The South African Revenue Service (SARS) recently released a Draft Interpretation Note (Draft Note) dealing with taxable benefits arising from the use of employer owned cellular phones and computer equipment, including employer funded communication services.
Various amendments were made to the Seventh Schedule of the Income Tax Act, No 58 of 1962 during 2008, particularly dealing with the private use of cellular phones and computer equipment, to eliminate the perceived prohibitive nature of compliance and enforcement costs associated with the aforementioned benefits. The main thrust of the amendments was to provide for no value to be placed on the fringe benefit where an employer owned asset (eg cellular phone or laptop) was used mainly for purposes of the employer's business. A similar no value fringe benefit was placed on services (eg airtime or data contract), again with the proviso that the services were utilised 'mainly' for purposes of the employer's business. The Draft Note essentially confirms what is meant by used 'mainly' for the employer's business as being a ‘quantitative measure of more than 50%’. The Draft Note states that the assessment of the 'mainly' rule will be done on a case by case basis taking into account, among others, the nature of the employee's work, job responsibilities, qualifying criteria for the entitlement to the use of the asset/service and the conditions attached to using the asset/service.
SARS states that it will take policy documents into consideration, meaning that employers must ensure their human resources and remuneration policies are kept up to date and more importantly, ensure that the relevant policy actually reflects the practical application thereof. It's of no use having a tax compliant policy in place that is not adhered to by employees in practice, which could result in assessments for additional taxes, penalties and interest. In any event, the onus will be on both the employer and employee of proving, based on the facts of each case, that the asset or service is/was used mainly for purposes of the employer's business.
The Draft Note also deals with the valuation of 'free' minutes for fringe benefit purposes according to an acceptable formula, which may be used to determine the cost of each 'free' minute. The determination of the cost of a 'free' minute becomes relevant in cases where the business portion of a monthly contract needs to be determined.
In the case of prepaid airtime, the Draft Note states that the value of the prepaid voucher will be a taxable benefit to the extent that it is used by the employee for private or domestic purposes. Essentially, a fringe benefit will be triggered under the free or cheap service provisions.
Finally, the Draft Note deals with the fringe benefit implications of a split billing arrangement between the employer and employee. The Draft Note states that the portion of the bill relating to the employer constitutes a free or cheap service in the hands of the employee and one would need to apply the 'mainly for purposes of the employer's business' test to determine whether employees' tax will arise. In the case of an employee portion, the Draft Note states that in the absence of an employee reimbursement, a taxable fringe benefit arises as a debt has been settled by the employer. Where the employee carries the cost of his portion, without any portion settled by the employer, no taxable fringe benefit will arise.
It must be stated that an Interpretation Note does not constitute legislation. In other words, an Interpretation Note can only interpret the law and cannot create law. In addition, taxpayers are not bound to an Interpretation Note, but can question its interpretation in a court of law. Given that the documentation is still in draft form, it may be subject to change after the end of the commentary period.