No Such Thing As A “Free” Holiday
01 November 2009
Posted by: TaxFind™
No Such Thing As A "Free” Holiday
Court rules who is liable for the fringe benefit tax if the employer gets it wrong
In a judgement handed down in the High Court in the Western Cape (Vacation Exchanges International (Pty) Ltd v Commissioner for the South African Revenue Services—judgement given on August 72009), the Court provided clarity on who must pay the tax when the taxable value of a fringe benefit is adjusted by SARS on the basis that it has been incorrectly calculated by an employer.
It may be recalled that in 2008, a time share operator had unsuccessfully appealed against an assessment for PAYE related to the provision of "points” in respect of its timeshare properties to sales staff, who could then utilise the points by occupying a time share unit operated by the employer for a period as vacation accommodation.
The appeal in that instance had proceeded on two points, namely that the taxable value was zero (contending that the employer did not own the units and did not pay the occupational levies, but merely administered the units on behalf of the owners—on this basis the cost incurred by the employer was zero and therefore there was no taxable value to the benefit), and secondly that the law required SARS to assess the tax in the hands of the employees and not to recover it by way of PAYE from the employer.
The employer appealed against the decision of the Tax Court, which had found for the Commissioner on both issues. However the High Court pointed out that success on either of the grounds of appeal would effectively dispose of the matter in the company's favour.
The Court first dealt with the issue of who is liable for the tax. The judgement dealt with the remedies that are available to SARS in relation first to the valuation of fringe benefits, and secondly to the collection of PAYE where this has been under paid.
Taxable value of fringe benefits
The Seventh Schedule to the Income Tax Act deals with the determination of the taxable value of fringe benefits, and contains provisions which enabled SARS to question and adjust the determination by an employer of the taxable value of a fringe benefit. In terms of Paragraph 3(2), SARS has the power to redetermine the taxable value of a fringe benefit if the employer's determination appears to be incorrect upon the assessment of the employee to whom the taxable benefit has been granted. Paragraph 17(4) includes a remedy that entitles SARS to penalise the employer in such circumstances, by imposing a penalty equal to 10% of the amount by which the fringe benefit was under-declared.
Calculate and deduct PAYE
The Fourth Schedule to the Income Tax Act deals with the responsibility of employers to calculate and deduct PAYE from the remuneration of employees and pay the amounts so deducted over to SARS. Paragraph 12(1)empowers SARS to estimate the amount of PAYE that should have been paid where an employer fails to furnish a return, if SARS is not satisfied with the return furnished, if the employer has failed to deduct PAYE or failed to make payment of any amount deducted. In such circumstances, the employer is liable to make payment of the amount so estimated.
Provision is also made for the payment of a penalty in such circumstances equal to 10% of the PAYE that was not correctly paid. The representative for SARS argued that the law gave SARS the option as to which of the provisions should be applied, and that SARS had acted correctly in electing to use the remedy provided under the Fourth Schedule.
The company, on the other hand contended that the procedure that should have been followed was for SARS to make a redetermination when assessing the employees and to collect the tax from the employees.
The Court, in a technical analysis, came to the decision that the structure of the Income Tax Act requires that an ‘amount’ be determined and included in a taxpayer's income. In particular Paragraph (i) of the definition of ‘gross income’ requires the quantification of the value of fringe benefits in terms of the Seventh Schedule. The amount so quantified would then form part of the employee's remuneration upon which PAYE is calculated.
Value of a fringe benefit
Where the value of a fringe benefitis under-estimated, the Seventh Schedule provides a remedy if SARS considers the value to be inadequate. On the other hand, the Fourth Schedule provides for remedies in relation to failures to report or pay PAYE in respect of remuneration, but not for the determination of the amount of the remuneration. The Court therefore allowed the appeal, holding, in effect, that the remedy available to SARS was to adjust the assessments in respect of the individual employees.
While the Court was mindful of the additional administrative effort that this would entail, it was not for the Court to make new law, but for the lawmaker to enact the necessary law to provide for the remedy that SARS sought to apply. In the circumstances the PAYE assessment was declared invalid, and it was unnecessary to determine whether the fringe benefit value had been correctly determined.
It is to be expected that the matter will be taken on appeal to the Supreme Court of Appeal as it involves an important area of administrative effectiveness for SARS. In addition, it is likely that next year's tax amendments will include provisions to overcome the problems that have resulted from this judgement. In the meantime, employers who are in dispute with SARS over the value of employee fringe benefits should consider the application of this judgement in relation to their disputes.
This article first appeared in PricewaterhouseCoopers’ in-house tax bulletin, "Synopsis”
Source: By PricewaterhouseCoopers (Taxbreaks)