TAXATION FOR INDIVIDUALS (TAXATION 2A)

UNIT 5
Fringe Benefits
 Fringe benefits
.
Unit outcomes

 Apply the provisions of the Seventh Schedule to identify and calculate fringe
benefits and the tax implications thereof

 Identify and discuss exemptions or exclusions arising from an employer/employee

relationship
 FRINGE BENEFITS

• Framework to calculate taxable income R

Gross income (Section 1 – definition of gross income and special inclusions and VII Schedule fringe xxxx
benefits)
Less: Exempt income (Sections 10, 10A and 12T) (xxx)
= Income (Section 1 – definition of income) xxxx
Less: Deductions (Section 11 studied together with section 23(m) and 20) (xxx)
Add: Taxable portion of allowances (Section 8) xxxx
= Taxable income before taxable capital gain xxxx
Add: Taxable capital gain (Section 26A) xxxx
= Taxable income before retirement fund deduction xxxx
Less: Retirement fund deduction (Section 11F) (xxx)
= Taxable income before donations deduction xxxx
Less: Donations deduction (Section 18A) (xxx)
= Taxable income (Section 1 – definition of taxable income) xxxx
 Fringe benefits

• An employee is entitled to use company assets for its own benefit and in addition receives some
amounts or allowances over and above their salaries.

• These amounts or allowances are referred to as fringe benefits. The Seventh Schedule of the Income
Tax Act lists benefits that are classified as fringe benefits and should be included in taxable income.

• Therefore, it is the responsibility of the employer to determine the cash equivalent of these benefits.

• The South African Receiver of Revenue (SARS) will then assess if the cash equivalent is calculated
correctly.

• If it is incorrectly calculated, SARS will re-determine the cash equivalent of the taxable benefits .
 Fringe benefits
.
Acquisition of an asset at less than the actual value

• This benefit comprises any asset (other than money) sold by an employer to the employee for no
consideration or a consideration that is less than the market value of that asset.

• Cash equivalent of this benefit is equal to the difference between the market value of asset at
the time the employee acquired the asset and the consideration given by the employee.
 Fringe benefits

Example 5.1 (Pg 83)

Mpilo is an employee of Zakum (Pty) Ltd. He acquired a laptop from Zakum (Pty) Ltd for R2 500. The
market value of the laptop at the time Mpilo acquired it from the company was R4 500.

• Determine the cash equivalent of the benefit, if any, that should be included in Mpilo’s taxable
income.

Solution:
Laptop market value at the time of sale 4 500
Less: Consideration received from Mpilo 2 500
Cash equivalent of the benefit 2 000
 Fringe benefits

Exceptions to the general valuation rule of this benefit:

• If the asset in question is an immovable property which was acquired by the employer for the
employee the benefit is the cost paid by the employer.

• If the asset acquired by the employee is trading stock, the cash equivalent is lesser of the cost of
trading stock or its market value
 Fringe benefits

Exclusions from this type of benefit:

• If the asset is awarded to an employee in respect of bravery award or long service award, the cash
equivalent is reduced by the lesser of cost of that asset to the employer or R5 000.

• Long service means an initial unbroken period of service of not less than 15 years, or any subsequent
unbroken period of service of not less than 10 years
 Fringe benefits

Example 5.2

Zack is an employee of Great Deals (Pty) Ltd (clothing factory). During the current year of
assessment, he acquired winter clothes from Great Deals (Pty) Ltd for R2 500. The market
value and the cost of these clothes was R3 500 and R3 000, respectively.

Required:

Determine the cash equivalent of the benefit, if any, that should be included in Zack’s
taxable income.
 Fringe benefits

Value of the benefit – cost price of the asset (trading stock) 3 000

Less: Consideration paid by Zack (2 500)

Cash equivalent of the benefit 500

Since Zack works for a clothing factory, the clothes that he bought constitute trading stock off the
employer, the cash equivalent is the lesser of market value and cost price of the clothes.
 Fringe benefits

Example 5.3

Sipho received an asset with a market value of R7 500 from his employer as an award for a 20-year
unbroken service he rendered to his employer. This asset was not initially bought with an intention
to be disposed of to the employees. The cost price of this asset was R6 500.

Required:

Determine the cash equivalent of the benefit, if any, that should be included in Sipho’s taxable
income.
 Fringe benefits

Value of the benefit – market price of the asset 7 500

Less: exemption in terms of long service award (5 000)

Less: Consideration paid by Sipho (Nil)

Cash equivalent of the benefit 2 500

The exemption of up to R5 000 in respect of long-service award is available for an initial

unbroken period of service of not less than 15 years or any subsequent unbroken period of
service of not less than 10 years.
 Fringe benefits
Activity 5.1 (pg 85)

Cyprian received an asset with a market value of R5 500 from his employer as an award for a 15-year unbroken service he
rendered to his employer. This asset was not initially bought with an intention to be disposed of to the employees. The
cost price of this asset was R4 500.

