What are fringe benefits?
Fringe benefits refer to benefits offered by employers to employees in addition to their regular salary, but the benefits do not account for cash payments.
The Cambridge Dictionary has a very concise definition of a fringe benefit, namely: ‘Something that you get for working, in addition to your pay, that is not in the form of money.’
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The basics of fringe benefits explained
Employers typically offer fringe benefits to employees to recruit, motivate, and keep the services of outstanding and high-quality employees.
In South Africa, the Seventh Schedule to the Income Tax Act (Act 58 of 1962) deals with fringe benefits, listing various fringe benefits that employers may grant to employees which will attract employees’ tax (also referred to as PAYE (‘Pay As You Earn’) tax for the employees.
The employer is obliged to determine the value of the cash equivalent of the value of a taxable benefit and to deduct employees’ tax on the amount of the benefit granted. The purpose of these measures is to prevent tax evasion by using non-cash benefits.
Every employer must provide an IRP5/IT3(a) certificate to the employee. The nature of the taxable fringe benefit and the cash equivalent of the value thereof must be indicated on the IRP5/IT3(a) certificate.
In addition, the employer is required to declare in an annual statement that all fringe benefits granted to employees are included in the certificates issued to employees.
Categories of fringe benefits recognised by the South African Revenue Service (SARS)
In the Seventh Schedule, the South African Revenue Service (SARS) recognises the following thirteen fringe benefits as taxable benefits.
| Number | Category | Reference to the Seventh Schedule | Code on IRP 5 certificate |
| 1 | Acquisition of an asset at less than the actual value | Pars. 2(a), 2A and 5 | 3801 |
| 2 | Long service awards | Pars. 5(2), 6(4), 10(2) | 3835 |
| 3 | Right of use of an asset | Pars. 2(b) and 6 | 3801 |
| 4 | Right of use of a motor vehicle for private or domestic purposes | Pars. 2(b) and 7 | 3802, or 3816, or 3866 |
| 5 | Meals, refreshments and meal and refreshment vouchers | Pars. 2(c) and 8 | 3801 |
| 6 | Accommodation | Pars. 2(d), 9 and 10A | 3805 |
| 7 | Free or cheap services | Pars. 2(e) and 10 | 3806 |
| 8 | Low interest or interest free debt | Pars. 2(f), 10A and 11 | 3801 |
| 9 | Subsidies in respect of debt | Pars. 2(g), 2(gA) and 12 | 3801 |
| 10 | Employer contributions to insurance policies schemes | Pars. 2(K) and 12(C) | 3801 |
| 11 | Employee’s debt or release from obligation to pay debt | Pars. 2(h) and 13 | 3808 |
| 12 | Medical scheme contributions paid by an employer | Pars. 2(i) and 12A | 3810, or 4474, or 4493, or 4005 |
| 13 | Medical costs incurred by an employer | Pars. 2(j) and 12B | 3813, or 4024 |
- Benefits granted to relatives of employees and others - in paragraph 16 of the Schedule.
- Valuation of contributions made by employers to a pension or provident fund - in paragraphs 2(l), 2(h), 12D and 13 of the Seventh Schedule.
- Valuation of contributions made by employers to the Bargaining Council - in paragraphs 2(m) and 12E of the Schedule.
The different categories are explained in detail in the GUIDE FOR EMPLOYERS IN RESPECT OF FRINGE BENEFITS (Revision:12) in terms of aspects such as meaning, values to be placed on the fringe benefits, exemptions, and exclusions, as well as examples.
Hence, this article will only briefly explain the fringe benefits as indicated by SARS, focussing on their meaning, deduction of employees’ tax, as well as a few examples, and some noteworthy information.
Thirteen categories of taxable fringe benefits recognised by SARS briefly explained
1. Acquisition of an asset at less than the actual value
In this regard, asset refers to ‘any asset consisting of any goods, commodity, financial instrument, or property of any nature’ that is provided by an employer, any associated institution, or by any person by an arrangement with the employer, to an employee, for no payment or for a payment considered less than the value of the particular asset.
Cash is not considered an asset in this situation.
- Deduction of employees’ tax
Employees’ tax must be deducted from the employee’s gross income in the month during which the employee acquires the asset.
- Employees are provided with credit cards in terms of an agreement, allowing them to buy goods.
- When security - such as the installation of alarm systems, burglar bars, or the provision of armed response - is provided.
- The regulation where the employee acquires an asset from the employer at less than the actual value (market value), was effectuated from 1 March 2014.
- Concerning low-cost housing, the benefit will have no value if: ‘The immovable property acquired by the employee is used for residential purposes,’ and the market value of the immovable property does not exceed R450 000 on the date of acquisition.
