A recent judgment of the Tax Court sitting in Pretoria highlighted yet again the very broad nature of the employment fringe benefit regime governed by the Seventh Schedule of the Income Tax Act and as applies to goods and services provided to employees through an employer. As a general principle, employees’ benefits received from their employers in whatever form could potentially be treated as part of employees’ remuneration and therefore subject to income tax in their hands. Such fringe benefits are therefore also subject to the PAYE regime and which should be applied by employers in withholding PAYE on the value of such benefits.
Paragraph (i) to the “gross income” definition in section 1 of the Income Tax Act specifically includes in gross income “… the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit or advantage granted in respect of employment or to the holder of any office, being a taxable benefit as defined in the said Schedule…”.
In the particular tax court case, a South African subsidiary company, forming part of an international corporate group, employed non-resident employees as part of a global secondment programme which the group was implementing. In terms of that secondment programme, employees were guaranteed an after-tax salary amount of not less than what the employees would have received in their country of residence while working for the South African subsidiary company. In other words, where a higher tax charge would be levied in South Africa on remuneration earned, the South African subsidiary would carry that cost on behalf of that employee.
In order to implement this complex “Tax Equalisation Scheme”, the South African employer company contracted the services of a firm of tax consultants to assist the non-resident employees to submit their tax returns in accordance with the South African income tax laws, and also to ensure that the returns reflect the correct information to give effect to the “Tax Equalisation Scheme”.
The Tax Court found that the services which the tax consultants provided, although arguably necessary for purposes of fulfilment of the employer’s contractual arrangement towards its employees, were in essence a service rendered to the employees and not the employer, even though the tax consultants’ services were paid for and contracted by the employer. As a result, these services constituted a “benefit or advantage” for the employees as envisaged in the gross income definition quoted above, and moreover such services were provided for the “private or domestic purposes” of the employees in question. As a result, the appeal against the PAYE assessment raised by SARS in the amount of R2.4m was dismissed.
Although a fact-specific judgment, it nevertheless again highlights the very broad nature potentially of the PAYE regime. Given the heavy penalties and other sanctions linked to a contravention of the provisions of the Fourth Schedule (which governs the collection and payment of PAYE, which may also be levied on fringe benefits received by employees), employers are advised to approach the tax consequences of employee benefits with caution.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)