Fringe Benefits: Chapter 5 – Valuation of Category 2 Fringe Benefits

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Chapter 5 – Valuation of Category 2 Fringe Benefits

Category 2 – Use of Assets, Accommodation and Related Costs

Category 2 fringe benefits relate to the provision to an employee of assets that are owned, leased or hired by the employer, company or partnership, including living quarters, furniture, boats, aeroplanes, machinery etc. Any cost directly connected to such provision is deemed to form part of the relevant fringe benefit.

The provision of computers, other related equipment and internet connection services are specifically excluded from constituting a fringe benefit.

VALUATION

The annual value of a Category 2 fringe benefit is determined as follows:

  • In the case of immovable property owned by the person providing the benefit, the fringe benefit value is 5% of the higher of the market value or the original cost. The 5% applies not only to accommodation but also to other immovable property such as garages, offices, stores, fields, boathouses etc.
  • Where the owner leases property to the employee or director a fringe benefit will also arise if the rent agreed upon is less than 5% of the market value or the original cost of the relevant property whichever is the higher. The fringe benefit value will then be the resulting amount less the agreed rent.
  • As in other cases, records must be kept by the employer regarding any payments/reimbursements made by the employee.
  • In the case of property/accommodation rented from an unrelated third party the value of the fringe benefit is the actual rent paid by the employer.
  • For benefits falling under this category arising out of the use of assets other than immovable property, the value of the benefit will be equal to 12% of the higher of the original cost or the market value. After six (6) years of ownership, the original cost for valuation purposes will be reduced by 40%.

Special provisions are being made in the case of shareholders (or directors who are also shareholders) where the use of company assets is presumed to arise as a direct result of their ‘ownership’ rights and not by virtue of employment or office. These provisions will allow either for the outright transfer of the asset in question from the company to the individual shareholder under certain conditions or for the transfer of the asset to a special ‘non-trading’ subsidiary company where the presumption of a fringe benefit does not arise.

In the case of immovable property the benefit is deemed to be provided on the date of the first occupation by the beneficiary, while in the case of movable assets the benefit is deemed to be provided when it is first made available to the beneficiary. In any case the benefit continues for as long as the asset is available to the beneficiary.

FURTHER COSTS

Costs that increase the value of the property/asset permanently

Any expenditure, met by the employer, that increases the value of the relevant property or asset permanently, such as improvements and additions, will effectively increase both the original cost and the market value. An example would be when an extension is added to an existing building or an existing old building is converted or reconstructed, or when a yacht is equipped with extra berths, engines or other accessories. In such cases, a new valuation of the relevant property/asset must be made and the value of the fringe benefit re-calculated accordingly.

Ordinary costs incurred in the normal maintenance or use of the property/asset

Any expenditure, met by the employer, connected with the normal use of the asset but which does not increase the value permanently (e.g. water, electricity, domestic services, redecoration, repairs of any kind, professional fees, insurance etc.) also constitutes a fringe benefit. Such expenditure is taxed fully in the year it is incurred and the relative cost must be added to the value of the fringe benefit for that year.

INSURANCE COVER OVER PROPERTY USED TO PROVIDE A FRINGE BENEFIT

The cost incurred by an employer or a company with respect to the insurance over property provided by means of a public deed as security for that company’s liabilities is not considered to be a further cost when the same property is used to provide a fringe benefit and should therefore not figure in the calculation of the fringe benefit.

DEDUCTIONS

The value of the benefit is reduced by any rent paid by the employee and by any payments made by the employee by way of reimbursement of bills or other expenditure connected with the use of the asset to the extent that the value of such payments were taken into account when calculating the value of the fringe benefit.

MARKET VALUE

The market value is estimated on the basis of the price which the asset might reasonably be expected to fetch in the open market at the time when it is first made available. In the case of immovable property the valuation is made of the free and unencumbered ownership of the property assuming vacant possession. In those cases where an asset was made available before 2001 the market value is that obtaining as at 1 January 2001.

