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Interest-free loans trigger employees’ tax

JONATHAN HORE

Most of us may be aware that PAYE is a tax that is charged on the remuneration that is earned by employees. Remuneration, for tax purposes, includes both cash payments and non-cash benefits that are enjoyed by employees under an employer-employee arrangement. In today’s article, I want to discuss the tax that arises when employees receive interest-free loans or loans on which low interest is charged. In this article words importing the masculine shall be deemed to include the feminine.

WHAT ARE NON-CASH BENEFITS?

An employee gets paid remuneration usually in the form of cash items such as salary, wages, commission and allowances. These are typically monetary rewards which can be transferred into the employee’s bank account and they can access the cash. However, there are instances where employees enjoy what the Income Tax Act (Act) refers to as ‘advantages’ which simply means that the employees are better off due to an arrangement that has been put in place by the employer.

In other words, if we took 2 employees of the same employer and one employee is granted an interest-free loan whilst the other is not, the one who receives the loan has an advantage over the other. The advantage comes in the form of a non-monetary endowment accorded by the employer, being an interest-free loan. You may know that there is no business which operates to advance interest-free loans to clients and this is the reason why employees who get interest-free loans are taxed.

Other non-monetary benefits include free or subsidised housing, private motoring and holiday benefits. Let me stress that whenever the term ‘benefit’ is used, it technically refers to instances where employees receive non-monetary advantages from their employers. It is also crucial to state that if a benefit arises from a third party not linked to the employer, no benefit arises. This means that if an employer uses his relationship with a bank to get a discounted rate for employees when they independently apply for loans, no benefit is taxed as the employees obtain the loans from the bank and not the employer.

TAX ON LOAN BENEFITS

Employees are taxed on the advantage that they enjoy on an interest-free loan or a loan on which interest less than that prescribed by Bank of Botswana is charged. Currently, the Bank of Botswana’s (BOB) prescribed rate is 5%, which is the rate as at 1 July 2018. Therefore, if an employer grants an interest-free loan to an employee, that employee enjoys an advantage which is subject to PAYE. The advantage is the difference between the BOB rate and whatever the employer charges the employee.

For example, if an employer advances an interest-free loan of P200 000 to an employee, the annual benefit to that employee would be (5% less 0%) x P200 000 which is P 10 000. But let me be upfront and state that the P10 000 is an annual benefit and if the loan is more than 12months, then the monthly benefit would be P 10 000 over 12months, which gives a monthly taxable benefit of P 833. The Act prescribes that the P 833 is to be added to the employee’s salary and other remuneration and the total is then subjected to PAYE. If an employees is charged interest of say 1.5%, then the benefit would be (5%-1.5%) x P 200 000, which is P 7 000 per annum or P 583 per month.

ADVANCE vs. LOAN

You may know that most employers grant salary advances to their employees, which are basically salaries paid before they become due. Technically, the salary advance is not taxed as it is not earned by the employee at the time it is paid to him and it has to be repaid to the employer. Different employers have different periods under which salary advances are granted; some get repaid over 3months and some are over 12months.

This brings us to the big question which seeks to establish at what point a salary advance changes to be a loan. This question is very common as there is no guidance from the taxman regarding this matter. What is currently happening in practice is that different employers apply what they believe to be reasonable, i.e. some treat any advance which is repayable over 6months as a loan whilst some start at 12months etc.

WHAT IF NO PAYE IS DEDUCTED?

It can happen that some employers may grant employees loans which result in taxable advantages but still not deduct PAYE as prescribed by the Act. If that is the case, the taxman goes after the employer for it is the employer’s responsibility to deduct PAYE. If the employer does not deduct PAYE, any penalties that may arise are charged on the employer. But don’t celebrate yet if your employer is not complying with the Act as the employer is empowered to deduct the tax from you after he gets slapped with a tax bill by the taxman. You better give this article to your employer if they are not deducting PAYE from interest-free loans; otherwise both of you may be in big mathata!

Well folks, I hope that was insightful. As Yours Truly says goodbye, remember to pay to Caesar what belongs to him. If you want to join our Tax Whatsapp group, send me a text on the cell number below. Jonathan Hore writes on behalf of Aupracon Tax Specialists and feedback can be relayed to jhore@aupracontax.co.bw or 7181 5836. This article is of a general nature and is not meant to address particular matters of any person.

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DIS Parley Committee selection disingenuous 

25th November 2020

Intelligence and Security Service Act, which is a law that establishes the Directorate of Intelligence and Security Service (DIS), provides for establishment of a Parliamentary Committee. Recently, the President announced nine names of Members of Parliament he had appointed to the Committee.

