Fringe benefits: Voyager Miles – pay now or PAY later

South Africans are used to accumulating Voyager Miles in their private capacity for airline tickets paid for by their employers. It happens all the time; a company swipes its credit card and the emplolyee’s personal Voyager Mile bank goes ka-ching. Does this make you liable for tax?

Fringe benefits become taxable if granted as a reward for services rendered (or still to be rendered). The Income Tax Act has specific provisions in the 7th Schedule for calculating the value of non-cash benefits for tax purposes.

“Any fringe benefit must be included when calculating how much employees’ tax an employer has to withhold,” says a Remuneration and Benefits Manager at a global audit, tax and advisory firm.

What happens if the fringe benefit calculation is wrong? Who is accountable to the South African Revenue Service (SARS) – the innocent employee or the non-compliant employer?

If the value of a fringe benefit is overstated, the result is a larger tax bill for the employee. But if it is understated, the employer could incur penalties and the employee would still be liable for the outstanding tax. So how does this affect the treatment of Voyager Miles accumulated in your private capacity from a business trip?

When you buy a ticket and your employer reimburses you, ownership of the Voyager Miles lies with your employer. So are you the employee getting a perk?

“The important question is whether the miles have a monetary value. If so, the value of the perk can be calculated, based on the amount of miles traded in for a flight, using the actual cost of that flight,” he says.

The Vacation Exchanges case, heard in the High Court in 2009, provides some answers. RCI, the trading name of a timeshare management company and the employer in this case, had a practice of allowing employees to use timeshare weeks not taken up by fee-paying members. They felt that giving staff the benefit of a holiday unit was no loss (or gain) to them as a company, so they assigned a nil valuation to the benefit for the employees’ tax.

SARS disagreed. They said the ‘free’ accommodation cost RCI money – the value they would have derived from renting it out. Therefore, it was part of an employee’s gross income, as per the 7th Schedule of the Income Tax Act.

“Failing to comply with SARS on this issue could result in a penalty equal to 10% of the cash equivalent of the value of the taxable benefit. Alternatively, they could impose a penalty of 10% of the understated cash equivalent. It is also important to note that employees are not without responsibility – the onus is on them to ensure that a truthful disclosure is made.”

In terms of the 7th Schedule, SARS currently has one of two options available to them. They can either seek the outstanding tax from the individual employees with their personal tax assessments or educate the company on the law and walk away from the situation.

In May last year, an amendment to the Income Tax Act was proposed that would give SARS the power to claim an underpayment of tax directly from the employer and not go the more difficult route of assessing individual employees. If successful, the draft amendment will come into effect from all tax years ending after 1 January 2011.

“So the next time you take a business trip, knowing that your private Voyager Mile bank is growing, think about the following: when it comes to fringe benefits tax, you can either pay now, or PAY later,” he concludes.

TAXtalk: www.taxtalk.co.za