Written by Andre van Wyk
Background
The granting of fringe benefits that are detailed in the Seventh Schedule to the Income Tax Act by a vendor to an employee or director is deemed to be a taxable supply for VAT purposes in terms of section 18(3).
The VAT Act
Section 16(3) of the VAT Act determines that output tax must be accounted for in the tax period to which it is attributable.
Section 16(4) of the VAT Act determines that as a general rule, output tax is attributable to the tax period in which the time of supply takes place.
Section 18(3) of the VAT Act imposes VAT on the supply of taxable fringe benefits as envisaged in the Seventh Schedule to the VAT Act, to the extent that the taxable benefit consists of a supply of goods or services.
Section 18(3) of the VAT Act also determines that the section will not apply in respect of any advantage or benefit to the extent that it is:
- An exempt supply in terms of section 12 of the VAT Act, for example the supply of financial services, residential accommodation, the supply of transport of fare-paying passengers.
- A zero-rated supply in terms of section 11 of the VAT Act, for example the buying of overseas air tickets or the supply of zero-rated foodstuffs.
- The supply of entertainment, for example wine and biltong baskets.
Section 9(7) of the VAT Act determines that where a supply of fringe benefits for income tax purposes is deemed to be a taxable supply of goods or services for VAT purposes, the supply is deemed to be made in the tax period in which the fringe benefit is deemed to be made to the employee in terms of the Seventh Schedule to the Income Tax Act (i.e. the output tax is attributed to such tax period).
Application of the principles
It must also be noted that certain fringe benefits that are subject to PAYE are not deemed supplies for VAT purposes as they are excluded in paragraph (i) of the gross income definition. Examples of that would be the allowances in terms of section 8(1) of the Income Tax Act, for example travel allowances, entertainment allowances and subsistence allowances.
Typical examples of fringe benefits that could be subject to VAT would include assets given to an employee, free or cheap services, the right of use of an asset, the right of use of a company car, and the release of an employee from a debt owed to his employer. (This will not be classified as an exempt supply as it is not the issue of a debt security.)
Typical examples of fringe benefits that will not be subject to VAT would include payment of a debt of an employee, contributions paid by the employer to medical aid, low-interest loans, the supply of residential accommodation and share option gains.
The cash equivalent of the benefit for normal income tax purposes will be seen as total consideration in respect of the deemed taxable supply of the fringe benefit. So, for example, if the cash equivalent is equal to R1,250, the output VAT will be 15/115 x R1,250 = R163.04 in the tax period in which the benefit accrued. It must be noted that if the vendor has a VAT apportionment ratio, then the output VAT will be apportioned accordingly if it was incurred in mixed-use cost centres or departments. For example, in the above example, if the vendor has a VAT ratio of 80%, the output VAT to be declared will only be 80% x R163.04 = R130.43.
Different rules apply when determining the VAT on the fringe benefit arising from the right of use of a company car.
In the case where the vendor is not entitled to an input VAT deduction on the company car, in other words where it is classified as a “motor car” and not a “motor vehicle”, for example a passenger vehicle, then the consideration in money per month is equal to 0.3% of the determined value of the motor car.
Where the vendor was entitled to an input VAT deduction on the motor vehicle, for example, a single cab bakkie, then the consideration in money per month is equal to 0.6% of the determined value of the motor vehicle.
It must be noted that VAT is excluded from the calculation of the determined value in terms of the 0.3% and the 0.6%. A reduction of R85 per month is allowed in the instance where the employee bears the full cost of the maintenance of the vehicle from the money consideration. A deduction of the money consideration is also allowed where the employee pays for the right of use of the vehicle. The employer must declare output VAT on the money received.
Example
A VAT vendor buys a single cab bakkie for R350,000 including VAT. The vendor grants an employee the right of use of the bakkie. The employee pays R1,100 (including VAT) for the right of use of the bakkie. The VAT payable on the fringe benefit will be as follows:
Determined value (calculated at excl. VAT) R304,347.82
0.6% R18,260.86
Less consideration paid for right of use (incl. VAT) (R1,100.00)
Consideration in money R17,160.86
VAT on fringe benefit 15/115 x R17,160.86 R2,238.37 per month
