Dear Reader,

This bulletin’s a little different. We’ve had a number of queries around the use of a company cell phone. So we’ve decided to share a query with you, and our expert’s response.

From his response, you’ll learn about the 3 different ways to structure (and tax) the company cell phone perk. And you’ll find out which method is the most cost and tax effective. Check which method your business is using:

It may be costing you more than you think…

Question:
We’ve a number of staff who use their private cell phones for business. We’ve changed our employment contracts, so that each employee has to choose between a cell phone allowance (which is taxable), or a reimbursive amount (not taxable). The actual amounts are the same either way.

Where an employee opts for the reimbursive method, he’s given a maximum amount (e.g. R100 per month based on the estimated business usage). He must submit his cell phone account, and the due amount must be equal to, or more than, the allowance allocated to him. If the cost of his business calls exceeds this allowance amount, then we reimburse him for this cost.

In most cases, the reimbursive amount is the same every month, because the employees aren’t claiming more than the maximum allowances allocated to them. And from what I’ve read, any reimbursement amount that’s fixed at a monthly rate, is a taxable allowance. Is this the case?
Is our reimbursement method acceptable to SARS, given that we don’t ask for actual call details (just bill totals, to check against the claimable amounts)?

Answer from our expert:
There are three ways of dealing with staff making business calls with cell phones, and they’ll have very different tax results for you and your employees.

1. If you pay an employee a fixed cell phone allowance it’s treated as a taxable benefit subject to employees’ tax. You (as the employer) can’t claim any input tax on the allowance, but only the amount of the allowance as an income tax deduction. This is very tax inefficient.

2. If you don’t pay the employee a fixed allowance, but reimburse him business calls he’s made on his private cell phone, he’s not taxed on the reimbursement. You (as the employer) can claim the Vat (cost of call x 14/114) on the calls as input tax, and the Vat exclusive amount as an income tax deduction. You must keep the employee's cell phone account, or a copy of it. This is more tax efficient.

3. If you supply an employee with a company cell phone, and he mainly uses it (50%+) for business calls, you can claim all the Vat on the account as input tax, the balance as an income tax deduction, and it’s not taxed as a fringe benefit (para 6(4) of the 7th Schedule to the Income Tax Act). This is the most tax efficient.

This final method is most beneficial to the employee, who gets the free use of a company cell phone, but isn’t taxed on it. You and your employee should enter into a written agreement for the use of the cell phone. And to yourself, you should state that the employee must use the cell phone mainly for business calls. If private calls exceed the lesser of business calls or a fixed amount, the employee must reimburse you for the excess. You must account for output tax and income tax on any reimbursement.

Hopefully, these tips go a long way to helping you cut back on taxes!

Until next week
Fulvia Becatti

Managing Editor, Practical Tax handbook & Practical Vat Handbook