This announcement was preceded by a meeting the President held with the Speaker and the Leader of Opposition. Following the announcement of Committee MPs by the President, the opposition, through its leader, made it clear that it will not participate in the Committee unless certain conditions that would ensure effective oversight are met. The opposition acted on the non-participation threat through resignation of its three MPs from the Committee.

The Act at Section 38 provides for the establishment of the Committee to examine the expenditure, administration and policy of the Directorate. The law provides that the Parliamentary Committee shall have the same powers and privileges set out under the National Assembly (Powers and Privileges) Act.

On composition, the Committee shall consist of nine members who shall not be members of Cabinet and its quorum shall be five members.  The MPs in the Committee elect a chairperson from among their number at their first meeting.

The Members of the Committee are appointed by the President after consultation with the Speaker of the National Assembly and Leader of the Opposition in the National Assembly. It is the provision of the law that the Committee, relative to its size, reflect the numerical strengths of the political parties represented in the National Assembly.

The Act provides that that a member of the Committee holds office for the duration of the Parliament in which he or she is appointed.  The Committee is mandated to make an annual report on the discharge of their functions to the President and may at any time report to him or her on any matter relating to the discharge of those functions.

The Minister responsible for intelligence and security is obliged to lay before the National Assembly a copy of each annual report made by the Committee together with a statement as to whether any matter has been excluded from that copy in pursuance of the provision of the Act.

If it appears to the Minister, after consultation with the Parliamentary Committee, that the publication of any matter in a report would be prejudicial to the continued discharge of the functions of the Directorate, the Minister may exclude that matter from the copy of the report as laid before the National Assembly.

So, what are the specific demands of the Opposition and why are they not participating in the Committee? What should happen as a way forward? The Opposition demanded that there be a forensic audit of the Directorate. The DIS has never been audited since it was set up in 2008, more than a decade ago.

The institution has been a law unto itself for a longtime, feared by all oversight bodies. The Auditor General, who had no security of tenure, could not audit the DIS. The Directorate’s personnel, especially at a high level, have been implicated in corruption.  Some of its operatives are in courts of law defending corruption charges preferred against them. Some of the corruption cases which appeared in the media have not made it to the courts.

The DIS has been accused of non-accountability and unethical practices as well as of being a burden on the fiscus.  So, the Opposition demanded, from the President, a forensic audit for the purpose of cleaning up the DIS.  They demand a start from a clean slate.

The second demand by the Opposition is that the law be reviewed to ensure greater accountability of the DIS to Parliament. What are some of the issues that the opposition think should be reviewed? The contention is that the executive cannot appoint a Committee of Parliament to scrutinize an executive institution.

Already, it is argued, Parliament is less independent and it is dominated by the executive. It is contended that the Committee should be established by the Standing Orders and be appointed by a Select Committee of Parliament. There is also an argument that the Committee should report to Parliament and not to the President and that the Minister should not have any role in the Committee.

Democratic and Parliamentary oversight of the intelligence is relatively a new phenomenon across the World. Even developed democracies are still grappling with some of these issues. However, there are acceptable standards or what might be called international best practices which have evolved over the past two or so decades.

In the UK for instance, MPs of the Intelligence and Security Committee are appointed by the Houses of Parliament, having been nominated by the Prime Minister in consultation with the Leader of the Opposition. This is a good balancing exercise of involvement of both the executive and the legislature. Consultation is taken for granted in Botswana context in the sense that it has been reduced to just informing the Leader of Opposition without much regard to his or her ideas; they are never taken seriously.

Furthermore, the current Committee in the UK has four Members of the ruling party and five MPs from the opposition. It is a fairly balanced Committee in terms of Parliamentary representation. However, as said above, the President of Botswana appointed six ruling party MPs and three from the opposition.

The imbalance is preposterous and more pronounced with clear intentions of getting the executive way through the ruling party representatives in the Committee. The intention to avoid scrutiny is clear from the numbers of the ruling party MPs in the Committee.

There is also an international standard of removing sensitive parts which may harm national security from the report before it is tabled in the legislature. The previous and current reluctance of the executive arms to open up on Defence and Security matters emanate from this very reason of preserving and protecting national security.

But national security should be balanced with public interest and other democratic principles. The decision to expunge certain information which may be prejudicial to national security should not be an arbitrary and exclusive decision of the executive but a collective decision of a well fairly balanced Committee in consultation with the Speaker and the minister responsible.

There is no doubt that the DIS has been a rogue institution. The reluctance by the President to commit to democratic-parliamentary oversight reforms presupposes a lack of commitment to democratization. The President has no interest in seeing a reformed DIS with effective oversight of the agency.

He is insincere. This is because the President loathes the idea losing an iota of power and sharing it with any other democratic institution. He sees the agency as his power lever to sustain his stay in the high office. He thought he could sanitize himself with an ineffective DIS Committee that would dance to his tune.

