Fringe benefits are a common and often valuable component of employee compensation packages in South Africa. These non-cash perks – such as interest-free loans, long service awards and the right of use of a motor vehicle – can significantly increase an employee’s total remuneration. However, the tax treatment of fringe benefits is frequently misunderstood or misapplied, leading to avoidable errors, audits, and unexpected tax liabilities. Understanding how SARS treats fringe benefits is essential for remaining tax-compliant and avoiding costly penalties.

Interest free staff loans

Many employers offer interest-free or low-interest loans to employees as part of incentive packages or to provide short-term financial relief. While these arrangements may seem straightforward, they carry significant tax implications under the Seventh Schedule of the Income Tax Act. Failure to treat them correctly as fringe benefits can result in non-compliance, penalties, and additional tax liabilities.

According to the Income Tax Act, when an employer provides an interest-free loan or charges interest at a rate below the official rate set by SARS, the employee is deemed to receive a taxable fringe benefit. The value of this benefit is calculated as the difference between the interest charged (if any) and the SARS official rate.

Common mistakes with interest-free loan fringe benefits

• Ignoring the benefit entirely: Many employers and employees mistakenly assume that no tax is applicable if the loan is internal and not from a financial institution. However, SARS treats the benefit as taxable regardless of the loan’s source, provided an employer-employee relationship exists.
• Using incorrect interest rates: Even if interest is charged, if the rate is below the SARS official rate, the difference must be treated as a taxable benefit. Some employers use outdated or arbitrary rates, resulting in underreported fringe benefits.
• Failing to declare the benefit on the IRP5: Employers may omit the benefit from the employee’s IRP5 tax certificate due to oversight or misunderstanding. This omission can trigger SARS verifications and shift the tax burden to the employee.
• Not accounting for multiple loans or rollovers: Employees may receive multiple small loans over time or rolling credit facilities. Each instance must be assessed cumulatively for tax purposes, but this is often ignored in practice.

SARS provides limited exceptions, including:

• Loans not exceeding R3 000 – loans below this threshold are exempt.
• Loans granted for study purposes, provided certain conditions are met (e.g., conversion to a bursary).
• Loans to fund low-cost housing, depending on the value and terms.

Long service awards

Recognising employees for their loyalty and long service is a positive and motivating gesture in any organisation. However, while these tokens of appreciation are well-intentioned, they may carry unexpected tax consequences if not treated correctly under the Seventh Schedule of the Income Tax Act.

According to the Seventh Schedule, a long service award refers to a benefit granted to an employee in respect of long service, where:

• The employee has rendered unbroken service to the employer for at least 15 years, or
• The award is made for every subsequent period of unbroken service of at least 10 years after the initial award.

Common mistakes in practice

• Assuming all long service gifts are tax-free.
• Exceeding the R5 000 value threshold – only the portion exceeding R5 000 is taxable. Employers often incorrectly treat the full value as exempt.

Effective 1 March 2022, paragraph 5(2)(b) of the Seventh Schedule, concerning long service awards, was amended to include a separate proviso. This proviso stipulates that the R5 000 exemption available under paragraph 5 for long service awards must be applied in aggregate with similar exemptions under paragraph 6 (use of assets for long service), paragraph 10 (services rendered for long service), and any cash awards granted for long service. The combined value of all such benefits may not exceed R5 000 in total.

Right of use of a motor vehicle

According to paragraph 7 of the Seventh Schedule to the Income Tax Act, when an employee is granted the right of use of a motor vehicle for private or mixed purposes (i.e. both business and private use), it constitutes a taxable fringe benefit. This benefit must be included in the employee’s remuneration and taxed accordingly via PAYE.

Importantly, the fringe benefit arises even if the vehicle is only partially used for private purposes (e.g. commuting to and from work).

Common mistakes in practice

• Treating the vehicle as a business-only asset: Employers often fail to account for private use of the vehicle – including commuting – and incorrectly assume no fringe benefit arises; however SARS specifically includes commuting as private use, and any such use must be taxed accordingly.
• Not adjusting for business use: SARS allows a reduction in the fringe benefit value if accurate records (such as a logbook) prove business use. However, if no logbook is maintained, no reduction is allowed – yet some employers often still reduce the taxable benefit, risking penalties.

The amount included under paragraph (i) of the gross income definition, in relation to the private use of a motor vehicle (i.e., the taxable benefit), is calculated as the value of the private use less any consideration paid by the employee for the use of the vehicle. Importantly, this consideration excludes any payments made by the employee for licence fees, insurance, maintenance, or fuel, as these are addressed separately under paragraph 7(8) of the Seventh Schedule.

Conclusion

The above-mentioned fringe benefits form part of an employee’s salary package. Accordingly, Pay As You Earn (PAYE) must be deducted and paid over to SARS on a monthly basis, in terms of the Seventh Schedule to the Income Tax Act.

Failure to correctly account for taxable fringe benefits can lead to SARS verifications and the imposition of penalties. Employers are encouraged to regularly review their employee benefit practices to ensure compliance and avoid unnecessary financial exposure.

Should you have any questions relating to fringe benefits, please reach out to your client manager.