Tuesday, 13 July 2010

Tricky tax aspects of companies' World Cup gifts

It was indicated in the previous column that soccer jerseys, tickets and other soccer-related paraphernalia made available by an employer to an employee, for no consideration, would attract fringe benefits tax, according to the seventh schedule to the Income Tax Act, 1962.

However, on the day before the opening ceremony of the 2010 Soccer World Cup the South African Revenue Service (SARS) released a media statement advising that draft legislation would be introduced proposing a limited exemption in respect of World Cup clothing, other goods or match tickets supplied by an employer to its employees.

The government has decided that where employers make World Cup clothing, related goods or match tickets available to employees and the value does not exceed R750, no tax will arise.

It must be questioned why the amendment was only announced on June l0 although SA was awarded the hosting of the World Cup during 2004.

It must be noted that when the employer provides World Cup clothing and tickets to employees with a value in excess of R750, that excess will remain subject to fringe benefits tax and the employer is legally required to deduct and withhold employees tax (PAYE) therefrom according to the provisions of the fourth schedule to the act.

Failure to comply with the provisions of the fourth schedule can give rise to the employer facing a 10% late payment penalty, interest at the prescribed rate and, possibly additional tax of up to 200% of the PAYE that should have been paid to SARS.

It must be remembered that the provisions of the seventh schedule are aimed at subjecting amounts of remuneration paid by an employer to an employee for services rendered to tax. Paragraph l0 of the seventh schedule prescribes the manner in which the cash equivalent of the value of any taxable benefit derived from the rendering of a service by an employer to any employee, as contemplated in paragraph 2(e) of the seventh schedule to the act.

Paragraph 10 contains specific rules regarding the manner in which the cash equivalent should be determined when the employer is engaged in the travel industry and makes tickets available to an employee. When the employer procures or renders other services to an employee it is necessary to take account of the cost incurred by the employer in rendering those services or having those services rendered to the employee less any consideration paid by the employee in respect of those services.

Therefore, where, for example, the employer acquires match tickets, soccer jerseys and related items at a cost of R2 000 it would appear that the excess over the exempt amount of R750 will be subjected to employees' tax . Clearly, where the cost incurred by the employer in procuring match tickets and related items does not exceed R750 no employees’ tax will arise.

When a business decides to purchase World Cup tickets and invites clients or customers to join staff members at the soccer matches, no fringe benefits tax should arise. Further, the company or business incurring such expenditure should be entitled to claim the expense as a deduction for tax purposes under the provisions contained in section 11(a) on the basis that such expense is in the nature of marketing.

In the SARS Press release issued on June 10 relating to the proposed amendment it was indicated that the 2010 Soccer World Cup is an important event for SA and its people for nation-building, and seeks to relieve employers of the obligation to deduct PAYE on World Cup T-shirts and jerseys made available by employers to employees to wear, particularly on what has become known in SA as Football Friday. Employers encouraged employees to show their support for SA’s hosting of the World Cup by wearing T-shirts or soccer jerseys supporting the national team on Fridays.

It remains to be seen when the legislation will be enacted, as Parliament will only resume its proceedings after the World Cup Tournament is completed.

Businesses acquiring match tickets and related soccer paraphernalia also need to consider the value-added tax (VAT) consequences relating to the expenditure incurred.

Those businesses that are registered for VAT purposes are usually entitled to recover amounts of VAT incurred on the purchase of goods and services utilised in the carrying on of their business. The VAT Act, 1991, contains a number of exclusions to the general rule and, particularly, in relation to what constitutes entertainment. Section I of the VAT Act defines entertainment as "the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him".

Section 17(2) of the VAT Act prohibits a business from recovering any VAT incurred in respect of goods or services acquired that constitute entertainment as defined in the VAT Act.

Therefore, where an employer acquires match tickets or hosts a function for clients and staff to observe the soccer matches, the VAT incurred on beverages and food will not be recoverable under the VAT system. This is no different to VAT incurred on meals provided by an employer to its employees for no consideration.

Insofar as the purchase of soccer jerseys and T-shirts are concerned the employer will acquire those items in order to make those available to employees for no consideration. It is debatable whether the employer will be entitled to recover the VAT on the purchase of such items as they are not acquired in order to render taxable supplies directly, but rather to engender nation-building and encourage employees to give of their best at their workplace.

It is important that businesses review the manner in which they have treated the purchase of match tickets, T-shirts and soccer jerseys from both an income tax and VAT point of view to prevent nasty surprises arising in the future when SARS conducts income tax, employees' tax and VAT audits on their affairs.

▪ Dr Beric Croome is a tax executive at ENS. This article first appeared in the July 2010 “Tax Bites” column of the Business Law & Tax Review in the Business Day.

Free image from Clipart

Thursday, 8 July 2010

Take your ‘free’, taxed seats for the soccer

The opening match of the 2010 FIFA World Cup took place at Soccer City on Friday, and the final will take place, at the same stadium, on July 11.

It has been widely reported in the media that the city of Johannesburg and the Mangaung municipalities have splurged more than R8m on World Cup tickets for municipal officials. It was reported that Johannesburg had spent well over R1m on 6 500 World Cup tickets for council members, which appears to go against directives issued by the National Treasury to the various arms of the government, not to incur such expenditure.

