Tax Alert: Tax Advice could be Conceived as a Taxable Fringe Benefit

In a recent Supreme Court of Appeal case, BMW South Africa (Pty) Ltd v Commissioner for the South African Revenue Service (No. 1156/2018), the court unanimously ruled that services provided by professional tax advisors to expatriate employees (“employees”) of BMW South Africa (“BMW”) constituted taxable fringe benefits in the hands of the employees, on which PAYE should have been withheld.
The facts of the matter, in short, are that BMW procured the services of professional tax advisors to ensure that certain employees, who are all expatriates, comply with the applicable South African Tax Legislation. During a PAYE audit of BMW, the South African Revenue Service (“SARS”) re-assessed BMW and concluded that the services rendered by the professional tax advisors constituted a taxable fringe benefit for the employees per the definition of “gross income” of section 1(1) of the Income Tax Act No.58 of 1962 (“the Act”), read in conjunction with paragraph 2(e) or 2(h) of the Seventh Schedule to the Act.
BMW contended that the employees did not have a choice whether or not they wanted to receive the services from the professional tax advisors. They contended further that the services were procured by BMW in order to provide assurance to BMW (i.e. to the benefit of BMW) with respect to BMW’s tax-compliance responsibilities. Nonetheless, the court ruled in favour of SARS and confirmed the revised assessments issued by SARS.
Following this judgement, it is established that if an employer has procured professional tax advice for his/her employees, a taxable fringe benefit arises in the hands of the employee, which must be included in the employee’s tax assessment for the year in which the services were received by the employee. As always - the devil is in the detail. Had the contracts been worded differently in order to link the benefit of the service to the employer instead of the employee, the ruling may have been in the taxpayer’s favour.
It is common cause for South African taxpayers, especially large international groups, to contract expatriates for special projects or fulfil critically skilled positions. These taxpayers (employer and employee) are at risk, if the employer procured the services of professional tax advisors to assist these employees with their tax compliance and did not include the value of the services as a taxable fringe benefit in those employees’ tax assessments.
If you believe you may be at risk of non-compliance, please contact your nearest Moore Office to obtain professional tax advice.