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Do you understand how to use the 3.5% rule for taxable fringe benefits?

by , 23 June 2014
Employees love it when you give them benefits. It generally saves them a huge amount of money when you consider the tax they pay on it is often so minor in comparison to the cost if they paid for the product or service themselves.

Your employees won't be so happy though if you get their tax wrong. And it's easy to over tax a fringe benefit if you're not sure of the basics.

So, to keep your employees happy and your tax correct, today we're explaining the 3.5% rule for taxable fringe benefits.

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3.5% is the golden number when it comes to taxable fringe benefits

It doesn't matter what taxable fringe benefit you give your employee, their tax will always be 3.5% of the full value of the company benefit. 
So let's say, for example, you let your employee use the company car. It's value is R150 000, the tax he'll pay each month is 3.5% of R150 000. So each month he'll pay R5 250.00 tax on the car.
That's the golden rule. But there's something you must remember when you apply it...

It's all about the CURRENT VALUE of the taxable fringe benefits

When you bought the company car it was R150 000. But let's say it's two years later and the car's value has depreciated. 
The depreciation is normally a 15% decrease each year. This means the car's value is now R108 375. That's now the value you must calculate your employee's tax on. 
So remember your employee's benefit tax must be on the benefit's current value. You should do a valuation on the benefit each year to ensure you're taxing your employee correctly. This will ensure they never pay more tax than they should. 
With this to rule in mind you can get your employees' taxable fringe benefits right every single time. 
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