Salary sacrifice schemes are popular in practice. Typically, they involve employers paying a decreased salary to their employees, with an added fringe benefit to make up for the lost ‘cost to company’ sacrificed by the employee to obtain the benefit. For example, an employee may prefer to enter into a salary sacrifice with his/her employer in exchange for being allowed to use an employer-provided motor vehicle or accommodation.
From both the employer and employee’s perspective, the income tax and PAYE consequences linked thereto are very often unchanged. The decreased salary paid by the employer is deductible for income tax purposes as well as such expenditure incurred to provide the benefit to the employee, whilst the employee is subject to income tax on both the decreased cash amount received as a salary as well as the fringe benefit provided by the employer. The employer is also liable to withhold PAYE as calculated on the total remuneration paid to the employee (which would include both the decreased salary amount as well as the fringe benefit provided). (See the Seventh Schedule to the Income Tax Act, 58 of 1962.)
The salary sacrifice scheme of Anglo Platinum Management Services (Pty) Ltd recently came under scrutiny. After having lost in the Tax Court, Anglo Platinum appealed to the Supreme Court of Appeal (Anglo Platinum Management Services (Pty) Ltd v CSARS  ZASCA 180 (30/11/2015)). In essence, the appeal involved a salary sacrifice scheme implemented by Anglo Platinum whereby it would purchase motor vehicles – selected by its employees – for use by its employees, in exchange for the employees agreeing to a salary sacrifice equal to the value of the benefit. The vehicles would remain the property of Anglo Platinum until enough has been sacrificed by the respective employees to equate to the purchase amount of the vehicles plus interest calculated thereon.
During this period, Anglo Platinum withheld PAYE on both the salaries paid to its employees, as well as the value of the fringe benefit derived by the employees in using Anglo Platinum’s motor vehicles. This is hardly contentious, and SARS did not dispute this treatment. What was in dispute however was whether there really was a salary sacrifice, and whether PAYE should not also have been withheld on the sacrificed amount (and the employees therefore taxed on this amount too). SARS argued that the scheme, although valid, was incorrectly implemented. In essence, so the argument went, the employees were still receiving their full salaries, and amounts withheld from their salaries were in essence payments made to the employer to facilitate funding for the acquisition of the vehicles. SARS cited two main indications in support of this, being that the employees were ostensibly responsible for insurance payments on the vehicles, and that notional accounts with payments, interest and related vehicle expenses were kept: employees would be responsible to pay any shortfall amounts on these accounts, and similarly be entitled to access any credits available on excess amounts withheld.
The Supreme Court of Appeal upheld Anglo Platinum’s appeal, largely based on the evidence of Anglo Platinum’s Mr Broodryk who testified on behalf of the taxpayer and who devised and implemented the scheme. It is clear that the court placed great emphasis on the implementation of the scheme to objectively consider whether the scheme in implementation reflected a true salary sacrifice by employees.
The legal matters in the case are not contentious. At issue is the implementation which is what so often goes awry where tax related advice is concerned. Our clients should take note of this: it is not good enough to have a positive tax opinion as regards a proposed structure or transaction. It is necessary, if not essential, to involve your tax experts in implementation too, be it in salary sacrifice matter, or any other transaction. Had Anglo Platinum not heeded this principle, the judgment by the Supreme Court of Appeal may very well have gone in SARS’ favour.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)