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 firstname.lastname@example.org or 7181 5836. This article is of a general nature and is not meant to address particular matters of any person.
The world in which we live is a criminally unequal one. In his iconic 1945 allegorical novella, Animal Farm, a satire on the facetiousness of the then Soviet Empire’s crackbrained experiment with a command economy, the legendary George Orwell in my view hit the nail squarely on the head when he said all animals were equal but some animals were more equal than others.
That’s the never-ending dichotomy of the so-called First World and its polar opposite, the so-called Third World as Orwell’s cleverly-couched diatribe applies as much to the tread-of-the-mill laissez faire economics of our day as it did to Marxist-Leninist Russia a generation back.
Even as the Nation of Israeli braced to militarily take possession of the Promised Land, General, its top three senior citizens, namely Moses, Aaron, and Miriam, were not destined to share in this god-conferred bequest. All three died before the lottery was won.
Financial Reporting (Amendment) Bill, 2020 and Accountants (Amendment) Bill, 2020 were expeditiously passed by parliament on Thursday.
What are these two Bills really about? The Bills are essentially about professional values that are applicable to auditors and accountants in their practice. The Bills seeks to basically enhance existing laws to ensure more uprightness, fairness, professional proficiency, due care, expertise and or professional technical standards.
The Financial Reporting Act, 2010 (FRA) establishes the Botswana Accountancy Oversight Authority (BAOA), as the country’s independent regulator of the accounting and auditing profession. BAOA is responsible for the oversight and registration of audit firms and certified auditors of public interest entities.
In the same vein, there is the Accountants Act, 2010 establishing the Botswana Institute of Chartered Accountants (BICA) which is responsible for the registration and regulation of the accounting and auditing profession. This consequently infers that some auditors have to register first with BICA as certified auditors, and also with BAOA as certified auditors of public bodies. So, the Bills sought to avert the duplication.
According to Minister Matsheka, the duplication of efforts in the regulation of auditors, which is done by both BICA and BAOA, creates a substantial gap on oversight of certified auditors in Botswana, as the two entities have different review procedures. He contends that the enforcement of sanctions becomes problematic and, thus, leads to offenders going Scot-Free, and audit quality standards also continue to plunge.
The Financial Reporting (Amendment) Bill, 2020, in the view of the Minister, brings the oversight and regulation of all auditors in Botswana under the jurisdiction of the Accountancy Oversight Authority and that Bringing all auditors within one roof, under the supervision of BAOA would therefore reinforce their oversight and significantly enhance accountability.
He also pointed that the Bill broadens the current mandate of the Authority by redefining public interest entities to include public bodies, defined as boards, tribunals, commissions, councils, committees, other body corporate or unincorporated established under any enactment.
This covers any company in which government has an equity shareholding. In order to enable the process of instituting fitting sanctions against violation of its provisions, the Bill clearly lays down acts and lapses that constitute professional misconduct.
This Bill further strengthens the sanctions for breach of the Act by public interest entities, officers, firms, and certified auditors. Reinforcing the law with respect to such sanctions will act as an effective deterrent for breach of the Act.
The Accountants Bill also strengthens the current mandate of the Institute by making it obligatory for those who provide accountancy services in Botswana to register with the Institute, and for all employers to hire accountants who are registered with the Institute.
The Minister reasons that in line with the spirit of citizen empowerment, this Bill proposes reservation of at least 50% of the Council membership for citizens. This, he says, is to empower citizens and ensure that citizenries play an active role in the affairs of the Institute, and ultimately in the development of the accounting profession in Botswana.
The Bills come at a point when Botswana’s financial sector is in a quagmire. The country has been blacklisted by the European Union. Its international rankings on Corruption Perception Index have slightly reduced. According to recent reports by Afro Barometer survey, perceptions of corruption in the public service have soured and so is mistrust in public institutions.
Rating agencies, Standard Poor’s and Moody’s have downgraded Botswana, albeit slightly. The reasons are that there continues to be corruption, fiscal and revenue crimes such as money laundering and general unethical governance in the country. There are still loopholes in many laws despite the enactments and amendments of more than thirty laws in the last two years.
One of the most critical aspect of enhancing transparency and accountability and general good governance, is to have a strong auditing and accounting systems. Therefore, such professions must be properly regulated to ensure that public monies are protected against white color crime. It is well known that some audit firms are highly unprincipled.
They are responsible for tax avoidance and tax evasions of some major companies. Some are responsible for fraud that has been committed. They are more loyal to money paid by clients than to ethical professional standards. They shield clients against accountability. Some companies and parastatals have collapsed or have been ruined financially despite complementary reports by auditors.
In some cases, we have seen audit firms auditing parastatals several times to almost becoming resident auditors. This is bad practice which is undesirable. Some auditors who were appointed liquidators of big companies have committee heinous crimes of corruption, imprudent management, fraud and outright recklessness without serious consequences.
There is also a need to protect whistleblowers as they have been victimized for blowing the whistle on impropriety. In fact, in some cases, audit firms have exonerated culprits who are usually corrupt corporate executives.
The accounting and auditing professions have been dominated by foreigners for a very long time. Most major auditing firms used by state entities and big private sector companies are owned by foreigners. There has to be a deliberate plan to have Batswana in this profession.
While there are many Batswana who are accountants, less are chartered accountants. There must be deliberate steps to wrestle the profession from foreigners by making citizens to be chartered. It is also important to strengthen the Auditor General. The office is created by the constitution.
The security of tenure is clearly secured in the constitution. However, this security of tenure was undermined by the appointing authority in many instances whereby the Auditor General was appointed on a short-term contract. The office is part of the civil service and is not independent at all.
The Auditor General is placed, in terms of scale, at Permanent Secretary level and is looked at as a peer by others who think they can’t be instructed by their equivalent to comply. Some have failed to submit books of accounts for audits, e.g. for special funds without fear or respect of the office. There is need to relook this office by making it more independent and place it higher than Permanent Secretaries.