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.
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.
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