2. Long service awards
Assets awarded to an employee can include ‘gift vouchers, or other assets, cash, free or cheap services, or the right of use of an asset owned by the employer for private purposes.
The value of the assets determined ‘is reduced by the lesser of the cost to the employer of all such assets so awarded to the relevant employee during the tax year and R5 000.’
- The employee is required to complete an initial unbroken period of 15 years of service with the employer, and any subsequent uninterrupted period of 10 years with that same employer.
- The total value of the long service award must not be more than R5 000.
3. Right of use of an asset
A taxable fringe benefit arises when an employee is allowed to use any asset (excluding residential accommodation or any motor vehicle) for private or domestic uses, either for free, or for a ‘consideration which is less than the value of such use.’
- Deduction of employees’ tax
- The taxable benefit ‘will be deemed to have accrued’ to the employee on the date on which he/she was first given the right to use the asset.
- The detailed regulation of SARS in this regard reads as follows:
‘The cash equivalent of the benefit must be apportioned and is deemed to have accrued on a monthly or weekly basis during the year at the same intervals that the employee receives his/her cash renumeration, except in respect of those cases where the employee is granted the sole right of use of the asset during its useful life or a major portion thereof.
As the latter benefit is deemed to accrue on the date on which he/she was first granted the right of use of such asset, employees’ tax must be deducted from the full value of the benefit during that specific month.’
The value to be placed on the benefit depends on one of the following scenarios, namely:
- The employer is leasing or hiring the asset.
- The employer owns the asset.
- The employee is allowed the sole right of use of the asset.
The following scenarios are examples of exemptions concerning the use of assets for domestic or private purposes:
- When the private use is incidental to the use of the asset for the business of the employer.
- The asset comprises computer or telephone equipment which the employee uses primarily for the purpose of the employer’s business.
- The use of books, other literature, or works of art.
4. Right of use of a motor vehicle for private or domestic purposes
When an employee is allowed to use any motor vehicle of the employer for domestic or private purposes, the benefit is taxable.
- Deduction of employees’ tax
- According to SARS, the cash equivalent of the value of the taxable benefit ‘shall be so much of value of private use of such vehicle as exceeds any consideration given by employee to employer for use of such vehicle during such period, other than consideration in respect of the cost of licence, insurance, maintenance, or fuel in respect of such vehicle.’ The different methods to calculate the value are explained in detail in the guide for employers provided by SARS.
- The value of the benefit shall be calculated on a monthly basis or each portion of a month during which an employee was allowed the use of the vehicle for private or domestic purposes, including travelling between the residence of the employee and his/her place of employment, or any other travelling done for private or domestic purposes.
- The cash equivalent of the fringe benefit accrues monthly, while employees’ tax must be deducted monthly.
In the following cases, the private use of a motor vehicle by an employee shall be considered to have no value:
- If the vehicle is available to and is used by other employees of the employer in general.
- If the employee uses the vehicle infrequently.
5. Meals, refreshments and meal and refreshment vouchers
A taxable fringe benefit is applicable where the employee has been ‘provided with any meal or refreshment or voucher’ permitting him/her any meal or refreshment, which can be either free of charge or for an amount which is ‘less than the value of such meal, refreshment or voucher.’
- Deduction of employees’ tax
- The amount taxable is the amount of the cost to the employer less any cost to the employee.
- The employer is required to deduct employees’ tax from the cash equivalent of the fringe benefit.
The following meals and refreshments, amongst others, carry no value and are therefore considered non-taxable:
- Any meal or refreshment provided by an employer to his/her employees in any canteen, cafeteria, or dining room managed by or on behalf of the employer.
- Meals or refreshments are enjoyed by employees when they simultaneously supply meals or refreshments to people whom the employees are required to entertain on behalf of the employer.
Meals provided with accommodation are excluded from this benefit because they are dealt with as part of the accommodation fringe benefit.
6. Accommodation
Regarding accommodation, the fringe benefit shall be considered taxable when the employer has provided the employee with residential accommodation either free of charge or for a rental amount which is less than the value of the specific accommodation.
- Deduction of employees’ tax
- The employer is required to determine the cash equivalent of the fringe benefit during the year at the same intervals at which the employee receives his/her cash renumeration, and employees’ tax must be deducted accordingly.
- Example of the calculation of the cash equivalent:
Rental value for the year: R96 000
Less: Amount paid by the employee: R72 000
Value of benefit: R24 000
- A certain formula is used to calculate the taxable benefit per month.
- The formula is applied in both cases where the employer owns the accommodation or where the employer rents the accommodation.
- There is also a value placed on the benefit in the case of holiday accommodation.
