Taxation of Fringe Benefits
During the Budget Speech for the year 2001 the Minister of Finance announced that Government will be establishing rules so that fringe benefits would be taxed under the Final Settlement System. Recently the Commissioner of Inland Revenue has issued a tax guide for the valuation of fringe benefits. These guidelines will be in the near future backed by official legislation.
Employment income is subject to tax in terms of section 4(1)(b) of the Income Tax Act.This charging provision brings to charge to tax all gains or profits arising from any employment or office.
Since benefits in kind have always been subject to tax in terms of section 4(1)(b) of the Income Tax Act these guideline only set out:
(a) The types of benefits which are taxable and those which are exempt;
(b) The methods of how to quantify benefits in
kind for tax purposes;
How employers are to record such benefits
under the Final Settlement
The guidelines define fringe benefits as any benefit provided to or deemed to be provided to by reason of any employment or office regardless of whether they are received in cash or in kind and whether they are received in terms of normal conditions of the contract of service or by way of special or ex gratia allowance.
Benefits are taxed both when received directly by the employee and also when provided indirectly i.e. either by third parties or to third parties.
Employment or Office
An employment exists where an individual is under a contract of employment whether written, verbal or implied. Employment includes both persons employed or a full time basis or on a part-time basis.
An office is a position which has an existence independent of the person who occupies it.The guidelines issued by the Commissioner of Inland Revenue list the following to be considered as an office:
* company directors (including persons who have a similar role);
* shadow directors;
* persons who have a controlling position, that is persons more than 5% of the voting or ordinary shares;
* partners of civil or commercial partnerships;
* other person who hold an office.
Application of Fringe Benefit Rules
A taxable benefit will arise when a benefit is provided by:
* employers to their employees;
* by companies and partnerships to their officers;
* by an employer to a company owned by an employee;
* by an associated company of the employer to his employees;
* by an employer to members of family or household of the employees.
Exceptions to this presumption apply when it results that:
* benefit is purely a personal donation; or
* a payment is made in settlement or on account of a debt that is not connected with the employment or office; or
* payment constitutes a dividend;
* payment is a drawing made by a partner on account of his share of profit.
An associated company includes:
* a parent company and its subsidiaries; and
* companies owned to the extent of more than 50% (of the voting shares or ordinary shares) directly or indirectly by the same persons.
Members of the family or of the same household
Members of the family include spouse of the individual concerned his ascendants, children (including adoptive children) and their spouses.
Members of the household include any ordinarily resident in the residence of the employee or officer.
Persons employed on a part-time basis are subject to tax on fringe benefits at the normal tax rates and not at the preferential rate of 15%. The employer will deduct tax under FSS rules on the salary only. No deduction at source is to be made on the fringe benefit element. Part-time employees are required to pay tax on their fringe benefits arising from part-time employment on submission date of their personal tax return.
Obligation to declare
Employees have the duty and responsibility to declare all benefits received by their employees and to keep records about all fringe benefits whether such benefits are taxable or exempt.
Employees are obliged to disclose benefits received in their personal tax returns.
Non-compliance with rules gives rise to penalties being charged by the Commissioner of Inland Revenue on employers or employees as the case may be.
Persons who ceased to be in employment or office
Benefits received by persons as are result of past employment or by reason of an office that they use to hold constitutes a fringe benefit.
Registration of Employees
Person who provide benefits to their employees or officers are required to be registered with the Inland Revenue Department as Employers and are required to lodge FS3, 5 and 7 documents in accordance with FSS Rules.
Types of Fringe Benefits
The guidelines distinguish between three main types of benefits:
* Category 1 – Car Benefits
* Category 2 – Use of Assets
* Category 3 – Other Benefits
A. Category 1 – Car Benefits
These include the use of cars owned, leased or hired by employers and made available to their employees/officers for private use and cash allowances paid to employees/officers for use of their own car.
Use of Car
The use of cars of the employer by the employees/officers for private purposes gives rise to a fringe benefit. A fringe benefit is said to arise when the car is not kept at employers’ premises after working hours and is used by the employee/officer outside working hours and it is at the disposal of the particular employee/officer and is regularly used for private purposes.
The guidelines define a car as a mechanically propelled road vehicle but excludes:
* vehicles whose construction is primarily suited for conveyance
of goods such as lorries (but excludes estate cars, pick up cars/vans
and off-road recreational vehicles);
* vehicles not commonly used as a private car and unsuitable
to be so used;
* motorcycles; and
* invalid carriages.
Individuals who are employed as drivers/messengers and in the performance of their duties are required to use cars of the employer but are not permitted to use such cars outside working hours are not considered to enjoy a fringe benefit even if they may park the car near their private residence.
Calculation of Car Fringe Benefits
The value of the private use element arising from use of car is calculated as a percentage of:
Car use value + Maintenance value + Fuel value
The car use value is equal to 17% of the car value. This percentage is reduced to 10% if the car is more than 6 years old.
