23 - 29 November 2000

Income tax on ‘fringe benefits’

By David Kelleher

While many have commented positively on this year’s budget there is a growing feeling among the middle class, especially those at managerial level, that Mr Dalli’s ‘measures’ will negatively affect their income and the amount of salary they actually take home.
As outlined in the budget speech last Monday, Mr Dalli announced that fringe benefits would as from 1 January 2000 be taxed. The details given by the Finance Minister during his speech were unclear as to how the benefits would be taxed, and which benefits would be exempt. He did however lay on the Table of the House an addendum to his speech.
Mr Dalli said that while the law has always ‘taxed’ fringe benefits as these are considered income, the government was now ensuring that legislation will be more strongly enforced come 1 January.
Although this may be fair, these measures directly hit out once again at those who regularly pay their taxes and not the other way round. Fringe benefits have always served as an incentive for workers... the better the benefits, the more efficient and effective the employee will be.
Granted that Mr Dalli must somehow rake in more millions to bring the deficit down to three per cent by 2004, the tax on fringe benefits will only serve to reduce confidence among the middle class workforce. A worker receiving Lm1,000 or less in petrol allowance for his own personal car will now be taxed on 50 per cent of the amount. Those earning above Lm1,000 will be taxed on the value of total benefits minus Lm500.
However, taxation on fringe benefits is more wide-ranging than this, thus the need for a 4,000 word explanation. What is irritating, and local businesses expressed their concerns about this moves is that employees who were granted benefits on the basis that this would compensate for the lower salary will now ask for another increase to make good, somehow, for what they are losing.
While the middle class and middle management are going to suffer the most in terms of added tax and obviously less income, the main targets that should have been tackled have, as one manager told The Malta Business Weekly, “been let off Scot free”.
“What has Mr Dalli done to tax those who are earning five times what they declare. I am here referring to doctors, plumbers and painters. Who is going to check what they are really earning? Whatever fringe benefits I have are being taxed while Mr Plumber can continue charging what he wants, with or without VAT. These people could not be happier. In terms of the Income Tax Act, this already existed but Mr Dalli knows too well where the problem lies. Has he addressed it? No. Instead he has shifted his focus from the working class to the middle class. That is unfair,” he said.
According to estimates provided by an accountant, an average manager with around Lm1,500 in benefits will have to pay around Lm29 more in tax a month. The following are excerpts of the document laid on the Table of the House on Monday, which explain how the value of benefits will be calculated.
In terms of the Income Tax Act all ‘benefits in kind’ are taxable. These ‘fringe benefits’ have a value to the employee, just like a salary or cash benefit.
The new rules apply to all those in employment. In this context employment includes employees, directors and certain other persons in controlling positions as well as those associated with them who benefit from their position.
Fringe Benefits have been categorised under three headings.
Employers must account and report on the value of the fringe benefits under each of these headings. There is no requirement to account for the tax on the fringe benefits under the three headings.

1 – Company Cars
This includes:
• The use of company cars “owned”, “leased” or “hired” by the company and made available to employees for their private use.
• “Cash Allowances” paid to employees in respect of the use of their “own” cars will also be included under this category.
2 – Use of an Asset and Accommodation
The use of an asset owned or leased by the Employer and made available for the private use of the Employee. This excludes the use of Company Cars which fall under Category 1, but includes the private use of residences, boats, aeroplanes, furniture, machinery etc.

3 – Other Benefits and services
These are all other services and benefits provided to the employee. Examples include low interest rate loans, reimbursement of bills (utilities, school fees etc), travel, entertainment, discounted goods, insurance, meals, domestic services, handymen, gardeners, professional advice, chauffeurs etc.
Although the FSS deduction is applied against the gross amount it is still important that the categorised value of fringe benefits be retained and accounted for.

