The tax consequences of receiving a year end gift

There are PAYE consequences says a Tax Consultant.

It has become common practice for employers to award gifts or other accolades at year-end functions to employees for long service, exceptional work or extended hours, for example.

Year-end gifts may be given over and above events such as birthdays, secretary’s day or weddings. However, there are possible PAYE implications of providing certain gifts, other than those for long service awards, to employees.

Paragraph (c) of the ‘gross income’ definition specifically includes any amount or voluntary award received ‘in respect of services rendered’ or ‘by virtue of any employment’, which, in terms of Stevens v CSars, connote essentially the same meaning. In essence, there needs to be a causal relationship between the amount received and the services rendered.

This was confirmed in the case of Stander v CIR where it was held that the employee’s employment must be the real or proximate cause of receiving the gift.

The causa sine qua non test is also referred to as the ‘but for’ test. When applied to any gift provided to an employee the question would be – but for the employee’s employment would he or she have received the gift from the employer? The answer is probably no, meaning the basic causal nexus exists.

However, the fact that the employee is employed is merely the causa sine qua non for the receipt of the gift. The additional test is whether the employee’s employment is the real or proximate cause or the causa causans for receiving the gift. The possible PAYE consequences of gifts are considered below:

Meals provided at functions and special occasions

Under paragraphs 2(c) and 8 of the Seventh Schedule the provision of free meals and meal vouchers constitutes a taxable fringe benefit. However, no value is placed on a meal or meal where it is supplied during business hours, extended business hours or on a special occasion.

The Act contains no definition of what constitutes a ‘special occasion’, but it is submitted that birthday or secretary day lunches, year-end functions and meals at team building events would likely qualify.

Gifts / gift vouchers for exceptional work or extended working hours

It would be difficult to argue that a gift/gift voucher received by an employee for exceptional work or extended working hours is not in respect of services rendered or by virtue of employment, ie. the requisite causal connection would be present.
The question that arises though is whether the gift constitutes a taxable fringe benefit for purposes of the Seventh Schedule and if not, will it be taxable under paragraph (c) of the “gross income” definition.

A taxable benefit arises under paragraphs 2(a) and 5 of the Seventh Schedule where an asset has been acquired by an employee for no consideration or for a consideration which is less than the actual value.

Paragraph 2(a) of the Seventh Schedule refers to any asset consisting of any goods, commodity, financial instrument or property of any nature, other than money. The wide meaning given to an ‘asset’ under paragraph 2(a) of the Seventh Schedule could arguably include a non-monetary item such as a gift voucher.

Where the ‘asset’ was acquired by the employer in order to dispose of it to the employee, albeit for no consideration, the value to be placed thereon would be the cost to the employer. Even if one can argue that the gift / gift voucher does not fall within the provisions of the Seventh Schedule, it is submitted that it could be subject to PAYE by reason of falling under paragraph (c) of the “gross income” definition.

Similar reasoning could be applied to secretary day gifts (other than meals) as the requisite causal connection is present on the basis that the gift serves as a reward for services rendered.

Birthday or wedding gifts

The question that arises under this heading is whether the requisite causal connection between employment and the gift exists. It is true that, but for the employment relationship the employee would probably not have received the gift.

However, the additional test is to determine whether it is the real or proximate cause. In ITC 701 it was held that reasonable birthday or other gifts to an employee cannot be said to be in respect of services rendered as it is an act of generosity and the rendering of services is purely incidental.

On the other hand, where dual reasons exist for providing the gift, eg. for services rendered as well for affection to the employee, the dominant reason must be established according to De Villiers v CIR.

The risk with arguing that the gift is an act of generosity is that Sars could regard the gift as a donation in which case a donations tax liability could arise.

There does however appear to be an argument to the effect that the real or proximate cause of the gift is the event (eg, birthday or wedding) and not the services rendered, meaning no PAYE would arise. Each case must however be judged on its own facts and circumstances.


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