Fringe benefits – Payment of and Employees – Debt or Release Employee from an obligation



South African Tax Guide

Fringe benefits – Payment of and Employees’ Debt or Release Employee from an obligation to pay a debt

Paragraph 2(h) of the 7th Schedule prescribes that a taxable benefit shall be deemed to have been granted if the employer has paid an amount owing by the employee to a third party, whether directly or indirectly, without requiring the employee to make any payment for the amount paid or the employer has released the employee from an obligation to pay an amount owing by the employee to the employer. This excludes medical contributions made by the employer or medical costs incurred by the employer.

Value to be placed on the benefit in terms of Paragraph 13 of the 7th Schedule is the amount paid by the employer or the amount of the debt from which the employee has been released.

There is no limitation on the method by which this debt may have been arisen or the size of the debt.

Examples: Where any debt owing by an employee to an employer is extinguished by prescription, the employer shall be deemed to have released the employee from his / her obligation to pay the debt, unless it can be shown to the satisfaction of the Commissioner that it was not the intention of the employer to confer a benefit on the employee. Payment by employers of a portion or the whole of an employee’s mortgage bond payment, credit card account, clothing account, etc., is fully subject to tax notwithstanding the fact that the payment is made by the employer directly to the institution or supplier.

Where an employee changes employment and is obliged to repay a study loan or a bursary to his / her previous employer, the new employer may pay this debt on behalf of the employee. Such a payment constitutes a benefit to the employee, which must be taxed in full.

No value shall be placed on the benefit derived by reason of the fact that an employer has paid subscriptions to a professional body due by the employee, if such membership of such body is a condition of the employee’s employment. Should the new employer grant a low interest or interest free loan to the employee in order to enable him / her to recompense the previous employer, such new loan cannot be regarded as a study loan in respect of which no benefit is considered to arise. However, a refund of any bursary, study loan or similar assistance by an employer on behalf of his / her employee to the employee’s previous employer, is not regarded as a taxable benefit, if — the employee’s previous employer made a grant on condition that the employee rendered service to the employer for an agreed period; on termination of service before the expiration of the period agreed upon, the employee is liable to refund an amount to his / her previous employer; upon accepting employment with a new employer, the outstanding amount is refunded to the previous employer by the new employer on behalf of the employee; and the employee consequently is liable to work for the new employer for a period not shorter than the remaining period which he / she should still have worked for the previous employer.

A Scholarship, which is subject to repayment if certain written conditions are not met, is treated as a bona fide scholarship or bursary until the conditions are not fulfilled. In the tax year in which such conditions are not fulfilled, the amount of the scholarship will be regarded as a loan and any benefit that the employee may have received will constitute a taxable benefit.

Employees’ tax — Employees’ tax must be deducted from the cash equivalent during the month in which the benefit accrues to the employee. If however the amount of employees’ tax to be deducted is excessive in relation to the employee’s monthly remuneration for that month, the deduction of the tax in respect of the benefit may be spread over the balance of the tax year during which the benefit accrued to him / her. IRP 5 — The cash equivalent of the benefit must be reflected under code 3808 on the IRP 5 certificate.


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