Category I
Use of Company Car
This category of fringe benefit includes the use of any car (or any mechanically propelled road vehicle) made available for private use (this includes travel to and from the place of work).
Cars exclude:
1. a vehicle whose construction is primarily suited for the conveyance of goods or burden of any description, for example a lorry or pick up truck (estate cars and ‘off-road’ recreational vehicles are considered as cars);
2. a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used;
3. motorcycles; and
4. invalid carriages.

Value of Fringe Benefit
The value of this fringe benefit is based on the Annual Car Benefit Value.
For an owned car it is the higher of 17 per cent of the car value (The car value is the list price when new as approved by the Commissioner of Inland Revenue PLUS the value of any accessories fitted) or the actual cost paid for the car. For a leased car it is the actual annual repayment value (including VAT) subject to a minimum of:
• if the car value is less than or equal to Lm12,000 then it is 20 per cent, otherwise
• if the car value is more than Lm12,000 then it is 22 per cent.
If the car is owned by the employer and is older than six years this value is reduced by 40 per cent.

The annual maintenance value
This represents the value of insurance, servicing, licence etc. It is a percentage of the car value:
• if the car value is less than or equal to Lm12,000 it is 3 per cent of the car value;
• if the car value is more than Lm12,000 it is 5 per cent of the car value.

The annual fuel benefit value
This represents the value of fuel where it is paid by the Employer. It is a percentage of the car value:
• if the car value is less than or equal to Lm12,000 it is 3 per cent of the car value;
• if the car value is more than Lm12,000 it is 5 per cent of the car value.
The ‘annual fuel benefit value’ is only payable when the employer pays for fuel.

The Private Use Value
The ‘private use value’ for each car is determined according to the car value in accordance with the table below.
A reduction in the ‘private use value’ may apply if:
• the car value is less than Lm7,000, and
• the car is less than 6 years old, and
• the car is heavily used by a salesman or support person.
In this situation the employer may apply to the Commissioner of Inland Revenue, on the appropriate form, to reduce the private use percentage to 20 per cent.

Cash allowances fringe benefits
In respect of car owned by employee
If a ‘cash allowance’ or ‘petrol allowance’ is granted to an employee for the use of the employee’s own car for business purposes, the allowance paid is understood as having a ‘private use value’ part upon which income tax will be due.
The ‘private use value’ is:
• if the annual cash allowance is Lm1,000 or less it is 50 per cent of the allowance.
• if the annual cash allowance exceeds Lm1,000 it is the cash allowance less Lm500.
This valuation rule only applies when:
• the allowance is specified in a Collective Agreement or in the employee’s Contract of Employment.
• the ‘employee’ is not a director or person in a controlling position
In other cases the entire allowance is fully taxable under normal FSS rules.

Category 2
Use of Assets, Accommodation and Related Costs
Provision of company owned or leased/rented assets including living quarters (including maintenance, domestic bills and other related services), furniture, boats, airplanes, machinery etc. It excludes computers and other related equipment.
This category of fringe benefits includes the use of any accommodation for the employee and their family, where the property is owned or leased/rented/hired by the employer.
The value of a Category 2 fringe benefit is as follows:
• In the case of all benefits in this category other than property/accommodation it is equal to 15 per cent of the higher of the market value of the asset on the 1st of January in the year of use, or its original cost.
• In the case of property/accommodation owned by the employer (or a related entity) it is 7.25 per cent of the higher of the market value or the original cost.
• In the case of property/accommodation rented from a third party it is the actual rent paid by the employer.

Category 3
Any other benefits or facilities
Benefits falling under this category could be classified as any other benefit not falling under Category 1 or Category 2 and that accrue as a result of a position of employment as defined previously.
The basic valuation rule for Category 3 fringe benefits is the actual cost to the employer of providing the relative fringe benefit. Examples of benefits falling under this category include beneficial loan arrangements, provision of entertainment, provision of scholarships, payment of hotel and restaurant bills, paid travel, and others.
An exception is made in the case of “transfer of assets” (which would normally be a one-off transaction) where the value of the fringe benefit would be the higher of the cost to the employer or the market value of the asset plus associated costs of transfer.
Health Insurance and telephony are exempt.