It is very often the case that a company extends an interest free or low interest loan to a director. This manifests either as a true incentive or benefit to that director (mostly the case in larger corporate environments) or in a small business environment in lieu of salaries paid. The latter is especially the case for example where a spouse or family trust would hold the shares in the company running the family business, but which business is conducted through the efforts of the individual to whom a loan is granted from time to time.
In terms of the Seventh Schedule to the Income Tax Act a director of a company is also considered an “employee”. This is significant, since directors can therefore also be bound by the fringe benefit tax regime applicable to employees generally. Paragraph (i) of the definition of “gross income” in the Income Tax Act specifically includes as an amount subject to income tax “the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit granted in respect of employment or to the holder of any office” Clearly, benefits received by a director of a company would therefore rank for taxation in terms of this provision.
The question remains therefore whether loans provided to such directors by the companies where they serve in this capacity would amount to such a taxable benefit, and further how such benefit should be quantified. Paragraph 2(f) of the Seventh Schedule is unequivocal in its approach that a taxable fringe benefit exists where a debt has been incurred by the employee [read director], whether in favour of the employer or in favour of any other person by arrangement with the employer or any associated institution in relation to the employer, and either-
(i) No interest is payable by the employee in respect of such debt; or
(ii) Interest is payable by the employee in respect thereof at a rate of lower than the official rate of interest…”
Paragraph 11 in turn seeks to quantify the amount of the taxable fringe benefit to be included in the gross income of the director. Essentially, the taxable fringe benefit would be equal to so much of interest that would have been payable on the loan at the prime interest rate less 2.5%, less any interest actually paid on the loan. The benefit therefore does not only arise on interest-free loans, but also on loans carrying interest at less than the prescribed interest rate.
It is necessary to note that a fringe benefit otherwise arising will not be a taxable benefit if the loan amount is less than R3, 000, or if it is provided to the director to further his/her studies.