Required:

Determine the cash equivalent of the benefit, if any, that should be included in Cyprians taxable income.

Solution:

Value of the benefit – market price of the asset 5 500

Less: exemption in terms of long service award (4 500)

Less: Consideration paid by Cyprian (Nil)

Cash equivalent of the benefit 1 000

 Fringe benefits
Right of use of an asset (excluding a motor vehicle and accommodation)

• This benefit arises when an employee is granted the use of entity’s asset for
private or domestic use at no consideration or a consideration that is less the
market value of such use.

• The value of the taxable cash equivalent of the benefit varies according to the

occupation of the asset.

 Fringe benefits
Type of occupation Value of taxable benefit

Asset that is leased by the employer Rental amount the employer has to pay for the period the asset
is used by the employee
Asset that is owned by the employer 15% per annum of the lesser of:
 Market value of the asset on the date the rights of use
were conferred on the employee; and
 The cost of the asset

The sole right of use of the asset is given to the employee Cost of the asset on the date the rights were conferred on the
employee.
 Fringe benefits

Example (15% rule- owned by an employer)

Melanie was granted the use of a laptop by his employer for a period 6 months from 1 September
in the current year of assessment. She used the laptop for private purposes. The market value of
laptop was on 1 September was R8 000. Melanie’s employer bought the laptop for R10 500.

Required:

Calculate the cash equivalent of the benefit, if any, for the current year of assessment .
 Fringe benefits
Solution:
Value of the benefit –
15% x R8 000 (market value is lower than cost (R10 500) of the laptop) x 6/12 600
Less: Consideration paid by employee (Nil)
Cash equivalent of the benefit 600

Notes:
The exclusion does not apply because the laptop was used for private purposes. See page 79/80
The value of the benefit is deemed to have accrued on a monthly basis and therefore must be
apportioned according to the number of months or weeks.
 Fringe benefits

The right of use of a motor vehicle

• This benefit occurs when an employee is granted the use of company motor vehicle for private or
domestic purposes.

• It should be noted that even if the employee is travelling between the employer’s premises and the
employee’s place of residence, it is considered a benefit.

• The cash equivalent in the right of use of a motor vehicle is determined as value of private use less any
amount (excluding fuel costs, insurance, cost of licences or maintenance) paid by an employee
 Fringe benefits

The value of private use is calculated as follows:

• 3,5% of the # determined value for each month the employee is entitled to use
the motor vehicle for private purposes (NO MAINTENANCE PLAN)

• 3.25% of the determined value for each month if the vehicle (at acquisition by
the employer) is a subject of a maintenance plan.

# Determined value = Retail market value (generally includes VAT)

 Fringe benefits

Example 7 (Pg 89)

Rajesh has been granted the rights of use of a motor vehicle by his employer during the
current year of assessment. The motor vehicle was purchased by Rajesh’s employer 14
months ago and its market value on the date of purchase was R115 000 (VAT inclusive @
15%). The vehicle has no maintenance plan.

Required:

Assuming all kilometres travelled by Rajesh were for private purposes, calculate the
taxable benefit arising from the right of use of motor vehicle for the current year of
assessment.
 Fringe benefits

Determined value 115 000

Less: VAT (R115 000 x15/115) (15 000)

(115 000 x 100/115) 100 000

Taxable benefit – R100 000 x 3,5% x 12 months 42 000

The value of the monthly benefit is reduced if the employee pays for the use
of the motor vehicle to the employer.
 Fringe benefits

• The taxable benefit is also reduced if:

the employee is able to provide an accurate record of kilometres travel for

business purposes;
the benefit is reduced by pro rata with the ratio of kilometres travelled for
business purposes to the total number of kilometres travelled; or
 Fringe benefits

Example 8

Prakash has the right of use of a motor vehicle from his employer and he does not
receive a travel allowance. He is responsible for bearing the maintenance costs
(R35 000) of the motor vehicle. The company is responsible for the fuel costs.
Prakash kept an accurate record of kilometres travelled for private purposes. He
travelled 30 000 kilometres for private purposes of his total 50 000 kilometres
travelled.
 Fringe benefits

The motor vehicle Prakash has the right of use was purchased by his
employer for R300 000.

Required:

Calculate the cash equivalent of the benefit for the current year of
assessment
 Fringe benefits
The private portion of the total kilometers is taxed

The fringe benefit is calculated as follows:

R300 000 x 3,5% x (30 000 km/50 000 km) x 12 75 600

Less: maintenance cost paid for private use (R35 000 reduced accordingly)

(R35 000 x [30 000 km /50 000 km]) (21 000)

Taxable benefit 54 600

 Fringe benefits
Meals, refreshments and meal and refreshment vouchers

• These are types of benefits that result from meals, refreshments and meal and refreshment
vouchers provided by the employer to the employees at no consideration or at a value less than
the cost of these benefits.

