Introduction
BPR 262 application
BPR 262 decision
Comment
In many businesses, it is common for employers to provide their employees with free or low-cost transport services from their homes to their place of employment. However, under the Income Tax Act (58/1962), such arrangements could constitute a taxable fringe benefit in the hands of the employees, depending on the circumstances and facts of the case.
The South African Revenue Service (SARS) released Binding Private Ruling (BPR) 262 on January 30 2017 and Binding General Ruling (BGR) (Income Tax) 42 on March 22 2017, both of which deal with this issue.
The applicant, a South African resident company, proposed to implement a transport scheme to assist its employees to travel to and from work safely and more efficiently. The nature of the applicant's business required its employees to commence and end their normal working days at times when public transport was either unavailable or limited.
The applicant proposed two types of transport service to implement the scheme:
- a shuttle service; and
- a direct service.
The shuttle service would connect each of the applicant's business units to the nearest public transport interchange to the relevant business unit. It would serve employees who work shifts during normal working hours and would be available where the nearest interchange is situated more than 500 metres walking distance from the business unit where he or she works. Employees would use the service between the transport interchange and the relevant business unit. However, they would use public transport services to travel from their homes to the nearest transport interchange.
The direct service would be a dedicated transport service between a specifically identified central point (collection point) in the residential area where an employee resides and the business unit where the employee works. The direct service would be available only to employees whose work is core to the applicant's operations and who work shifts that are difficult to align with existing transport services. The direct service would be available only where the nearest available public transport is situated more than 500 metres walking distance from the business unit where the employee works. Employees would be required to organise their own transport from their homes to the collection points and back.
The applicant would use its discretion to distribute the collection points fairly and design the routes in a circular format to allow maximum coverage of the particular area, taking into account its size and density. From a cost perspective, the applicant would engage with independent shuttle transport service providers to pick up and drop off the employees in implementing the shuttle and direct services. The service providers would invoice the applicant directly, which would bear the cost of providing the shuttle services. The employees would not be required to pay anything for these services.
In light of the abovementioned facts, SARS ruled that no value will be placed on the taxable benefit to be granted to the applicant's employees in providing them with the shuttle and direct services.
To determine whether an employer's provision of a free transportation service to its employees constitutes a taxable benefit, Paragraphs 2 and 10 of the Seventh Schedule to the Income Tax Act must be considered.
Paragraph 2(e) of the Seventh Schedule states that a taxable benefit (ie, a 'fringe' benefit) is deemed to have been granted by an employer to an employee if any service has, at the expense of the employer, been rendered to the employee for his or her private or domestic purposes. In terms of South African tax law, expenses incurred in travelling between an individual's home and place of employment are considered to be expenses of a domestic and personal nature. To determine the cash equivalent of the value of this fringe benefit, Paragraphs 10(1) and (2) of the Seventh Schedule must be applied.
Paragraph 10 of the Seventh Schedule deals with the provision of free or cheap services. Under Paragraph 10(1)(b), the cash equivalent of the value to be placed on the fringe benefit, including services such as the shuttle and direct services, will be the employer's expense in rendering the service less any amount paid by the employee as consideration. However, Paragraph 10(2)(b) of the Seventh Schedule states that "no value shall be placed… on any transport service rendered by an employer to his employees in general for the conveyance of such employees from their homes to the place of their employment and vice versa".
In BGR 42, SARS acknowledged that there is uncertainty as to the application of the no-value provision contained in Paragraph 10(2)(b). Further, SARS stated that the word 'homes' need not be restricted to the exact position of an employee's specific dwelling as an employee could, for example, live:
- in a block of flats;
- on a farm; or
- in a rural area with little or no accessible roads.
Under certain circumstances, an employee would therefore be required to walk to the nearest accessible road to obtain the transport service which could be a few kilometres away from his or her dwelling. In light of these circumstances, SARS stated in BGR 42 that an employer may arrange for employees living within a certain radius to be collected from or dropped off at a common area or central point between the employees' homes and place of employment. An employer may also provide transport services for only part of the trip between the employees' homes and place of employment.
SARS also provided clarity on the interpretation of Paragraph 10(2)(b), ruling in BGR 42 that:
"transport services provided to employees to and from any collection or drop-off point en route to or from the employees' homes and place of employment is accepted to fall within the provisions of paragraph 10(2)(b). No value will, therefore, be placed on these transport services."
The clarity provided by BGR 42 is welcomed. From a practical perspective, the fact that no value is placed on these transport services means that no tax will be payable by these employees in receiving such transport services, even though they still constitute a fringe benefit.
For further information on this topic please contact Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.