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Do you know when SARS will charge your employee tax if you pay off his debt?

by , 13 August 2014
In this tough economy, it isn't surprising that most of your employees are in debt. To buy anything big, you need to take out credit to afford it.

Now you may feel a desire to help your employees out in these situations. This kind of generosity is extremely useful to employees as it can help them escape from vicious lenders that want their money back.

But there are situations when this kind act will still cost your employee in tax.

So before you decide to help, know when SARS will tax your employee for your good dead...

 

SARS will charge your employee tax on your good dead if you don't ask him to pay you back

 
If you pay off your employee's debt to a third party and don't ask him to pay you back (making you the new lender he owes). he must pay fringe benefit tax on this employee benefit. 
 
The amount of tax your employee will pay on this benefit is 3.5% of the total amount of debt you paid off. This means, if you pay off your employee's debt of R23 000, he must pay 3.5% of that amount or R805. 
 
The reduction in their debt will be a huge benefit to your employee, but he won't always have to pay this tax. Let me explain...
 
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Here's when your employee won't pay tax on this benefit

 
If you ask your employee to repay you (do this in writing so you can prove it) and he doesn't for five years, you've basically released your employee from his obligation to pay you back. 
 
In this case, your employee won't pay any fringe benefit tax. However, you must prove you tried to recover the debt from your employee and that it wasn't just a way to give him a tax-free benefit.
 
There you have it. While we'd never suggest you cheat the system to give your employee a bit of tax-free debt rescue, you need to know the tax consequence of these actions.
 


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