Thanks for the free soccer tickets and the T-Shirt Boss, now please pay my tax!

In the spirit of the first Soccer World Cup to be held on the African continent, employers have been providing employees with free soccer tickets and/or South African soccer T-shirts. Often, these employers do not realise that the provision of these items actually constitutes a fringe benefit and is subject to employees’ tax. Alternatively, for those who are aware, they deliberately choose to ignore it.

Any benefit or advantage granted by an employer to its employees is deemed to be a taxable fringe benefit, whether the benefit is granted by virtue of employment or as a reward for services rendered.

These benefits are easy to quantify. As an illustration, assuming that the T Shirt is an original, it would be valued at around R1 300 and the tickets’ value will be dependent on what price the employer acquired them for (e.g. R140 per ticket). The amount subject to fringe benefits tax (for the T Shirt and 2 tickets) would be R1 580. Assuming that the individual falls within the 35% tax band, the tax would be R553.

Employees will however be quite upset if they see that tax has been withheld on the value of the fringe benefits. After all, the tickets and the T shirt were given to them and no one said anything about taxes having to be paid!

One solution for employers to consider is to pick up the tax cost in relation to the awarding of these benefits. This however creates a rollercoaster effect, in that where an employer picks up the tax cost, a further fringe benefit is created and a full gross-up calculation will need to be performed. At the end of the day, the tax cost will definitely be higher. Unfortunately, most payroll systems cannot perform a gross up calculation and tax experts will need to be brought in to assist.

There are some employers who realise that there is a tax impact on this transaction but deliberately choose to ignore it. A significant number of relatively large employers fall within this category. This may constitute intentional tax evasion, the penalty for which could be as high as 200% of the amount of tax payable.

It is very easy for the South African Revenue Service (“SARS”) to check whether the employer has accounted for the fringe benefits tax on this benefit on the payroll. As an illustration, to the extent that employees participates in Soccer Friday and individuals sport their SA T shirts, SARS could become aware of this by word of mouth or by anonymous tip-off. SARS could also target the taxation of this benefit by sending out random questionnaires to companies or including this as a question when conducting an employees’ tax audit.
Well, at the end of the day, the Taxman will get his due. Employers who did not account for the fringe benefit during the 2010 tax year should “do the right thing” and rectify their non compliance prior to the 2010 employees’ tax reconciliation being submitted to SARS. Let’s do the right thing for a better South Africa.