Many employees receive a cell phone allowance in some form or other as part of their employment remuneration package. Despite these employment benefits being relatively common, some employers and employees still run into unexpected tax consequences.
Esther van Schalkwyk, Senior Tax Consultant at BDO South Africa unpacks some of the important aspects of cell phone allowances and highlights the value of proper tax planning.
Cell phone allowances or the use of employer-provided cell phones
may constitute taxable fringe benefits which are included in the employees taxable income and form part of the remuneration for purposes of employees withholding tax. Employers are required to withhold and timeously pay to SARS employees tax based on an employees remuneration (including taxable fringe benefits) and failure to pay the appropriate amount of employees tax to SARS may result in penalties and interest being levied against the employer over and above the amount of employees tax outstanding. A belated attempt by employers to recover accumulated employees tax from employees may cause widespread staff dissatisfaction and should be avoided, warns van Schalkwyk.
Employees often receive company cell phones which may be owned or leased by the employer. Two distinct taxable benefits may arise, namely the employees right to use an asset for private or domestic purposes and the employees use of free or cheap services at the employers cost for private or domestic purposes. The provision of free or cheap services arises where an employee uses a telecommunication network at the employers cost (for example call charges or data downloads).
The taxable benefit of the right to use an asset is the value of the private use less any consideration payable by the employee for the use, or any amount spent by the employee on repairs and maintenance, says van Schalkwyk. Where the asset is leased by the employer, the value of the private use is the rental payable by the employer for the period of use. Where the asset is owned by the employer, the value of the private use is 15% per year of the lesser of the cost or the market value of the asset when the employee obtained use of the asset.
However, there are exceptions to this rule advises van Schalkwyk. Where the private use is incidental to the business use, the value of private use is nil. If the employee is granted the sole right of use over the assets useful life or a major (meaning more than 50%) portion thereof, the value of private use is the cost of the asset to the employer, and this benefit accrues to the employee on the date on which the employee is first granted the right to use the asset.
According to van Schalkwyk, a notable exception is available where the asset consists of telephone or computer equipment which the employee uses mainly (meaning more than 50%) for the purposes of the employers business. In this case no value is placed on the private use and no taxable benefit arises.
Employers are advised to document the terms of use for company cell phones in a formal policy document which is consistently implemented. If it can be shown that the employee uses the cell phone to perform the particular job and the employee is required to use the cell phone mainly for the purposes of the employers business, SARS will generally accept that no value be placed on the private use.
The taxable benefit of the use of free or cheap services (such as Whatsapp, Viber, Facetime) is the cost to the employer for the services, less any consideration payable by the employee. The taxable benefit is limited to the portion attributable to the private use. A similar exception is available as above in that if the services are used mainly (meaning more than 50%) for the employers business purposes, no value is placed on the private use and no taxable benefit arises. If a telecommunication service (such as data downloads on Whatsapp or viewing Youtube) is provided to employees for enjoyment solely at their place of work, no value is likewise placed on the private use.
Van Schalkwyk advises that instead of a company cell phone, employees may be compensated for using their own cell phones in conducting their employers business affairs. In these circumstances employees will typically receive a cell phone allowance or a reimbursement for actual business expenditure incurred on behalf of the employer.
Reimbursements for expenditure incurred by employees on the instruction of their employer for business purposes should not be included in the employees taxable income or be subject to employees tax. The employee will be required to prove to the employer that the expenditure was in fact incurred for business purposes as instructed – this can be achieved by way of itemised billing statements. Reimbursements of private expenditure will be subject to taxation in the employees hands and be subject to the withholding of employees tax.
A predetermined cell phone allowance that is not linked to actual business expenditure should be included in the employees taxable income and be subject to the withholding of employees tax, says van Schalkwyk. Such allowances generally form part of the employees taxable income without any deductions or reductions.
It is evident that cell phone allowances can take a variety of forms and in each case it is important to determine whether a taxable fringe benefit arises. In the case of the use of a company cell phone or a telecommunication service, no taxable benefit will arise if the cell phone or service was used mainly for the employers business purposes. Van Schalkwyk concludes by saying that it is advisable that the terms of use for company cell phones and telecommunications services be properly documented in an employment policy document and consistently applied. Reimbursements for actual proven business expenditure are not taxable whereas predetermined cell phone allowances are generally fully taxable and subject to employees withholding tax.
The structuring of employee fringe benefits can have far reaching tax consequences and should be done in consultation with a tax advisor.