The non-participation of the opposition MPs renders the Committee dysfunctional; it cannot function as this would be unlawful. Participation of the opposition is a legal requirement. Even if it can meet, it would lack legitimacy; it cannot be taken seriously. The President should therefore act on the oversight demands and reform the DIS if he is to be taken seriously.

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The Maccabean Uprising

25th November 2020
Jewish freedom fighters

 Jews drive away occupying power under the command of guerrilla leader Judas Maccabees but only just

Although it was the Desolation Sacrilege act, General Atiku, that officially sparked the Maccabean revolt, it in truth simply stoked the fires of an already simmering revolution. How so General?

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Atomic (CON)Fusion

25th November 2020

For years I have trained people about paradigm shifts – those light-bulb-switch-on moments – where there is a seismic change from the usual way of thinking about something to a newer, better way. 

I like to refer to them as ‘aha’ moments because of the sudden understanding of something which was previously incomprehensible. However,  the topic of today’s article is the complete antithesis of ‘aha’.  Though I’d love to tell you I’d had a ‘eureka ‘, ‘problem solved’ moment, I am faced with the complete opposite – an ‘oh-no’ moment or Lost Leader Syndrome.

No matter how well prepared or capable a leader is. they often find themselves facing perplexing events, confounding information, or puzzling situations. Confused by developments of which they can’t make sense and by challenges that they don’t know how to solve they become confused, sometimes lost and completely clueless about what to do.

I am told by Jentz and Murphy (JM) in ‘What leaders do when they don’t know what to do’ that this is normal, and that rapid change is making confusion a defining feature of management in the 21st century.  Now doesn’t that sound like the story of 2020 summed up in a single sentence?

The basic premise of their writing is that “confusion is not a weakness to be ashamed of but a regular and inevitable condition of leadership. By learning to embrace their confusion, managers are able to set in motion a constructive process for addressing baffling issues.

In fact, confusion turns out to be a fruitful environment in which the best managers thrive by using the instability around them to open up better lines of communication, test their old assumptions and values against changing realities, and develop more creative approaches to problem solving.”

The problem with this ideology however is that it doesn’t help my overwhelming feelings of fear and panic which is exacerbated by a tape playing on a loop in my head saying  ‘you’re supposed to know what to do, do something’. My angst is compounded by annoying motivational phrases also unhelpfully playing in my head like.

  • Nothing happens until something moves
  • The secret of getting ahead is getting started

and

  • Act or be acted upon

All these platitudes are urging me to pull something out of the bag, but I know that this is a trap. This need to forge ahead is nothing but a coping mechanism and disguise. Instead of owning the fact that I haven’t got a foggy about what to do, part of me worries that I’ll lose authority if I acknowledge that I can’t provide direction – I’m supposed to know the answers, I’m the MD!  This feeling of not being in control is common for managers in ‘oh no’ situations and as a result they often start reflexively and unilaterally attempting to impose quick fixes to restore equilibrium because, lets be honest, sometimes we find it hard to resist hiding our confusion.

To admit that I am lost in an “Oh, No!” moment opens the door not only to the fear of losing authority but also to a plethora of other troubling emotions and thoughts:  *Shame and loss of face: “You’ll look like a fool!” * Panic and loss of control: “You’ve let this get out of hand!” * Incompetence and incapacitation: “You don’t know what you’re doing!”

As if by saying “I’m at a loss here” is tantamount to declaring “I am not fit to lead.” Of course the real problem for me and any other leader is if they don’t admit when they are disoriented, it sends a signal to others in the organisation stating it’s not cool to be lost and that, by its very nature encourages them to hide.  What’s the saying about ‘a real man never asks for direction. ..so they end up driving around in circles’.

As managers we need to embrace the confusion, show vulnerability (remember that’s not a bad word) and accept that leadership is not about pretending to have all the answers but about having the courage to search with others to discover a solution.

JM point out that “being confused, however, does not mean being incapacitated.  Indeed, one of the most liberating truths of leadership is that confusion is not quicksand from which to escape but rather the potter’s clay of leadership – the very stuff with which managers can work.”

2020 has certainly been a year to remember and all indications are that the confusion which has characterised this year will still follow us into the New Year, thereby making confusion a defining characteristic of the new normal and how managers need to manage. Our competence as leaders will then surely be measured not only by ‘what I know’ but increasingly by ‘how I behave when I accept, I don’t know, lose my sense of direction and become confused.

.I guess the message for all organizational cultures going forward is that sticking with the belief that we need all-knowing, omni-competent executives will cost them dearly and send a message to managers that it is better to hide their confusion than to address it openly and constructively.

Take comfort in these wise words ‘Confusion is a word we have invented for an order not yet understood’!

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