Fringe Benefits: Chapter 6 – Valuation of Category 3 Fringe Benefits

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Chapter 6 – Valuation of Category 3 Fringe Benefits

Category 3 – Other benefits

Any other benefit not falling under Category 1 or Category 2 is deemed to fall under this category.

Examples of benefits falling under this category include, amongst others, transfers of assets at subsidised prices, low interest rate loans, reimbursement of bills (utilities, school fees etc), and the provision of free or discounted goods and services like e.g. travel, entertainment, insurance, meals, domestic services, professional advice, provision of transport etc.

VALUATION

The value of a Category 3 fringe benefit which is a provision of a good or a service is determined as follows:

In-house property fringe benefits

In-house property is property which consists of goods or services manufactured, produced or processed or otherwise treated by the employer as part of the employer’s business or by an associated company as part of that company’s business. In such cases the value of the fringe benefit is determined as being the difference between the normal selling price of such good or service (less any discounts available to the general public) and the price (if any) at which the good or service is actually provided to the employee.

External property fringe benefits

An external property fringe benefit is any property fringe benefit which is not an in-house property fringe benefit. In such cases, the value of the fringe benefit is equal to either the cost to the employer or the market value, whichever is the higher, of the relevant good or service less the price at which the good/service was awarded to the employee.

Transfer of assets

Where the benefit consists in the transfer of the ownership of an asset, both tangible and intangible (which would normally be a one-off transaction) the value of the fringe benefit would be:

  • the normal selling price of the asset less the price at which the asset was transferred to the employee in the case of an ‘in-house’ property, or
  • the higher of the original cost to the employer or the market value of the relevant asset less the price at which the asset was transferred to the employee in the case of an ‘external’ property.

In all cases any associated costs of transfer must be added to the fringe benefit value.

In the case of a transfer of an ‘external’ movable asset that is more than 6 (six) years old the cost to the employer

is reduced, for valuation purposes only, to 60% of the original cost.

BENEFICIAL LOAN ARRANGEMENTS

The provision of a loan to an employee constitutes a fringe benefit. For this purpose a “Loan” includes any form of credit, including any kind of advance and any amount shown in the employer’s books or records as owed by an employee or director.

Withdrawals made from a current or loan account with a company are either:

  • sums withdrawn by them from the employer as remuneration, or on account of remuneration, in which case FSS deductions should be applied at the time of each withdrawal, (the withdrawal would not be a loan but a normal cash payment of emoluments), or
  • amounts which put the account holder in debt to the company, in which case the value of the benefit is chargeable on the beneficiary as a fringe benefit.

Note: Drawings made by partners on account of the share of their profits of a partnership and accounted for as such are not to be treated as a benefit.

FRINGE BENEFIT VALUE OF LOAN

The amount chargeable to tax is the excess, if any, of:

  • the interest that would have been payable if the borrower had been required to pay interest on the loan at commercial rates, over
  • the amount of interest actually paid by the borrower for the period in question.

At the start of each year the Inland Revenue Department will publish an official loan benchmark rate which will be used throughout the year to determine the fringe benefit value. The Commissioner of Inland Revenue will also have the power to change the rate part way through the year in response to prevailing conditions (e.g. falling interest rates).

For the year starting on the 1st of January 2001 the benchmark rate for loans advanced to employees will be 8.5% per annum.

The benchmark rate for loans advanced by financial institutions to their employees will be 4.5% per annum up to 31 December 2005. Financial institutions are only those institutions that are licensed by the appropriate authorities to lend money to the general public.

SHARE OPTION SCHEMES

Another form of benefit is the right to acquire shares in a company. In terms of typical share option schemes, employees of a company would be given the option to buy or subscribe to shares in the company, or in an associated company, at a given price. The option would be valid for a certain period, and an employee may therefore exercise that option at a time when the value of the shares may have increased.

The grant of an option to acquire shares is not, in itself, a taxable benefit. The company will, however, be treated as providing a taxable fringe benefit if and when the employee exercises the option and acquires shares in the company. The value of the benefit is the excess, if any, of the market value of the shares at the time when the option is exercised over the price paid for those shares by the employee.

The employee may subsequently transfer the shares at a profit. For the purpose of determining the taxable profit in such an event the cost of the shares would not be the price actually paid by the employee but the market value (if higher) established for the purpose of determining the fringe benefit.

Example

In 2001 an individual is granted an option to purchase shares in the company that employs him at Lm1 each in 2006. In 2006 the employee exercises his option by purchasing 1,000 shares at Lm1 each (market value of shares = Lm1.50 each). In 2010 he sells his shares at Lm1.80 each.