The maintenance value is 3% of the car value for cars whose value does not exceed Lm 12,000. The maintenance value is increased to 5% if car value exceeds Lm 12,000.
The fuel value is 3% of the car value if such value is less than Lm 12,000 and 5% for vehicles whose value exceeds Lm 12,000. This only applies when fuel is provided by the employer.
The car value is the invoice cost including VAT, customs duty, registration tax, cost of accessories inclusive of VAT and delivery charges. If employer received a special discount on acquisition of car this discount is to be added back to the invoice value.
With regard to leased vehicles, second hand vehicles and vehicles acquired prior to 1 January 2001, the car value shall be that as determined by the Commissioner of Inland Revenue in a price list that he will be issuing.
The private use percentage shall be based on the following basis:
Car value (Lm) Private use value (%)
0 to 7,000 30
7,001 to 9,000 40
9,001 to 14,000 50
14,001 to 20,000 55
over 20,000 60
When use of a vehicle for business purposes is very heavy and car value does not exceed Lm 7,000 permission may be sought from the Commissioner of Inland Revenue to reduce the private use percentage to 20%. An application in this regard should be made on form FB2. Such a form may be obtained from the Inland Revenue Department.
Example – vehicle purchased in the year 2001 for Lm 10,000 and fuel is provided by employer.
The taxable benefit will be:
Lm 10,000 @ 17% = Lm 1,700
Lm 10,000 @ 3% = Lm 300
Lm 10,000 @ 3% = Lm 300
Lm 2,300 @ 50% = Lm 1,150
Therefore the monthly taxable benefit it would amount to Lm 95.83c.
Car Cash Allowances
The taxable portion of car cash allowances that does not exceed Lm 1,000 is 50% of the total cash allowances.
If the car cash allowances exceed Lm 1,000 the taxable amount shall be the total cash allowance less Lm 500.
The full cash allowance is taxed if it is received by a director, partner or person having a controlling position. If employee who makes use of a car of the employer receives a car cash allowance also, the car benefit is worked out as if employer does not provide the fuel and the car cash allowance is taxed in full.
The maximum deduction shall be 50% or Lm 500 as the case may be on all allowances received even if received from different unrelated employers.
Reimbursements on Rate Per Kilometre Basis
When employees make use of their personal car for the execution of their duties and the employer reimburses the employee on an agreed amount per km such reimbursement will not constitute a benefit if:
* the rate paid does not exceed 15 cents per day;
* payment covers business travel element only
* reimbursements are recorded by employer on a log book which must be kept for at least six years by the employer.
When the above conditions are not met in full payments received are taxed in the same manner as car cash allowance.
B. Category 2 – Use of Assets
The use of assets owned, leased or hired by the employer and used by employees for personal purposes gives rise to taxable benefits. Also any costs directly connected with such use constitute a taxable benefit.
The guidelines distinguish between immovable and movable assets.
The value of the benefit arising from use of immovable property is 5% of the original cost or market value of the property which ever is the higher.
When the employer/director/shareholder pays rent to the employer a benefit will arise if the rent paid is less than 5% of market value or original cost as the case may be. The benefit will be the resulting difference.
If the property is rented or leased by the employer than the benefit arising to the employee will be the actual rent paid by the employer.
With regard to movable assets the value of the benefit is 12% of the higher of market value or original cost. After the lapse of 6 years the original cost of movable assets is reduced by 40% for fringe benefits calculation purposes.
When an asset is used by a shareholder not as a result of an employment or office but as a result of ownership, special provision are being drafted so that it would be possible to transfer such assets under special rules to the individual shareholders or to a special non-trading subsidiary.
A taxable benefit will start to arise from date when first occupied or made available and shall continue to exist until such time it continues to be available.
If further costs are incurred by the employer such as an extension to property or fixing of new engines to a boat the fringe benefit will have to be recalculated on the new value of the assets.
Expenses paid by employer and not reimbursed by the employee on assets being used by the employer such as electricity bills, maintenance and insurance constitute a taxable benefit.
The market value of property should be value assuming the property is free and unencumbered. In case of assets made available to employees, directors …. prior to the year 2001 the market value should be that as at 1 January 2001.
In this regard one should seek a valuation from an expert valuer. The Commissioner of Inland Revenue may appoint his own expert to obtain a valuation. If the valuation of the Commissioner of Inland Revenue’s expert exceeds the value as determined by the employer by more than 15% the fringe benefit value will be deemed to have been under declared. If difference is less than 15% the value of declared by the employer will be accepted.
Exemptions relating to accommodations
Accommodation will not constitute a fringe benefit if:
* the accommodation is an official residence allocated by a public authority or institution of a public nature as a result of public office; or
* the accommodation is allocated temporarily on account of special security measures; or
* he employee is bound in terms of his contract of service to reside in accommodation provided by the employer for the better performance of his duties and it is customary for employers to provide such accommodation in connection with such or similar duties – this rule does not apply to accommodation provided to a director/officer of a company or a partnership.
