only applies when: •the allowance is specified in a Collective Agreement or in the employee's Contract of Employment. •the 'employee' is not a Director or person in a controlling position. In other cases the entire allowance is fully taxable under normal FSS rules. Category 2 Use of Assets, Accommodation and Related Costs Provision of company owned or leased/rented assets including living quarters (including maintenance, domestic bills and other related services), furniture, boats, aeroplanes, machinery etc. It excludes computers and other related equipment. This category of fringe benefits includes the use of any accommodation for the employee and their family, where the property is owned or leased/rented/hired by the employer. Value of fringe benefit The value of a Category 2 fringe benefit is as follows: •In the case of all benefits in this category other than property/accom-modation it is equal to 15% of the higher of the market value of the asset on the 1 of January in the year of use, or its original cost. •In the case of property/accommodation owned by the employer (or a related entity) it is 7.25% of the higher of the market value or the original cost. •In the case of property/accommodation rented from a third party it is the actual rent paid by the employer. Plus Any expenditure met by the employer or the person making the property available. This includes any payment of any bills related to the prop-erty (e.g. water, electricity, ground rent, domestic services, redecoration, repairs etc). Less Any payments made by the employee to the employer by way of reim-bursing the full value or part thereof of the particular fringe benefit. Note The market value of the property is estimated on the basis of the price it might reasonably be expected to fetch in the open market assuming vacant possession. The annual value for other benefits and facilities provided connected with living accommodation will be valued in accordance with the actual cost incurred by the provider in providing the fringe benefit. Example A An employer makes an owned' property available to an employee for the tax year. The property is valued by a certified appraiser at the start of the year and estimates the market value at Lm85,000. In addition, the employer pays bills to the value of Lml,300, whilst the employee pays bills to the value of Lm500. Step 1– Calculate annual benefit value: 7.25% of market value = (7.25% of 85,000) = Lm6,163 Step 2– Add expenditure made by employer: Lm6,163 + Lml,300 = Lm7,463 Step 3– Deduct expenditure made by employee: = Lm7,463 – Lm500 = Lm6,963 In this example the employee's annual salary is 'inflated' by Lm6,963 (i.e. Lm580.25 per month) before making FSS deductions. Example B An employer rents a property for Lm600 per month, which he puts at the disposal of a director. In addition, the employer pays bills to the value of Lm2,500. The director makes no payments in relation to the property Step 1– Calculate the yearly rental value: Lm600x12 = Lm7,200 Step 2– Add expenditure made by employer Lm7,200 + Lm2,500 = Lm9,700 Step 3– Deduct expenditure made by the director : Lm9,700 – 0 = Lm9,700 In this example the director's annual salary is 'inflated' by Lm9,700 (i.e. Lm808.33 per month) before making FSS deductions. Example C An employer makes available the use of a boat owned by the company to one of its directors and his family. The boat was purchased in 1987 for Lm20,000. In addition the employer also pays the sum of Lm800 towards servicing and upkeep, whilst the employee pays Lm300 towards the cost of fuel. The boat is valued on 1 January 2001 by a marine surveyor who deter-mines the market value as LmLm8,500. Step 1– Calculate annual benefit value: 15% of the higher of the market value of the asset on the first of January in the year it is used or its original cost. 15% of greater of 20,000 and 8,500 = 15% of 20,000 = 3,000 Step 2– Add other expenditure made by Employer: (3,000 from Step 1) + 800 = 3,800 Step 3– Deduct any expenditure incurred by the director: (3,800 from Step 2) - 0 = 3,800 Note that the Lm300 paid by the director for fuel is a cost directly incurred by him for which he was not reimbursed by the employer and should not figure in the calculation of the fringe benefit. In this example the director's annual salary is 'inflated' by Lm3,500 (i.e. Lm291 .67 per month) before making FSS deductions. Category 3 Any other benefits or facilities of any kind Benefits falling under this category could be classified as any other ben-efit not falling under Category 1 or Category 2 and that accrue as a result of a position of employment as defined previously. Value of fringe benefit The basic valuation rule for Category 3 fringe benefits is the actual cost to the employer of providing the relative fringe benefit. Examples of benefits falling under this