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