Tax-Free Company Transport – How to Benefit from This Provision

It is a daily struggle for millions of South Africans to get to and from their places of employment. With the aim of dealing with this challenge, many organisations have deemed it necessary to provide transport for their employees.
 
South African Revenue Services (SARS), in recognition of this necessity, introduced Paragraph 10(2)(b) of the Seventh Schedule to the Income Tax Act to provide this service at “no value” for tax purposes.
The wording of the provision and how it is put into practice can be confusing, particularly in cases where an employer does not provide the transport service directly but has contracted the service to a third party. This article briefly discusses the complexities and outlines the requirements an employer must meet, to enjoy the full benefit of this provision.
 
What it Means
 
SARS has issued a binding general ruling (BGR 50) that demystifies the related tax law.
 
In essence, BGR 50 states that in normal circumstances a taxable benefit arises when an employer provides any service to an employee for his or her private or domestic purposes at the expense of the employer.
 
However, with this provision, the taxable benefit will attract “no value” if the employer meets the criteria stipulated when providing the transport to its employees to and from work.
 
What are the Requirements?

  • The transport service is rendered directly by the employer;
  • Where the transport service is not rendered directly by the employer, for instance in cases where the service has been contracted to a third party, such as a transport service provider, the employer must make the conditions under which the transport services are provided clear, namely:
    • The transport service is provided exclusively to employees along predetermined routes;
    • The employees may not request the transport service on an ad hoc basis; and
    • The contract for transportation is between the employer and the service provider and the employee may not be party to such a contract.

Situations that fall outside the provision
 
In instances, where employers reimburse or pay employees for the use of public transport or the purchase of bus tickets for example, this “no value” provision will not apply because the transport service provider does not have a direct contract with the employer. Such reimbursements or payments will constitute a taxable fringe benefit in the hands of the employees.
 
Will it work practically?
 
The use of this provision is encouraged in instances where all the employees are situated in the same geographic area, and the area is reasonably close to the place of employment. Alternatively, it has been suggested that employers make use of this provision, by transporting employees from their places of employment to specific drop-off areas, for example a bus depot, taxi rank or train station.

For more information, contact Lynn Alaraju or your nearest Moore Stephens office.