During 2012 the South African Revenue Service (“SARS”) issued a draft interpretation note on the taxable benefits arising from the use of employer-provided cellular phones or computer equipment and employer-funded telecommunications services. Substantial comment was received and the draft interpretation note was amended and recently published for a second round of public comment.
It is worth noting that the issues relating to the taxation of the private use of cell phones are not limited to South Africa. For example, we understand that in the United States, the private use of an employer-owned cellular phone was previously treated as a fringe benefit and included in an employee’s wages. The Inland Revenue Service (“IRS”) altered their position and since 2010 the IRS treats an employee’s use of an employer-owned cellular phone for business purposes as a working-condition fringe benefit, the value of which is excludable from an employee’s wages. Additionally, any personal use of the employer-owned cellular phone constitutes a de minimis fringe benefit, which is also excludable from an employee’s wages.
In a previous article we discussed and summarised the main principles the first draft interpretation note covered. This article focuses on some of the further amendments to the draft interpretation note and the effect thereof.
Previously, the Seventh Schedule to the Income Tax Act No. 58 of 1962 (“the Act”) treated almost all private or domestic use by employees of employer-owned cellular phones and computer equipment and employer-provided telecommunication services as a taxable benefit. Due to the increase in employers providing employees with cell phones and notebook computers and given the fact that employees were increasingly able to use the items outside the office, personal use was inevitable and the legislation was amended in 2008 to provide that in certain circumstances an employee’s private or domestic use would not be taxed.
In particular, paragraph 6(4)(bA) of the Seventh Schedule to the Act was included to provide that no value would be placed “on the private or domestic use of an asset consisting of telephone or computer equipment which the employee uses mainly for the purpose of the employer’s business”. A similar amendment was incorporated in relation to free and cheap services provided, which covered the subscription fee. The word “mainly” has been interpreted by the Supreme Court of Appeal to mean a quantitative measure of more than 50%. This means that if more than 50% of the total use of the asset is for business purposes, the private use does not constitute a taxable fringe benefit.
The draft interpretation note
The above amendments provided welcome relief to employers. Most companies have sufficient cost management structures in place to ensure that these phones are primarily used for business purposes. The element of private use should be minimal. Employers have been advised to have cell phone policies in place that manage the business and/or private use of these phones, as the onus of proof rests firstly with the employer and secondly, with the employee, in proving that, based on the facts and circumstances, the phone is required due to the nature of the employee’s job and that it is mainly used for business purposes.
The draft interpretation note, however, states that the phone’s capabilities and functionality, and the different ways it is used by the employee, will dictate the various aspects of use which are relevant and must be taken into account in determining if an asset is used mainly for business purposes.
The note also includes a new example that illustrates the calculation of a taxable benefit, both in respect of the right to use the phone as an employer’s asset as well as the free or cheap services provided. It appears that the taxable benefit to be included in the employee’s taxable income will be the percentage of private use in relation to the total subscription fee, i.e. if 60% of the use was private for a particular month, and if the contract price was R700 per month (including a “free cell phone” and “100 free minutes”), R420 will be taxable in the employee’s hands per month.
SARS admits in this note that the identification of business or private use could be a detailed task which can be administratively burdensome and onerous.
We agree with this. In our view, it seems that a detailed analysis will almost always be necessary, especially in the case of smartphones. An employer will have to determine how much data each employee uses to send personal emails or to access Facebook or Twitter. This requirement will place an enormous administrative burden on employers. In terms of the current legislation, the potential taxable benefit that could arise from the provision of cell phones is far easier to administer, because of the requirement in the Seventh Schedule to use the phone “mainly for purposes of the employer’s business”.
Although no mention is made of such an intention in this draft of the interpretation note, SARS has the power to issue a Binding General Ruling (“BGR”) as an interpretation note in terms of section 89 of the Tax Administration Act No. 28 of 2011 (“the TAA”). Should this happen, section 82 of the TAA provides that it may be cited by SARS or a taxpayer in any proceedings, including court proceedings.
This note, as well as further possible amendments thereto, should therefore be carefully considered, as SARS is likely to follow this interpretation (which requires a higher level of administrative compliance) when conducting payroll audits or assess individuals.