• The cash equivalent for these benefits is determined by deducting the consideration paid by the
employee from the cost of meals, refreshments and meal and refreshment vouchers provided by
the employer. Take note of the exclusions under 5.2.5
 Fringe benefits

Example 10 (pg 93)

The lecturers and administrators at Academy College of Training sit together at lunch time in a staff cafeteria
located inside the college premises and eat their lunch every day. The staff eat free of charge and the cost per
employee amounts to R40 per day for the employer.

Required:

Calculate the cash equivalent of the benefit for the current year of assessment.

Solution:

No value is placed on the benefit as a meals or refreshments supplied by an employer to their employees in a
cafeteria operated by or on behalf of the employer and used mainly or wholly by their employees (exclusion)
 Fringe benefits

Accommodation

Residential accommodation
• The meaning for the benefit of this nature is derived through accommodation offered
to an employee at either low or no rental.

• The following formula is used to calculate the cash equivalent of the taxable benefit
derived from a residential accommodation if the employer owns the accommodation or
does not own the accommodation but it vests in the employer or associated institution.

• (A – B) × C /100 × D / 12
 Fringe benefits

A – Remuneration of employee
B – 91 250

C - 17, 18 (at least 4 rooms that are either furnished or have power), 19 (at least 4 rooms that are
furnished and have power)

D – No. of months accommodation was used for

 Fringe benefits

Where the employer does not own the accommodation and the rent is paid to a
person (offering the accommodation) who is not a connected person, the taxable
benefit is determined as follows:

• the lower of the amount calculated using

 the formula above

 the rental amount paid by and any expenditure incurred by the employer in respect of the
accommodation
 Fringe benefits
Holiday accommodation
• This type of benefit arises when the employer provides an employee with free or low
rental holiday accommodation

• the holiday accommodation is hired by the employer (not owned): The value of the
taxable benefit is the sum of the rental payable and amounts chargeable in respect of
meals, refreshments or any other services borne by the employer.

• the accommodation is owned by the employer or associated institution: The value of the
taxable benefit is an amount calculated at the prevailing rate per day at which such
accommodation could normally be let to a person other than an employee
 Fringe benefits
Example 5.8 -pg 91

• Adam Sandler has been granted the use of a 5-room unfurnished apartment by his
employer to use as from 1 March in the current year of assessment. The company owns
the apartment and bears all the costs of electricity, water, sewerage and municipal rates.
Adam Sandler earned remuneration of R300 000 (excluding accommodation benefit)
during the previous year of assessment. The company also granted Adam Sandler the use
of a holiday flat for free for 18 days to use on his vacation with his family during the
current year of assessment.
 Fringe benefits
Adam’s employer also owns the holiday flat. Adam and his wife together with their
2 children made use of the holiday flat. The company normally rents out the
holiday flat at R300 a day per person to independent third parties.

Required:

Calculate the cash equivalent of the benefit for the current year of assessment.
 Fringe benefits
Apartment
(A – B) x x = (R300 000 – R91 250) x x = R37 575

Holiday flat
R300 x 4 people x 18 days = R21 600

Total benefit: R37 575 + R21 600 = R59 175

 Fringe benefits
Medical fund contributions paid on behalf of an employee

• This type of benefit arises when the employer contributes directly or indirectly to
the medical scheme on behalf of the employee.

• The cash equivalent of this benefit is the amount contributed by the employer on
behalf of the employee and employee’s dependents
 Fringe benefits
The following exceptions apply in respect of benefits arising from medical fund
contributions:

• the total contributions made the employer is divided by the number of

employees who are benefiting from the contributions and allocate the amount
per employee to the relevant employee (cannot apportion the contribution)

• Medical contributions (fringe benefit) made on behalf of a pensioner or to

dependents of a person who died whilst still employed are not taxed (exemption)
See further
exceptions under 5.2.7
 Fringe benefits
Payment of contribution on behalf of employee to a pension, provident or retirement annuity

fund (covered in unit/chapter 6)

• Contributions to retirement fund benefits by the employer on behalf of the employee is

considered a taxable benefit on the hands of employee.

• The cash equivalent of this benefit depends on whether the contributions are made to defined

benefit fund or defined contribution fund.

• If contributions are made to a defined contribution fund, the contributions allocated to the

employee are included as a fringe benefit for that employee as the cash value of the

contribution
 Fringe benefits
Allowances and advances
• Travel allowance
 Fringe benefits
• If the employee received a travel allowance that is higher than the portion
expended for business purposes, the difference will be included in the taxable
income of the employee.