Persons to whom this rule applies are advised to ask for a valuation of the asset by an expert valuer as on the applicable date in order to be able to estimate the value of their fringe benefit. The Commissioner of Inland Revenue may appoint his own experts to obtain an estimate of the market value. When the department’s valuation exceeds the value on which the employer has determined the value of the fringe benefit and the difference is more than 15% of the department’s valuation, the value of the fringe benefit will be deemed to have been under- declared. When the difference is 15% or less the declared value will be accepted.

THE COST

The original cost of immovable property owned by the employer is the price paid or payable for the acquisition of the ownership of that property, subject to the special rules applicable to property held on emphyteusis.

ACCOMMODATION NOT CONSTITUTING A FRINGE BENEFIT

Accommodation in immovable property does not constitute a fringe benefit if:

  • the relevant property is considered an official residence allocated by a public authority or an institution of a public nature in virtue of a public office; or
  • the accommodation is allocated temporarily on account of special security measures; or
  • the employee is bound in terms of his contract of service to reside in accommodation provided by the employer for the better performance of his duties and it is customary for employers to provide such accommodation in connection with such or similar duties – this rule does not apply to accommodation provided to a director/ officer of a company or a partnership

Example A

An employer makes an ‘owned’ property available to an employee for the tax year 2001.

The property is valued by a certified appraiser at 1st January 2001 who estimates the market value at Lm85,000. In addition, the employer pays bills to the value of Lm1300 whilst the employee reimburses bills paid to the value of Lm500 out of the Lm1300.

Step 1 Calculate annual benefit value5% of market value = (5% of 85,000)= Lm4,250 Step 2 Add expenditure made by employer= Lm4,250 + (Lm1,300 -Lm
500)= Lm4,250 + Lm 800= Lm5,050

In this example the employee’s annual salary is ‘inflated’ by Lm5,050 (i.e. Lm420.83 per month) before making FSS deductions.

Example B

An employer rents a property for Lm600 per month which he puts at the disposal of a director. In addition, the employer pays bills to the value of Lm2,500.

The director makes no payments in relation to the property.

Step 1 Calculate the yearly rental value= Lm600 X 12 = Lm7,200 Step 2 Add expenditure made by employer= Lm7,200 + Lm2,500= Lm9,700

In this example the director’s annual salary is ‘inflated’ by Lm9,700 (i.e. Lm808.33 per month) before making FSS deductions.

Example C

An employer makes available the use of a boat owned by the company to one of its directors and his family.

The boat was purchased in 1987 for Lm20,000. In addition the employer also pays the sum of Lm800 towards servicing and upkeep, whilst the director pays Lm300 towards the cost of fuel.

The boat is valued on 1 January 2001 by a marine surveyor who determines the market value at Lm8,500.

Step 1 Calculate annual benefit value:Since the boat has been in the ownership of the employer for more than 6 years, the original cost is reduced by 40% which is equal to Lm20,000 X 60% = Lm12,000= 12% of greater of 12,000 and 8,500

= 12% of 12,000

= 1,440

 Step 2 Add other expenditure made by Employer= (1,440 from Step 1) + 800= 2,240

Note that the Lm300 paid by the director for fuel is a private expense directly incurred by him for which he was not reimbursed by the employer and should not figure in the calculation of the fringe benefit.

In this example the director’s annual salary is ‘inflated’ by Lm2,240 (i.e. Lm186.66 per month) before making FSS

deductions.

GROUND RENTS

When property is held by the employer on emphyteusis the value of the fringe benefit will be established on the same basis as if it were owned by him and the annual fringe benefit value will accordingly be 5% of the market value or the original cost, whichever is the higher. The market value in such a case will be the market value of the full ownership, disregarding the emphyteutical grant.

The cost of property is the premium, if any, paid or payable in accordance with the deed of emphyteusis increased by twenty times the ground rent payable for the year for which the value is being determined. This applies both to perpetual and temporary emphyteuses.