Page 614 - SAIT Compendium 2016 Volume2

IN 71 Income Tax acT: InTeRPReTaTIon noTes IN 71
Example 1 – Valuation of the bene t
Facts:
Y has worked for ABB Limited for an initial unbroken period of 15 years. ABB Limited bought Y an air-conditioner at a cost of R7 000 in the 2013 year of assessment as a reward for long service.
Result:
The value to be placed on the asset granted to Y as a reward for long service must be reduced by R5 000. The difference of R2 000 (R7 000 – R5 000) is included in the employee’s gross income and remuneration which is subject to employees’ tax.
Example 2 – Cash and Krugerrands awarded as recognition for long service
Facts:
ABC Pty Ltd (ABC) awarded an employee, A, a Krugerrand and a R7 000 cash bonus in recognition of 45 years’ service with the company. ABC paid R15 000 for the Krugerrand. The award was given to A at the annual company dinner held in December 2012. A was not required to contribute any amount towards the cost of the award. A did not receive any long service awards before this award.
Result:
The cash bonus is speci cally excluded from paragraph 2 (a) as it constitutes ‘money’. However, it will be included in gross income1 and is subject to employees’ tax. The value of the Krugerrand is equal to the cost of the coin to ABC (it is movable property which ABC purchased speci cally to give to A) less the R5 000 long service award reduction (the lesser of R5 000 and cost, as cost exceeds R5 000). A was not required to give consideration for the award. Accordingly, the cash equivalent of the taxable bene t which must be included in A’s gross income is R10 000 [(R15 000 – R5 000) – R0]. Total amount included in gross income is R7 000 (cash) and R10 000 (Krugerrand).
The phrase ‘unbroken period of service’ is not de ned. SARS interprets it to mean continuous employment with a single employer without a lawful termination of the employment contract by either party. Having regard to the de nitions of ‘employer’ and ‘employee’ in paragraph 1, transfers between employers who are ‘associated institutions’, as de ned in paragraph 1, will not qualify as an unbroken period of service. However, should an event take place when continuous service is deemed to occur under law,* this will constitute an unbroken period of service.
4.4 Consideration
Employers generally place a limit on the value of an asset awarded. However, employers sometimes permit an employee to select an asset which costs more than the given limit, provided that the employee pays the difference between the purchase price and what the employer had intended to spend. The value of the taxable bene t is then calculated as the full cost of the asset less the contribution by the employee, reduced by the lesser of R5 000 or the cost to the employer of all assets awarded to the employee for long service during the year of assessment (as discussed in 4.3 above).
4.5 Gift vouchers
Employers often award gift vouchers to employees in recognition of long service. This gives employees greater choice in selecting an asset of their preference. A gift voucher is a form of property and represents a right to acquire goods or services from a merchant. It is thus regarded as an asset for purposes of paragraph 2 (a). Accordingly, gift vouchers granted by employers to employees in recognition of long service fall within the scope of paragraph 2 (a) and qualify for a reduction in the value of the asset provided the length-of-service requirements discussed in 4.3 have been satis ed.
* For example, transfers under section 197 of the Labour Relations Act, 1995.
606 saIT comPendIum oF Tax LegIsLaTIon VoLume 2