- SARS mentions that no value shall be placed on ‘any accommodation away from an employee’s usual place of residence’ inside South Africa or outside the country under certain circumstances.
7. Free or cheap services
A taxable fringe benefit arises if an employee has received any service from the employer (or some other person) at the expense of the employer and the specific service has been used by the employee for his/her domestic or private purposes, without any compensation or inadequate compensation by the employee.
- Deduction of employees’ tax
Example:
If an educational institution (traditional university or university of technology) provides free education for the children of personnel, a taxable fringe benefit is in play, of which the value is determined as follows:
- The marginal cost associated with the tuition of the particular person.
- However, if a contribution by the employee equals or exceeds the marginal cost, the benefit is non-taxable.
There are numerous situations where no value is placed on the particular benefit, according to SARS. For instance:
- Services rendered to employees at their place of employment, aiming at:
- Better performances by the employees.
- Providing recreational opportunities at work.
- Services to transport employees from their home to place of work and vice versa.
- Communication services to employees if the services are primarily utilised for the purposes of the business of the employer.
- If an employee is required - for the purposes of the employer’s business - to stay at a specific location further than 250 kilometres from his/her usual place of residence in South Africa, a travel facility may be granted by the employer to the spouse or minor child of the employee as a non-taxable benefit.
8. Low interest or interest free debt
SARS explains this taxable fringe benefit in the light of the following features:
- A taxable benefit arises if a debt has been granted, ‘whether in favour of the employer or associated institution in relation to the employer,’ to an employee and either no interest is payable by the employee or interest is payable at a lower interest rate compared to the official rate of interest.
- Debts for the following purposes are excluded: ‘The payment of any consideration in respect of any qualifying equity share in terms of section 8A by the employee.’ The payment of any securities transfer tax payable regarding the equity share. ‘A debt, in respect of which a subsidy is payable, has been incurred by the employee.’
- Deduction of employees’ tax
- The value to be placed on the benefit is described by SARS as ‘the amount of interest that would have been paid on the amount owing in respect of debt during the year of assessment if any interest had been paid at the official rate, less such amount of interest (if any) actually incurred by the employee.’
- The value (amount) that is taxable is calculated as follows: Interest is calculated at the official interest rate for the portion of the year applicable, from which the amount of interest (if any) actually payable by the employee for the applicable portion is deducted.
- The official interest rate refers to an interest rate that is equal to the repurchase rate of the South African Reserve Bank (SARB) plus 100 basis points. Currently (March 2023), the official interest rate is 8.25% (repurchase rate of 7.25% plus 100 basis points.)
- No value shall be placed on the fringe benefit when it is a result of, inter alia, the following situations: A debt owed by an employee to his/her employer ‘if such debt or the aggregate of such debts does not exceed the sum of R3 000 at any time.’ A debt that enables an employee to further his/her own studies.
9. Subsidies in respect of debt
A subsidy in respect of debt provided to an employee is also taxable. For instance, If the employer has paid any subsidy regarding the amount of capital repayments or interest payable by the employee in respect of any debt.
Furthermore, if the employer has made a payment to a third party with regard to the granting by the party concerned of a low interest of interest free debt to an employee, the payment is considered a subsidy.
- Deduction of employees’ tax
The full amount of the subsidy in respect of any debt - including the interest amounts or capital repayments - is taxable, meaning it is subject to the deduction of employees’ tax.
10. Employer contributions to insurance policies schemes
Any contribution (directly or indirectly) by the employer of an employee to an insurer in connection with insurance benefits for the benefit of an employee, his/her spouse, children, dependant, or nominee will initiate a fringe benefit in the hands of the employees.
- Deduction of employees’ tax
- The cash value of the benefit is the total cost of all the premiums paid by the employer regarding the employee’s insurance policies during the year of assessment.
- If the portion of any cost incurred by the employer cannot be ascribed to the employee who benefits from the employer’s payments, ‘the benefit will be the total amount of expenditure incurred by the employer for the benefit of all employees divided by the number of employees in respect of whom the expenditure is incurred, during the year of assessment, according to SARS. (Accentuation by the article writer.)
This regulation is not applicable when the total cost incurred by the employer is in respect of an insurance policy, originating solely from the employment of the employee.
11. Employee’s debt or release from obligation to pay debt
A payment (directly or indirectly) by the employer for an amount owing by an employee to a third party, and subsequently releasing the employee from the requirement to repay the employer, constitutes a taxable fringe benefit.
A payment by the employer can constitute a portion or the whole of the amount owed by the employee, including credit cards, a mortgage bond, and a clothing account.
In addition, if a new employer undertakes to repay an employee’s study debt or a bursary to a former employer of the employee, it is also considered a benefit to the employee, which is fully taxable.
