Fringe benefits – Low interest or interest free loans

Paragraph 2(f) of the 7th Schedule prescribes that a taxable benefit shall be deemed to have been
granted if a loan (other than a loan for purposes of paying any consideration by the employer in
respect of a qualifying equity share, the payment of any stamp duties or uncertified securities tax
payable in respect of that share or a loan in respect of which a subsidy is payable to the borrower by
the employer), has been granted to the employee, whether by the employer, by any other person by
arrangement with the employer or any associated institution in relation to the employer.
Value to be placed on the benefit in terms of Paragraph 11 of the 7th Schedule is: The amount of
interest that would have been paid on the loan during the tax year if any interest had been paid at
the official rate, less the amount of interest (if any) actually incurred by the employee. Where an
employer provides loans financed out of his / her own funds to employees, the taxable benefit will
be the amount of interest that the employees would have paid in respect of the tax year, if they
were obliged to pay interest at the official interest rate.
No value shall be placed on the benefit derived in consequence of —– The granting of a casual loan
or loans if the aggregate of such loans do not exceed the sum of R3 000 at any time. The loans
contemplated in this exclusion are short-term loans granted at irregular intervals to employees and
not all loans merely because they are less than R3 000. A taxable benefit would arise if the loans
were granted on a regular basis to all employees or a certain category of employees notwithstanding
the fact that the loan does not exceed R3 000. – The granting of a loan for the purpose of enabling
the employee to further his / her own studies. – If a financial institution such as a bank provides
loans to its employees at the same rate as to the customers of the institution on the same conditions
and under the same circumstances, no taxable benefit will accrue if such customer rate is below the
official interest rate. – If a low interest or interest free loan is provided to a director of a company or
to a member of a close corporation, no taxable benefit will accrue if such loan is, for example,
provided only as a result of the director’s share holding and not in respect of any services rendered.
In such a case, the interest on the loan will not be deductible in the hands of the company or close
corporation.

Deemed loans:
Paragraph 10A of the 7th Schedule makes provision for the benefits granted to employees under a
certain type of housing scheme, to be deemed to constitute a loan. Under this type of scheme, the
employee’s house is acquired by and registered in the name of his / her employer. The employee is
in terms of the agreement with the employer either entitled or obliged to acquire the house, either
on termination of his / her service or after the expiration of a fixed period, at a price stated in such
an agreement. The employee is granted the right to occupy the house and as a consideration in
respect of his / her occupation pays a rental to the employer, which is calculated as a given
percentage of the cost of the house to the employer. This scheme is in effect identical to the
granting by the employer of a low-interest housing loan and is in terms of Paragraph 10A to be
treated as such.
Paragraph 10A of the 7th Schedules also provides that where the employee ultimately purchases the
house from the employer, which will probably be at a price considerably lower than its then market
value, the difference between the market value and the purchase price will not be subject to tax in
the hands of the employee, provided that the purchase price is not lower than the market value of
the house on the date on which the original agreement was concluded between the employer and
the employee.

Deemed interest:
Paragraph 11(5) of the 7th Schedule provides that where a loan obtained by the employee from the
employer is used by the employee to produce income, for example where the employee uses the
money to purchase fixed property from which he / she derives rental income, the cash equivalent of
the taxable benefit which is included in the employees’ taxable income, will be deemed to be
interest actually paid by him / her and will be allowed as a deduction from the income earned.
Accrual of taxable benefit:
A portion of the cash equivalent is, for employees’ tax purposes deemed to have accrued to an
employee where — interest on the loan becomes payable by the employee at regular intervals
during the tax year, on each date during the year on which interest becomes payable; interest on the
loan becomes payable at irregular intervals or where interest is not payable, on the last day of each
period during the year in respect of which any cash remuneration becomes payable to the
employee.
Employees’ tax:
The amount that is subject to employees’ tax is determined by calculating the interest at the official
rate for the portion of the year mentioned above, reduced by the amount and interest (if any)
actually payable by the employee for the portion in question.
An alternative method for the calculating of the cash equivalent for employees’ tax and normal tax
purposes may be used if the Commissioner is satisfied that such method achieves substantially the
same result as the prescribed methods