Tax implications of security costs for employers and employees

Audit and Advisory firm Mazars Moores Rowland says that a tax deduction for security costs similar to the current deduction for medical costs, or an exemption from fringe benefit tax on employee security costs would be a step in the right direction by Treasury. This is according to Dirk Kotze, a tax partner at the firm.

The draft interpretation note (IN) published by SARS on March 18^th last year regarding the tax deductibility of security costs created a storm in a teacup, with the media and various political and lobbying groups calling for tax incentives given current levels of crime.

In reality, the interpretation note doesn’t provide any additional or new tax write-offs; it merely reiterates the application of tax legislation that has been in place for some time now and is therefore somewhat redundant.

As things stand, security costs incurred in the production of income from carrying on a trade or business are normally tax deductible whereas security costs incurred for private or non- business purposes are not deductible.

Any type of security cost that creates an enduring benefit, such as security systems, would be regarded as capital expenditure and tax relief would only be available if any of the capital allowances apply. The IN confirms that security costs of a permanent nature, such as perimeter walls or electric fences, are not subject to tax allowances.

“There are no real current tax incentives for having personal security, whether paid for privately or by an employer. This is despite private security costs being incurred by everyday citizens in order to prevent them from becoming a burden on state resources such as the police and the courts. This is very similar to medical costs incurred by everyday citizens in order to prevent them from becoming a burden on state health resources,” says Kotze.

There are times when employers incur security costs on behalf of employees. For example, if employees are required to be away from their normal place of residence for prolonged periods some sort of security for their property or family may be warranted. “Costs incurred by the employer in these circumstances may result in taxable fringe benefits in the hands of the employee,” says Kotze

Fringe benefits generally occur when employees receive benefits from their employers that are consumed by them privately or for non-business purposes. These benefits are taxable in the employees’ hands as part of their remuneration. Fringe benefits include the use of company owned assets by employees for private purposes as well as the payment of an employee’s debt by the employer.

If an employer contracts with a security company to install a security system at an employee’s property, it incurs a tax deductible security or staff cost (even if the deduction is limited to capital allowances on capital costs) and the employee gains a fringe benefit equal to the cost of the security system.

“The same effect will occur when an employer agrees to pay the monthly or annual security monitoring costs of an employee. An interesting scenario may arise where, due to his or her duties an employee requires body guards for security purposes,” says Kotze.

The fact that the employee enjoys a private benefit doesn’t prevent the tax deduction of the cost to the employer. This is because the costs relating to the security are incurred for the purposes of carrying on the employer’s trade while producing income through the work of its employee.

“This form of security expenditure, being subject to fringe benefits tax, may be regarded as forming part of staff costs which should in any event be tax deductible as part of the employer’s annual salaries and wages bill.”

He says employers need to take care that the possibility of having tax deductible security costs doesn’t expose them to employees’ tax risks if not accounted for correctly through the payroll. “Employees must also be informed that their private security costs still remain non-deductible and that the assumption of security related costs by their employer may result in taxable fringe benefits.”