In the November 2015 Supreme Court of Appeal case of Anglo Platinum Management v SARS, the Court considered whether a valid and binding salary sacrifice agreement had been achieved between Anglo Platinum and its employees.
As long as it’s done lawfully and reflects the intention of the parties, employers may offer the option of structuring an employee's salary or, as it is known, salary sacrifice/income substitution. South African income tax law confirms the lawful structuring an employee's remuneration so as not to pay more tax than is necessary. Salary sacrifice or income substitution may be in the form of a benefit to the employee and the cost of the benefit is recouped from the employee's salary, resulting in a reduced salary in return for the benefit e.g.: travel allowances or company car schemes may be structured. Anglo Platinum Management v SARS involved a motor vehicle salary sacrifice scheme.
Anglo Platinum Management v SARS is not the first case to put employees’ tax implications of a company-car scheme in the spotlight. In early 2015, a case heard in the Gauteng Tax Court highlighted the nature of an employee’s entitlement to amounts allocated towards a company car fringe benefit in terms of a total Cost to Company (“CTC”) remuneration structure and the employees’ tax implications thereof.
The facts of Anglo Platinum Management v SARS are as follows: the Anglo Platinum employees had to fill out employment forms indicating how they wished their CTC remuneration packages to be structured i.e.: choose between cash remuneration and other benefits. One of the benefits on offer was the use of a motor vehicle. If the employee decided on the motor vehicle benefit, then Anglo Platinum purchased the vehicle for them from the dealer in cash, entered it into their (Anglo Platinum’s) asset register and claimed depreciation. The vehicle was registered in the employee’s name however the company owned the vehicle until the employee had settled their financial obligation (the employee’s salary was reduced monthly to pay off the vehicle, including a notional interest and insurance premium, by deducting an agreed amount).
What came into dispute in this case was the entitlement of the employee to claim credit in the notional account and the contractual obligation to pay the insurance premiums. SARS argued that the credit entitlement and insurance premium obligation are inconsistent with a genuine salary sacrifice scheme. SARS argued that the use of the vehicles was a consideration received by the employees as part of their employment and therefore taxable under paragraph (c) of the definition of gross income in the Income Tax Act 58 of 1962 (as opposed to a reduced taxable benefit under a valid salary sacrifice).
The Court found that the credit the employees became entitled to when joining the scheme was not a conditional right, but a contingent right, exercisable at a later date and on the occurrence of an uncertain future event (the employees could elect not to claim credit in the notional accounts quarterly and could claim whatever credit remained at the end of the financial year; the amounts available to be claimed quarterly were unanticipated and insignificant due to the fact that it was impossible to predict future running expenses of the motor vehicle as well as the notional interest).
The Court stated that:
“Neither the employees’ right to claim a credit, which the Commissioner argued was inimical to an antecedent divestment of a right, nor the provisions of some of the agreements making the employees responsible for insurance premiums on the motor vehicles undermines the efficacy of the scheme. The credit claimable arose from a small unpredicted and unanticipated future contingency, and the taxpayer in fact paid for the insurance premiums. Therefore, the Commissioner’s argument that the use of the vehicles was in reality a consideration received by each employee as part of their employment and thus taxable under para (c) of the definition ‘gross income’, as opposed to para (i) as a taxable benefit by virtue of a valid salary sacrifice, must fail.”
So, what is the take out for companies when it comes to salary sacrifice schemes?
- Carefully consider the Income Tax Act, particularly Schedule 7 (fringe benefits) before drawing up any contractual agreements
- Make sure there's no question to the intentions of the restructured remuneration package. The employee's contract of employment must reflect the true intention of the parties. If the scheme is entered into after the contract of employment has been signed, then ensure that both you and the employee sign an enforceable agreement for the salary sacrifice scheme. Your employee must agree to a reduction in his or her salary and you must undertake to provide some benefit in exchange
- Reflect the financial substance, i.e.: in figures, of the restructured remuneration package in either your contract of service with your employee/the salary sacrifice scheme contract
- Amend any service contract so that it records the salary sacrifice arrangement
- Amend the rules of the relevant benefit funds, if necessary
- Implement, maintain and enforce the salary sacrifice scheme in accordance with its terms as detailed in the contract
- The salary sacrifice must be made prior to the accrual of any monetary amount