category include beneficial loan arrange-ments, provision of entertainment, provision of scholarships, payment of hotel and restaurant bills, paid travel, and others. An exception is made in the case of "transfer of assets" (which would normally be a one-off transaction) where the value of the fringe benefit would be the higher of the cost to the employer or the market value of the asset plus associated costs of transfer. Where any doubt exists as to how the benefit is valued employers and/ or employees should seek assistance from the Inland Revenue Department. Detailed meanings of terms used such as what constitutes a beneficial loan arrangement' and other benefits will be drawn up. Beneficial loan arrangements "Loan" means more than just lending money. It includes any form of credit, including any kind of advance by reason of the employment, and any amount shown in the employer's books or records as owed by a director or employee. Withdrawals made from a current or loan account with a company are either a. sums withdrawn by them from the company as remuneration, or on account of remuneration, in which case FSS deductions should be applied at the time of each withdrawal, or b. amounts which put the account holder in debt to the company, in which case the cash equivalent of the benefit of the loan is chargeable on the beneficiary. Where there is more than one loan owing to the company by the same employee, the balances of the loans will be considered as a single loan. The amount chargeable is called the cash equivalent of the benefit of the loan. This is the difference between a. The interest that would have been payable if the borrower had been required to pay interest on the loan at commercial rates, and b. the amount of interest actually paid by the borrower for the same year. At the start of the year the Inland Revenue Department will publish an official loan benchmark rate which will be used through the year to determine the fringe benefit value. The Commissioner of Inland Revenue retains the right to change the rate part way through the year in response to prevailing conditions (e.g. falling interest rates). Reimbursement of expenses, such as water and electricity bills, school fees, education, scholarships, entertainment etc. The fringe benefit value of bills paid by employers is the amount actually reimbursed or the costs directly incurred by the employer. It extends to school fees, utility bills (water and electricity), scholarships, insurance, entertainment etc. Free or discounted holidays and airline tickets The fringe benefit value of airline tickets or holidays provided by an employer is the higher of: • The actual cost incurred by the employer in providing the benefit, and • 50% of the market value of the ticket/holiday package. Less any amount reimbursed by the employee. Discounted goods and/or services produced by the employer A fringe benefit would arise when goods and/or services produced or manufactured directly by the employer are made available to the employee at a discounted price. The first Lm300 of such benefits is exempted from tax on fringe benefits if: The beneficiary is not a director or a person in a controlling position; and The employer operates a scheme whereby its employees are entitled to free or discounted goods or services produced or manufactured directly by the employer; and The employer applies to the Commissioner, on the appropriate form, for the exemption. Free or subsidised meals This benefit is not taxable if the meals are provided on the employer's business premises, or in any canteen where meals are pro-vided for the staff generally, or a ticket or token is used to obtain such meals, if the meals are provided on a reasonable scale and either a. All employees may obtain free or subsidised meals on a reasonable scale, whether on the employer's premises or elsewhere or b. The employer provides free or subsidised meal vouchers for staff for whom meals are not provided. This concession does not apply, in the case of a hotel, catering or similar business, to free or subsidised meals provided for its employees in a restaurant or dining room at a time when meals are being served to the public, unless part of it is designated as being for the use of staff only. Where the benefit is taxable, the employee is taxable on the cost to the employer. Exemptions Health insurance Payments or reimbursements made for health insurance are excluded from the provisions of these guidelines and are not taxable in the hands of the beneficiary except in the case of Directors or those in controlling positions. Telephony Payments or reimbursements made for fixed or mobile telephones are excluded from the provisions of these guidelines and are not taxable in the hands of the beneficiary. | ||||||
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