According to the regulations the tax treatment of the events involved is as follows:

  • on joining the scheme in 2001(i.e. on being granted the option) the employee suffers no tax – there is no fringe benefit at this point;
  • the exercise of the option in 2006 (i.e. when the employee acquires the shares) will constitute a fringe benefit and a taxable event in terms of article 4(1)(b) – the amount of the fringe benefit will be the difference between the market price of the shares and the option price at the time the option is exercised (Lm1,500 – Lm1,000 = Lm500);
  • the gain on the disposal of the shares in 2010 will constitute a capital gain chargeable under article 5 of the Income Tax Act – calculated on the difference between the sale price of the shares and the market price of the same shares at the time when the option was exercised (Lm1,800 – Lm1,500 = Lm300), that is, the gain excludes the benefit portion (Lm500) which has been taxed already under article 4(1)(b),

REIMBURSEMENTS

Private Expenses

When private expenses of an employee are borne by an employer the employer would be providing a fringe benefit. An employer may cover such private expenses either by paying directly for them or by reimbursing the cost or part of the cost to the employee.

Private expenses include utility bills such as water and electricity bills, school fees, private tuition, scholarships, meals, entertainment, travel etc. In a limited number of cases the benefit is exempt (see Chapter 7 – Exemptions) but otherwise it is taxable as a fringe benefit. The value of this fringe benefit is the amount actually paid or reimbursed plus any other costs directly incurred by the employer.

Reimbursements of costs incurred by the employee on behalf and in the exclusive interest of the employer are not fringe benefits if they are supported by receipts issued in the employer’s name. Whether such costs can be claimed or not as a deduction by the employer depends on the relevant rules of the Income Tax Act on deductions.

Business Travel

The costs of business travel are not a fringe benefit. These include tickets for the journey, accommodation, meals and costs necessary for attending to the business in question. Business travel means travelling for marketing, concluding business transactions, attending business seminars, a temporary posting of an employee outside Malta, and similar purposes. Participation in training courses abroad are exempt subject to the conditions for the exemption on training courses and scholarships referred to below (see Exemptions). When the private element in business travel is minimal and incidental it will be disregarded. But when the private element is substantial, such as when the employee is accompanied by members of his family or the duration of the stay is out of proportion to the business purpose of the journey, it would not be considered as business travel and the full costs will be treated as a private cost.

DISCOUNTED GOODS AND SERVICES PRODUCED BY THE EMPLOYER

As explained earlier a fringe benefit arises when goods and/or services manufactured, produced or processed or otherwise treated by the employer as part of the employer’s business or by an associated company as part of that company’s business are made available to the employee at a discounted price or for free. The first Lm300 worth of such benefits in any calendar year is exempted from tax on fringe benefits if:

  • the beneficiary is not a director or a person in a controlling position; and
  • the employer operates a scheme whereby the employees are entitled to free or discounted goods or services produced or manufactured directly by the employer.

In the case of discounted goods, the value of the fringe benefit is equal to the difference between the selling price of the relevant good or service provided and the actual price paid by the employee to the employer. The selling price means the normal selling price made available to the general public including any discounts that are generally given to the public at large.

When the benefit consists of the provision of airline tickets provided by an employer who is in the airline industry the value of the fringe benefit is the higher of:

  • the actual cost incurred by the employer in providing the benefit, and
  • 20% of the market value of the relevant economy fare ticket.

FREE OR SUBSIDISED MEALS

The provision of free or subsidised meals is not taxable if the meals are provided in any canteen where meals are provided for the staff generally.

This concession does not apply to free or subsidised meals provided by an employer being a hotel or a catering establishment or a similar establishment for its employees in a restaurant or dining room at a time when meals are being served to the public. The concession will still apply if a part of the restaurant or dining area is designated as being for the use of staff only.

In such cases, where the benefit is taxable, the value of the fringe benefit is the actual cost to the employer.

GIFTS

It has already been stated that pure gifts are not taxable. However, the fact that a particular benefit is termed as “gift” or “ex gratia” is not enough to exempt it from tax. If it is for services rendered the gift remains taxable. It is common practice for employers to give employees gifts at Christmas time. A single gift to each employee of, say, a bottle of whisky or perfume will be deemed to be an exempt benefit provided the value of each was modest. However, if some employees were given a range of gifts of which only some were of modest value, eg expensive art works, food hampers and wine, it would be necessary to look at the package of associated benefits rather than each individual item.