Follow these tips when you give your employee ah low interest or interest-free loans
First of all, if you give an employee a loan, and either no interest is payable on the loan or interest is payable at a rate lower than the official interest rate, it's a taxable fringe benefit! (Paragraph 11 read with 2(f) of the Seventh Schedule to the Income Tax Act
Note that the value of the benefit is the amount of interest the employee would pay if he has to pay interest at the official rate, less the amount of interest (if any) he actually incurs.
When does the fringe benefit accrue to you, the employee?
This same law states that a portion of the taxable benefit accrues on each date during the year where your employee pays interest on the loan at regular intervals (monthly, weekly, etc.).
If your employee pays interest at irregular intervals, the benefit accrues to him on the last day of each period when the cash remuneration becomes payable.
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Let's look at 3 tax-free examples of loan for your employees:
- Interest-free loan to your employee, not higher than R3 000 at any relevant time
- Loan offered for studies, no interested is charged and there is no taxable fringe benefit
- Loan offered so that the employee buys shares under a broad-based share incentive scheme is tax
free (Section 8B of the Income Tax Act)
Here is a specific example: Your employee is a salesman and earns predominantly commission-based income. He needs a laptop computer for work and his employer gives him an interest-free loan to help him buy the computer.
Amount advance by the employer: R24 000
Monthly repayments by Mr Smooth: R1 000 for 24 months
Taxable fringe benefit included in his remuneration: R2 640 per annum.
When Mr Smooth files his annual tax
return, he can claim a deduction on the R2 640 as interest deemed to have been expended in the production of his commission income.