As an employer you know that giving your employees cell phones is a fringe benefit. And SARS expects you and/or your employee to declare income tax and/or Vat on this fringe benefit.
But often, it's confusing as to when this fringe benefit attracts Vat and when it attracts income tax. And, the method you're using to structure the fringe benefit, may not be the most efficient tax structure for you or your employee.
Today I'm going to clear this up for you. Read on for three ways you can deal with staff making business calls on cell phones and their tax consequences so you can structure this fringe benefit in the most tax efficient way...
1. You pay your employee a fixed cell phone allowance
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If you do this, it's a taxable benefit and it's subject to employees' tax. You, as the employer, can't claim any input tax on the allowance. But you can claim the amount of the allowance as an income tax deduction.
This is very tax inefficient, there's no input tax claimable. But the advantage is there's no paperwork!
2. You reimburse your employee for the business calls he makes
SARS won't tax your employee for the money you pay him back.
You, as the employer, can claim the Vat on the business calls as input tax. And on the Vat-exclusive amount as an income tax deduction. To work out how much input tax you can claim, multiply the cost of the business call x 14/114.
But you must keep the employee's cell phone account or a copy of it. This is more tax efficient, but there's a lots of paperwork. And remember, you can only claim input tax claimable on business calls.
If you don't keep the records and SARS asks for them, it will deny your input tax claim!
Read on for my recommended way to structure this fringe benefit…
3. You supply your employee with a company cell phone
This method applies if you give your employee a company cell phone to use mainly
for business calls. So for instance, more than 50% of all calls he makes are for business.
In this instance, his personal calls (which must be less than 50% of all calls made) aren't taxed as a fringe benefit (para6(4) of the 7th Schedule to the Income Tax Act
This is the most tax efficient method to use. You can claim all the Vat on the account as input tax. There's no paperwork, but there's a risk of abuse.
So you get all your input tax and your employee gets the tax-free use of your company cell phone.
But because this method could be open to abuse, I'd advise you to enter into a written agreement with him about the use of the cell phone.
State that he must use the cell phone mainly
for business calls. If he doesn't do so, or if he goes above a fixed amount, he must pay you back the excess. Then, make sure you account for output tax by applying the 14/114 tax fraction on the amount he pays you, and declare income tax on the Vat-exclusive amount.
Well there you have it. Now you know how to structure fringe benefits on cell phones so you save money.
There are 11 other taxable fringe benefits, you can take advantage of too. Find out what they are here…