- Deduction of employees’ tax
The cash value (cash equivalent) of the benefit is the amount paid by the employer to release the employee from debt obligations as well as the amount paid by the employer on behalf of the employee to a retirement annuity fund.
The employer is required to deduct employees’ tax from the ‘cash equivalent during the month in which the benefit accrues to the employee.’
However, if the amount of the employee’s tax is disproportionate to the employee’s remuneration for the specific month, the tax reduction in respect of the fringe benefit may be arranged over the remainder of the tax year during which the fringe benefit accrued to the employee.
SARS mentions various situations in which no value should be placed on the taxable fringe benefit. Situations such as:
- When the employer has paid subscription fees to a professional body membership of such a body is a requirement for the employee’s employment.
- Insurance premiums indemnify an employee solely against claims deriving from negligence and/or omissions by the employee when in active service with the employer.
- When a new employer approves of a low-interest or interest-free debt to the employee, enabling him/her to repay the previous employer. Such new debt owed by the employee to the employer cannot be considered as a studly loan.
- Regarding a refund of any bursary, study debt, or similar assistance by an employer on behalf of an employee to his/her former employer, the following benefits are, amongst others, not taxable:
When the former employer of the employee ‘made a grant’ on condition that the employee makes his/her services available to the employer for a specified period.
On the conclusion of the employee’s service before the end of the period agreed upon, the employee is legally responsible for repaying an amount to his/her former employer.
12. Medical scheme contributions paid by an employer
When the employer contributes (directly or indirectly) to a medical scheme on behalf of an employee and his/her dependents, a taxable fringe benefit comes into play.
- Deduction of employees’ tax
SARS applies the following rules to determine the value of this fringe benefit:
- The amount of the contributions - directly or indirectly - paid to a medical scheme for the benefit of the employee and his/her dependants for a given period.
- As of 1 March 2012, the amount of contributions paid by the employer on behalf of an employee who is 65 years and older and still employed by the employer, is a taxable fringe benefit.
- Where an ‘employee has retired from the employ’ of an employer, regardless of the age of the employee and the employer proceeds with the contributions on behalf of the retired employee, ‘the ‘no value’ fringe benefit still applies.’
- Concerning cases where an employer’s contributions to a medical scheme consist of a lump sum payment in respect of all employees or class of employees - implying that payments are made in such a way that ‘an appropriate portion’ thereof cannot be allocated to the specific employee - the following rule applies: The amount of that contribution ‘in relation to that employee and his/her dependants’ is considered an ‘amount equal to the total contribution or payment by the employer to the scheme during the relevant period for the benefit of all employees and their dependants divided by the number of employees in respect of whom the contribution or payment is made.’ (Accentuation in the quotation by the article writer.)
- An employer must deduct employees’ tax during the month in which the fringe benefit accrues.
- In South Africa, all medical schemes operate in terms of the Medical Schemes Act (Act 131 of 1998) and are regulated by the Council for Medical Schemes.
- No value is placed on the fringe benefit if the contribution by the employer is made on behalf of:
A pensioner or the dependants of the pensioner after his/her death.
In this regard, a pensioner is described by SARS as ‘a person who by reason of superannuation, ill-health, or other infirmity retired from the employ of such employer.’ Infirmity can include physical or mental weakness, while, according to GoLegal, superannuation ‘applies when a court dismisses a civil action due to an inordinate delay in prosecuting the matter.’
A deceased employee’s dependants after the death of such an employee, if the employee was employed by the employer at the time of death.
13. Medical costs incurred by an employer
A taxable benefit arises when the employer incurred (directly or indirectly) any amount regarding the following expenses on behalf of the employee, his/her spouse, child, relative, or other dependant:
- Medical, dental, and similar services
- Hospital services
- Nursing services
- Medicines provided
- Deduction of employees’ tax
- The value to be placed on the benefit is the amount incurred by the employer as described above.
- The same method used in the fringe benefit derived from ‘medical scheme contributions paid by an employer’ (refer to number 12 above) is applied when an appropriate portion of a payment cannot be attributed to a specific employee.
- Deduction of employees’ tax has to take place during the month in which the fringe benefit accrues.
SARS specifies various circumstances where no value is placed on the benefit, of which the following two are examples:
- Where the services are rendered or the medicines are supplied for purposes to comply with any law of the Republic of South Africa.
- Where the services are provided by the employer to its employees in general at their workplace to improve the performance of their duties.
Note: This article does not purport to provide all the details about fringe benefits allowed by the South African Revenue Service (SARS). In order to get the full picture of fringe benefits in the South African context, you are referred to SARS’s GUIDE FOR EMPLOYERS IN RESPECT OF FRINGE BENEFITS (Revision:12).