• To determine the cost of business travel, you will need business kilometres
travelled and cost per kilometre. Therefore, the cost of business travel will be
calculated as follows:

• Cost of business travel = business kilometres x cost per kilometre

 Fringe benefits
• Actual expenses include the following costs:
 For a vehicle that is owned by the employee, the cost of wear and tear. The cost of the vehicle that
is used to calculate the wear and tear is limited to R665 000 and the wear and tear is calculated
over a period of seven years.
 All other costs, including insurance, tyres, licences, etc. that are necessary in running and
maintaining the vehicle.

Deemed cost per kilometre

 This cost is used when the employee did not keep an accurate record of expenses actually
incurred.
 Fringe benefits
.
​Value of the vehicle (R) ​Fixed cost per annum ​Fuel cost (cent/km) ​Maintenance cost
INCLUDING VAT (R) (cent/km)
0 – 100 000 33 760 141,5 43,8

100 001 – 200 000 60 329 158,0 54,8

200 001 – 300 000 86 958 171,7 60,4

300 001 – 400 000 110 554 184,6 65,9

​400 001 – 500 000 134 150 197,6 77,5

500 001 – 600 000 158 856 226,6 91,0

600 001 – 700 000 183 611 230,5 102,1

700 001 and above 209 685 234,3 113,1

 Fringe benefits
• The fixed costs in the table are per annum and in Rands while the fuel and
maintenance costs are in cents and per kilometre.

• This means that the fixed costs will have to be converted into cents and
proportionated on pro rata basis, if the right of use of a vehicle was not for a full
year.
 Fringe benefits
Revision Question - pg 104

Gabe Stone received a travel allowance from his employer amounting to R130 000
for the current year of assessment. He uses his car for business and private travels.
He bought this car a year ago for R460 000 (including a VAT of R60 000). Gabe
travelled a total of 29 000 kilometres during the current year of assessment, of
which 19 000 km were for private purposes. He also kept an accurate record of
expenses incurred in respect of the car for the current year of assessment.
 Fringe benefits
The costs are as follows:

• Finance charges 79 110

• Maintenance cost 11 000

• Fuel cost 23 000

• Insurance premiums and licences fees 8 500

Required:

Calculate the taxable portion of the travel allowance received by Gabe for the current year of
assessment.
 Fringe benefits
•`
Actual cost per kilometre: (Unit 5 revision solution, pg 169-170)
• Wear and tear (R460 000/7) R65 714
• Finance cost R79 110
• Maintenance cost R11 000
• Fuel cost R23 000
• Insurance premiums and licences fees R 8 500
• Total vehicle expense for the year R187 324

• Cost per kilometre (R187 324/29 000 x 100) 645,9 cents

 Fringe benefits
•`

Deemed cost per kilometre: Cents

• Fixed cost per kilometre (134 150/29 000 x 100) 462,6

• Fuel cost 197,6

• Maintenance cost 77,5

• Total cost per kilometre 737,7

• Therefore, the deemed cost is selected since it the highest cost per km.
 Fringe benefits
•`
Calculation of business kilometres travelled:

• Total kilometres travelled 29 000

• Private kilometres travelled (19 000)

• Business kilometres travelled 10 000_

Calculation of taxable allowance:

• Travel allowance received 130 000

• Business travels (10 000 km x 737,7 cents/100) (73 770)

• Taxable portion of the allowance 56 230_

 Fringe benefits
•`
Subsistence allowance (section 8(1)(c))

• Subsistence allowance is provided to employees when they are away

from their place of residence for at least one night. It is provided to
cover costs incurred by the employee in respect of accommodation,
meals and other incidental costs. The portion of the allowance
expended for business purposes is not taxable and it is calculated
based on:
actual figures (if the employee has proof of expenditure incurred); or
deemed figures (if employee does not have proof of expenditure incurred).
 Fringe benefits
Actual figures
• This is the amount that has been actually incurred by the employee in
respect of accommodation, meals and incidental costs. The employee
must be able to prove to the Commissioner that these costs were
actually incurred.
Deemed figures
• Deemed costs in respects of accommodation in the Republic are
determined as follows: (2024 rates)
 If the advance or allowance is in respect incidental costs incurred, the exclusion
amount per day is R161; or
 If the advance or allowance is in respect of meals and incidental cost, the
exclusion amount per day is R522.
 Fringe benefits

Summary
• In this study unit the different types of FB’s were identified and discussed as per
the provisions of the Seventh Schedule
• The tax implications of the different types of benefits arising from an
employer/employee relationship were also explored
• Finally allowances and advances in an employer/employee relationship were also
examined.

End of Unit 5