My purpose is not to consider the lawfulness or otherwise of such expenditure, but rather to consider the income tax consequences arising where an employer, whether it is a municipality or private sector employer, acquires tickets for the World Cup and makes those tickets available to employees free of consideration. It has been reported that some employers have acquired T-shirts for employees’ use and it is important that employers are aware of the employees’ tax consequences arising out of such gestures.

Left: Enjoy the 2010 Soccer World Cup in South Africa, but beware the tax consequences of your free tickets and free vuvuzelas. (Photo of Bailey Cockerill and Darryl Michaux by Megan Viljoen, Ghana vs Uraguay)

Any employer paying remuneration to an employee is legally required to withhold and deduct Pay-As-You-Earn (PAYE) or employees ’ tax from the amount of remuneration paid by the employer to the employee. This is according to the provisions contained in the fourth schedule to the Income Tax Act.

However, it is not only the cash consideration paid by an employer to an employee that attracts employees’ tax, but also those benefits constituting “taxable benefits” as defined in the seventh schedule. Fringe benefits have been taxed in SA since 1984 in an attempt to ensure that an employee receiving a cash package only pays a similar amount in tax to an employee receiving a mixture of cash and fringe benefits.

Paragraph 2 of the seventh schedule defines what constitutes “taxable benefits”. Such benefits are required to be valued and which will result in the employer facing the obligation to withhold and deduct PAYE from such benefits made available to its employees.

Paragraph 10 of the seventh schedule provides that where an employer renders any service to the employee, the cost thereof, less the consideration paid by the employee therefore, shall be subjected to PAYE. Where an employer procures World Cup tickets and makes those available to employees for no consideration, that will constitute a taxable benefit as envisaged in paragraph 10(1)(b).

The employer is legally required to withhold PAYE from the cost of acquiring the tickets made available to employees. It must be remembered that the failure to withhold PAYE on benefits made available to employees constitutes an offence under the act. Further, the employer always remains liable to pay the tax that should otherwise have been deducted and, in addition thereto, a late payment penalty of 10% of the tax payable on the benefit made available to the employee and which was not subjected to tax, interest on the unpaid tax.

Furthermore, the South African Revenue Service (SARS) is empowered to levy additional tax of up to twice the PAYE that should have been levied on the fringe benefits made available to employees.

Therefore, where an employer fails to comply with their statutory obligations to subject remuneration or, indeed, any fringe benefits to PAYE as required, they stand exposed to substantial financial consequences, including prosecution.

It must be pointed out that where an employer acquires, for example, soccer jerseys or T-shirts and makes those available to employees for no consideration, the cost thereof will constitute a fully taxable fringe benefit, which is subject to PAYE. Once again, the failure to deduct PAYE in such circumstances, will result in the employer facing the above adverse consequences.

Where an employer incurs the cost of transporting employees to another city to attend a match, the costs relating thereto will constitute a taxable fringe benefit from which PAYE is required to be deducted.

Should the employer decide to absorb the tax liability on behalf of the employees, on the basis that it does not wish to put its employees in a disadvantageous position, the settlement of the tax obligation by the employer for its employees is, itself, a taxable fringe benefit.

In such cases, the employer would need to calculate the tax arising on the settlement of the tax obligation, which becomes a complex calculation because of the nature of the benefit arising and the various iterations that the employer will need to undertake to determine the correct amount of tax payable in such circumstances.

Certain companies have chosen to sponsor the World Cup event and, as a result of that sponsorship, become entitled to various tickets which may, in turn, be made available by the sponsor to its employees. In such a case, it would be necessary to ascertain the cost incurred by the employer to procure the tickets for the World Cup and that amount will fall to be taxed in the hands of the individual employees attending the soccer matches in the country.

Once the World Cup has run its course, SARS will, no doubt, undertake investigations into employers ’ affairs to ensure that tickets made available to staff and related items have been correctly taxed, as was the case with previous tournaments hosted in SA, such as the Rugby World Cup and the Cricket World Cup.

Where, however, a business purchases tickets for the World Cup for purposes of entertaining clients as part of its marketing strategy and allows certain designated employees to accompany company clients to a football match, no fringe benefit should arise. Traditionally, SA has not sought to subject to employees’ tax the personal enjoyment and benefit that may arise from attending a sporting event with a client as is the case with certain other countries.

Further, the cost of acquiring tickets should be deductible for tax purposes on the basis that it is incurred as part and parcel of the company’s marketing strategy, which would be deductible under section 11(a) of the act, that is, the general deduction formula.

It is important, therefore, that where employers have made the decision to facilitate employees’ participation in the historic World Cup event, that the tax consequences are properly dealt with. Failure to comply with the onerous provisions of the fourth schedule to the act exposes the employer to substantial financial penalties, as a result of the non-deduction of PAYE on the cost of tickets made available to employees for no consideration. In addition, employers could fact the risk of a criminal prosecution.

■ This article by Dr Beric Croome  first appeared in the column “Tax Bites” in the June 2010 edition of the Business Law Review of Business Day.