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Fringe benefit tax 101: If you pay a debt on your employee's behalf, he must pay tax

by , 25 June 2014
You pride yourself on the fact that you're an employer who takes care of his employees. You know they're the life-blood of your company, so you're always ready to help yours out.

This even includes saving your employees from their debt. But if you pay your employee's debt and don't ask him to pay you back, SARS will see it as a taxable fringe benefit.

This means your employee will still pay 3.5% on the value...

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12 Taxable fringe benefits - are you taking advantage of all of them?
There are hundreds of companies out there that don't know which fringe benefits are taxable or they land up taxing the wrong percentage on them... 
This kind of error could cost you thousands in penalties to SARS if it catches you out – and it will!

You're employee will pay 3.5% on any taxable fringe benefit

If your employee doesn't pay you back, he'll still have to pay SARS its 3.5%. 
This happens when your employee doesn't pay you back within five years, because it automatically becomes a taxable fringe benefit.
If you've asked your employee to pay you back but he simply hasn't you must prove it wasn't a fringe benefit. 
But if this payment is an employee benefit, here's how you must calculate this 3.5%.

Calculate 3.5% on the debt you paid as a taxable fringe benefit

The rule with fringe benefits is your employee pays 3.5% on the total value of the benefit. According to the Practical Tax Loose Leaf Service, in this case, that value is simply the amount of the debt you settled for your employee. 
For example, if you pay off a R1 000 speeding fine your employee owes, he'll pay tax of 3.5% of R1 000, or R35 in tax on this company benefit. The bigger the debt, the higher the tax will be.
So before you decide to just help your employees out, inform them of the fringe benefit tax they'll need to pay. 
PS: You can avoid 200% tax penalty

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