Fringe Benefits: Chapter 2 – Collection of Income Tax on Fringe Benefits

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Chapter 2 – Collection of Income Tax on Fringe Benefits

INTEGRATION WITH FSS

The value of different fringe benefits is determined in accordance with the valuation guidelines in this booklet. These valuations will determine the ‘salary value’ of the fringe benefits which will be taxed in the same way as ordinary income through the Final Settlement System (FSS).

Employers are responsible for reporting the value of fringe benefits provided by them or by associated companies. The disclosure of fringe benefits provided by third parties (e.g. tips) over which the employer has no control is the sole responsibility of the employee.

DETERMINING THE FSS DEDUCTION

Currently FSS tax deductions are made from cash payments. With the inclusion of fringe benefits the taxable emoluments will include a cash portion and a non-cash portion. FSS deductions will be applied on the total taxable emoluments but deducted from the cash portion. For obvious reasons tax cannot be withheld from payments in kind.

The steps involved are:

  • determine the fringe benefit value for the pay period in accordance with these guidelines;
  • add the fringe benefit value for that pay period to the salary and wages earned in that pay period;
  • calculate the FSS tax deductions by reference to the gross (fringe benefit value plus salary/wages) amount and
  • deduct the FSS tax deduction from the cash portion.

50% RULE

There is currently a rule under the FSS provisions that limits the amount of tax that can be deducted from a pay packet to 50% of the total emoluments made in that period. This limitation will now apply to the cash portion of the emoluments, so that the maximum deduction is now 50% of the cash portion of the emoluments for the period.

RECORDS TO BE KEPT BY EMPLOYERS

Employers must keep records that show how the valuation of the fringe benefit/s was determined as the Commissioner of Inland Revenue may request to view such records on demand. To assist employers the Inland Revenue Department has drawn up a template that shows the information that must be retained by employers. This template is for demonstrative purposes only and the format given need not be strictly adhered to as long as all the information shown on the template is retained and made available to the Department on request. Employees may request to be supplied with the information contained therein. (Refer to Appendix A – Form FB1 – Personal History Sheet on Each Individual).

Fringe benefits can be:

Continuing as in the case of a company car, a boat, a residence, a chauffeur, a loan etc.

One-offs as in the case of transfer of assets, airline tickets, discounts, utility bills etc.

Employers must make this distinction to ensure they retain adequate records to substantiate the tax treatment of fringe benefits. For example, the value of a car or a boat will not vary through the year unless they are changed during the year. It is therefore expected that records will be retained to show how a continuing fringe benefit was initially determined and valuation criteria applied and how one-off fringe benefits were determined and valued, including the source documents used to substantiate the valuations.

CHANGES TO EXISTING REPORTING SYSTEMS

The following changes need to be effected to existing systems:

  • The introduction of the three categories of fringe benefits against employee records.
  • Changes to the calculation of FSS to extend the ‘taxable emoluments’ amount and limit the effect of the 50%rule to the ‘cash portion of emoluments’.
  • Changes to the FS3, FS5 & FS7 to report the values of fringe benefits. Examples of the changed forms are shown in Appendix A.
  • Changes to the electronic lodgement layout to include the categorised value of fringe benefits.
  • Changes to the payslip to print the value of fringe benefits.

Employers are obliged to identify the value of fringe benefits into separate categories on the FS3 and to identify the gross (less any non-taxable part of car cash allowances) value of fringe benefits on the FS5 and the FS7. The categorised value of fringe benefits is the value of fringe benefits paid under Categories 1, 2 and 3.

Employers are also obliged to show on the employee pay slip the gross value of the fringe benefits taken into account in calculating the FSS deduction. There is no obligation to separately identify the value of the fringe benefits by category on the pay slip. The table below summarises these reporting requirements.

Form ‘Cash’ earnings excluding fringe benefits Fringe Benefits Including car cash allowances FSS Deductions on Salary + Fringe Benefits
Gross Categorised
Employee Payslip ✔ ✔ ✘ ✔
FS3 ✔ ✘ ✔ ✔
FS5 ✔ ✔ ✘ ✔
FS7 ✔ ✔ ✘ ✔

The actual tax on the value of fringe benefits need not be identified and therefore is not reported separately.

As with all tax matters, all fringe benefits calculations and tax paid are to be supported by comprehensive records and fiscal receipts/tax invoices which may be inspected by the Department periodically.

RECORDS TO BE KEPT FOR COMPANY CARS

Employers need to keep specific records of all owned, hired or leased cars irrespective of whether they are used to provide fringe benefits to their employees. A list of all such cars must be kept and is to be submitted to the Commissioner of Inland Revenue when so requested.

The records must show the following information:

  • description of each vehicle: registration number, make and model,
  • year of first registration in Malta,
  • in the case of second hand cars brought from overseas the year of first registration outside Malta,
  • car value when new inclusive of all taxes and licences and to which must be added back any discounts obtained.This must be supported by relative invoices/documents. In the case of second hand cars brought from overseas, the value when new will be determined according to the Price Lists issued by the Commissioner of Inland Revenue,
  • name of beneficiary, indicating also whether he is a salesman or support person,
  • address and description of place where vehicle is garaged (if car is garaged/kept overnight by employer), and
  • whether owned by the employer or leased or hired.

REQUEST FOR FURTHER INFORMATION

The Commissioner may request from an employer or company a full list of all vehicles and other assets, movable and immovable, used by the employer/company whether owned directly by the employer/company or leased or hired, irrespective of whether the same vehicles and other assets are being used for fringe benefit purposes.

ELECTRONIC LODGEMENT

Changes necessary to electronic lodgement formats of FSS data are shown at Appendix B.