When property is held by employer on an emphteusis the value of the fringe benefit is calculated in the same manner as if it is owned by the employer. The annual benefit shall be 6% of the market value of full ownership (disregarding the emphyteutical grant) or original cost.
The cost of property shall the premium paid if any, and is increased by 20 times the yearly ground rent.
C. Category 3 – Other Benefits
Any benefits that do not fall under categories 1 and 2 are deemed to fall under category 3. The valuation of such benefits depends on whether such benefits are ‘in-house’ or ‘external’.
In-House benefits consist of goods or services produced or provided by the employer as part of his business. In such case the value of the benefit is the difference between the normal price charged by the employer (less discounts available to general public) less price if any paid by the beneficiary. The first Lm 300 of such benefits in a calendar year are exempt if such benefits are available to all employees. Directors and shareholders cannot benefit from this exemption.
External benefits consists of goods or services not produced or provided by the employer. The value of the benefit is:
* the normal selling price of asset less the transfer price; or
* the higher of original cost to the employer or market value less transfer price.
In case of transfer of external movable assets which are more than 6 years old the cost to the employer should be reduced to 60% of the actual cost.
Preferential rates of interest on loans gives rise to taxable benefits. Loans shall include any types of credit. The taxable amount shall be the difference between the interest rate charged at commercial rates as established by the Commissioner of Inland Revenue. For the year 2001 the benchmark commercial rate shall be 8.5%.
Up to the year 2005 the benchmark rate applicable to loans provided by financial institutions to their employees shall be 4.5%
Free or subsidised meals
Free or subsidised meals provided in a canteen for staff in general will not constitute a taxable benefit.
This concession also applies to free meals provided by the employers involved in the hotel or catering business provided that meals are not provided in the restaurant or dining areas when meals are provided to the public. If part of restaurant or dining areas is designated as being for staff use only this exemption will still apply.
In determing the benefit arising out of airline tickets provided by an employer who is involved in the airline industry the benefit shall be the higher of:
* cost to employer; or
* 20% of market value of the relevant economy fare ticket.
Business travel does not constitute a fringe benefit. This includes tickets for journey, accommodation, meals and costs incurred to attend the business in question. When private element in business travel is minimal it is disregarded. However if private element is substantial the full costs incurred will be treated as private costs.
Share Option Schemes
Share option schemes given to employees give rise to a benefit if such option is actually exercised. The benefit is the difference between market value and price paid. If subsequently employee transfers such shares acquired the cost taken in calculating the gain arises shall be the price paid plus the taxable benefit that has arising on date of acquisition.
Reimbursements of expenses incurred by an employee on behalf of the employer do not constitute a benefit if they are supported by receipts issued in the name of the employer.
The guidelines issued by the Commissioner of Inland Revenue lists a number of exemptions. The exemptions include:
Health insurance – in the case of directors or persons being in a controlling position within a company/partnership the exemption only applies if benefit is within the same parameters as that provided to all employees.
Telephony services – payments or reimbursements made for fixed or mobile telephones. >Cash allowances in respect of such services are taxed in full.
Computer equipment – use of computers including similar equipment and provision of internet services.
Recreational or child minding facilities – if provided in premises of employee or associated company.
Goods consumed on premises – goods and services produced or provided by employer and consumed on business premises during working days.
Newspapers – including journal or periodicals pertaining to profession or trade of employer used for business purposes.
Subscriptions to Professional Bodies – if such subscription is necessary for the carrying out of the employee’s work.
Long Services Awards - provided that such award is in recognition of 15 years services or more and does not exceed Lm 50 per year of service and no similar award was given in the previous ten years.
Suggestion Scheme Awards – provided that it is open to all employees and suggestion does not fall within duties of employee. This exemption does not apply to directors or persons in a controlling position.
Christmas parties – also includes similar activities open to staff in general.
Training courses/scholarships – the course must be in an area of study related to the employment of the individual. When a course is attended overseas travelling cost and accommodation are also exempt.
Collection of Tax on Fringe Benefits
Employers are responsible for reporting the value of fringe benefits provided by them. With regard to benefits provided by independent third parties (such as tips) the responsibility lies on the employee.
By the introduction of rules on the taxation of benefits in kind employees will be subject to tax on cash and non-cash items. The tax deduction computation under the FSS system will be made from cash portion of the income. The present limitation that FSS deduction cannot exceed 50% of the total emoluments will now be applied on the cash portion of the emolument.
Employees are requested to keep detailed information about benefits provided to their employees and such records may be subject to inspection by the Inland Revenue Department.
The Commissioner of Inland Revenue has taken the necessary steps to amend the FS3, FS5 and FS7 documents.
We believe the information given is correct, but we cannot accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the information contained in this document.