The actual loans mentioned above are different from the employer-employee “loans”, where the repayment obligation is conditional rather than unconditional. Under such an agreement (for example. B if a five-year loan is granted on its terms at the end of the employee`s five-year employment with the lending employer and is to be repaid only if the employee terminates within those five years or is terminated for cause), according to the theory that, instead of providing financial support to his employee, the employer entered into the agreement primarily to induce the employee to provide services for the duration of the five-year period. In this context, the receipt of the “proceeds of the loan” by the employee may constitute taxable compensatory income. According to sars, Interpretation Note 66, 2012: “Any scholarship or bursary awarded on a reimbursable basis due to non-compliance with the conditions set out in a written agreement will be treated as a bona fide scholarship or exchange until the non-compliance provisions of the agreement are applied. In the taxation year in which these provisions are invoked, the amount(s) of the grant or bursary shall be considered a loan and, where applicable, any benefit received by an employee through an interest-free or low-interest loan shall constitute a taxable benefit within the meaning of paragraph 2, point (f). The worker shall not be entitled to the exemption referred to in Article 11(4)(b) because the loan was not granted to enable him to study. An employee shall enjoy a taxable advantage within the meaning of point (h) of paragraph 2 if he is paid the repayment of a loan received from his employer in order to enable him to study. • So, if Employer A grants an employee a loan that requires him to pass the course, it would have no tax consequences for the employee at the time the loan is granted.• If Employer A grants the employee a scholarship that must be repaid if the employee does not pass the year/course, then it would have no tax consequences for the employee at the time the scholarship is awarded If an employee of a Company holds 10% or more of the year/course. voting rights in the Company, any loan taken out by such employee will be considered a dividend under Article 2 (22) (e) if certain conditions are met. But even in such cases, interest on such a payment is still taxable as a “perquisite”. The interest rate of the loan, the documentation of the loan, the means by which the principal of the loan must be repaid, the guarantee of the loan, the potential or contractual delivery of the loan and even the specific use of the borrowed funds can each play a decisive role in the success or failure of the credit operation planned for tax purposes. If an employer lends funds to an employee with appropriate loan documents that provide for “monetary repayment” of the loan (as opposed to repayment through the provision of services), an adequate interest rate, and the characteristics of an arm`s length loan, the transaction should be followed by the IRS as a loan.
A “benefit” is a service that the employer offers to an employee based on their job title. Such a benefit is considered for tax purposes under the heading “salary”. Similarly, an interest-free or concessional loan granted by an employer is taxable as a “benefit” to an employee. Therefore, the employer should deduct the withholding tax (TDS) on the interest accrued on the loan as part of the employees` wages. In some cases, there are exceptions to taxation, as described below. Loans granted to employees for educational purposes are not considered a bursary or bursary, but are treated as low or interest-free loans on which no value is invested. For the purposes of Article 11(4)(b), no value is attached to a taxable advantage which an employee obtains by granting him a low-interest or interest-free loan to enable him to pursue his own studies. Nelson Mandela, ambassador for education in his native South Africa, said: “Education is the most powerful weapon you can use to change the world. Tax legislation therefore often encourages employers to help employees with their education, and South Africa is no exception Companies often include employee loans in their executive compensation programs. (Since the advent of the Sarbanes-Oxley Act, publicly traded companies have been prevented from entering into credit transactions with their officers and directors.) A private company considering a loan to its employee should carefully consider the various tax requirements and consequences when structuring the agreement.
The official interest rate will be lowered from 6.25% to 5.25% from May 1, 2020 until another change in the repo rate is announced. .