As expected, the Minister of Finance announced in his 2010/2011 budget speech that legislation would be introduced to counter the judgment in the Vacation Exchanges International (Pty) Ltd case (decided on 7 August 2009) which held that SARS could not hold an employer liable for under deducted employee's tax where the value of a fringe benefit is re-determined.
Where SARS is not satisfied with the determination of any cash equivalent under the Seventh Schedule, the High Court held that it cannot assess the employer by way of an employee's tax assessment. Instead, it must assess the individual for income tax on the re-determined fringe benefit through the normal income tax assessment process, which in the case of a large workforce would be difficult and costly.
The proposed amendment would allow SARS to raise an assessment on an employer where the value of a fringe benefit is re-determined for employee's tax purposes. Further amendments may also be required to ensure that employer payment of employee's tax, where a fringe benefit is re-determined, does not result in the triggering of further benefits.
The proposed amendment will seek to rectify the blow SARS was dealt in effectively administering employee's tax compliance.
Company car fringe benefit rate set to increase
The Budget proposals include a tightening of the company car fringe benefit rules by looking to increase the monthly taxable value. It is unsure to what extent the change will be but is seemingly directed to counter the potential abuse of company car fringe benefits given the changes made to the taxation of travel allowances from 1 March 2010.
With effect from 1 March 2010, 80% of a travel allowance will be subject to the deduction of PAYE. Furthermore, individuals in receipt of travel allowances wanting to claim deductions in respect of business travel must maintain detailed logbooks. The travel allowance deduction would therefore be based on the actual business kilometres travelled by the employee, and the current deeming provisions of 18 000 km will no longer apply.
Currently, 2.5% of the determined value of a vehicle (generally cost price excluding VAT and finance costs) is subject to PAYE on a monthly basis. By carefully structuring a remuneration package the after tax cash flow of an employee would be more when compared to a similar structure which includes a travel allowance. SARS has more than likely taken cognisance of this fact and given the lack of detail in the Budget, employers should only implement new car schemes once clarity is obtained through draft legislation.
SITE system to be scrapped
Standard Income Tax on Employees (SITE) applies to the first R60,000 of annual remuneration earned. Given the fact that the tax threshold for individuals has crept up to R57,000 Government has taken the decision to scrap the SITE system with effect from 1 March 2011.
The Budget indicates that transitional measures will be introduced for low income taxpayers with multiple sources of income. A more important factor is the impact this will have on payroll systems across the country. Even though the administrative burden of SARS will be eased it will cost employers substantial amounts of money to adapt their systems accordingly.
Ruaan van Eeden, Senior Associate, Tax