TAXATION OF EMPLOYMENT BENEFITS

• Date: 01 December 1993
• Author: LIU HERN KUAN
• Published date: 01 December 1993

An individual’s employment income always comprises two components — monetary remuneration (like wages, salary, bonus allowances) and fringe benefits (perks — for example, low interest housing, car and computer loans, use of company cars, provision of medical benefits.). Generally, it is not a problem determining whether tax would be chargeable on the monetary component to one’s employment income. Salary and bonuses received by an employee would simply be the income subject to tax at the appropriate rate. It is more difficult to determine tax on the ‘perks’ of employment. Taxation of employment perks involves the identification of a benefit as emanating from employment and placing a value on that benefit for tax purposes. This article raises and discusses generally some unresolved issues which arise in determining the taxability of employment ‘perks’ (hereinafter referred to in this article as employment benefits or fringe benefits) in Singapore.1

This will be done by considering first how employment benefits are taxed. The legislative framework will be examined with a view to considering when a benefit becomes subject to tax. Then this article will consider the types of benefit that are taxable where the main issue is when an advantage or a benefit will be taxable. Finally, this article consider how non-cash benefits can be valued for tax purposes. As a preliminary issue however, we will first consider the policy issues for taxing employment benefits.

1. WHY TAX EMPLOYMENT BENEFITS?

There are fundamental reasons why tax should be imposed on fringe benefits. The first reason is the concern for equity. An employer who supplies a motor car or provides free meals to an employee will in effect allow the employee to spend his wages on other personal expenses. If two employees receive the same pay but one is supplied with a motor car, it would not be right to subject both employees to the same amount of tax.2 Secondly, if fringe benefits are not taxed, it would encourage tax planning and avoidance. If employment perks are not subject to tax, employee remuneration packages

can be structured such that they are ‘loaded’ with fringe benefits to avoid tax. Employees paid partly in money and partly in goods or other benefits would only be taxed on money received. Employers would also most likely be able to claim a tax deduction on the benefit provided as an expense wholly and exclusively incurred in the production of income. All this would in turn lead to revenue loss for the State. In principle therefore, tax should be payable on all employment perks given or granted by the employer to the employee in respect of employment.

However, the justifications behind taxing employment benefits must be balanced against the administrative difficulties involved. The costs of running the tax system should not outweigh the extra revenue derived from taxing employment benefits. There should be a fair and accurate system for taxing benefits conferred by for example, the provision of company car, overtime meals, entertainment allowances or low interest loans? There should be adequate legislative and administrative machinery to compel some form of recording and computing of the value of a benefit provided to the employee in respect of say subsidized meals at the company restaurant.

All tax systems have to decide how far they want to go in taxing indirect benefits from employment. It may be that in a comparatively lower tax environment where tax savings from avoidance may not be as great as in other countries it may be acceptable to have a general charging provision as opposed to a comprehensive set of specific charging provisions for taxing employment benefits. This is the case in Singapore. It is to a discussion of the relevant statutory provisions that we now turn.

II. THE STATUTORY PROVISIONS — HOW ARE BENEFITS TAXED?

Employment income is chargeable to tax under Section 10(1)(b) and 10(2)(a) of the Singapore Income Tax Act.3 These provisions in so far as they are relevant to the discussion herein, are set out as follows:

1. “10(1). Income tax shall…be payable…in respect of-

…

(b) gains or profits from any employment.

…

1. (2). For the purposes of subsection (1)(b), “gains or profits from any employment” means-

1. (a). any wages, salary, leave pay, fee, commission, gratuity, perquisite or allowance (other than a subsistence, travelling, conveyance or entertainment allowance which is proved to the satisfaction of the Comptroller to have been expended for purposes other than those in respect of which no deduction is allowed under section 15) paid or granted in respect of the employment whether in money or otherwise;

   …”

Paragraphs (b) and (c) of Section 10(2) also include, within the definition of “gains or profits from any employment”, the value of any food, clothing or lodging provided by the employer and the annual value of any place of residence provided for the employer. The main charging provision of employment income (which includes employment benefits) is therefore found in paragraph (a).

It is observed that for tax to be chargeable, a benefit must be ‘paid or granted in respect of employment’, must fall within Section 10(2)(a) as one or more of the enumerated benefits and must be correctly valued for the imposition of tax. This article will discuss each of these requirements.

A. BENEFIT PAID OR GRANTED IN RESPECT OF EMPLOYMENT

Two observations may be made from a reading of Section 10(2)(a). First, the definition of taxable gains and profits from employment is exhaustive. Gains and profits means (as opposed to ‘includes’) only the benefits set out in paragraphs (a) to (c). The effect of an exhaustive definition is that gains and profits from employment only mean the stipulated benefits in these paragraphs. Second, only benefits ‘paid or granted in respect of employment’ will be subject to tax. This phrase provides the nexus between the employment and the benefits given or granted to the employee. The effect is that other forms of benefits or those not ‘paid or granted in respect of employment’ within Section 10(2)(a) will not be taxable. Since the definition is exhaustive it is crucial in determining the taxability or otherwise of a benefit, to see if that benefit is ‘in respect of employment’. Clearly the nexus is extremely wide. Learned local commentators have taken the view that a benefit is granted ‘in respect of employment’ if it is a reward for services performed or to be performed by the employee.4 The authority cited in support of this

proposition is Hochstrasser v. Mayes,5 a decision of the English House of Lords.

In the Hochstrasser case, the employer operated a scheme whereby if an employee was transferred to a different part of the United Kingdom (hereinafter referred to as ‘the U.K.’) the employee had the option of selling his house to the company at market valuation and the employer would make good any capital loss suffered on sale. When the taxpayer was transferred, he could only manage to sell his house, which he bought for £1,850 for £1,500. The employer made up the difference of £350 and the Revenue sought to charge to tax the £350. The question was whether this was an emolument from employment. The House of Lords held that the payment was not taxable because it was to compensate the taxpayer for the loss sustained in the sale of the house and not for his services. In the High Court, Upjohn J. said that “the payment must be made in reference to the services the employee renders by virtue of his office and it must be something in the nature of a reward for services past, present or future.” Viscount Simonds accepted this statement as correct but observed that the word ‘past’ may be open to question.6 Lord Radcliffe held that for the payment to be taxable, it must, following the words of the statute, arise from the employment. A payment arose from employment if it was “paid to him in return for acting as or being an employee.”.7 Upjohn J.’s formulation as qualified by Viscount Simmonds, is generally accepted in the U.K. as the test used to determine if a benefit given by an employer will be subject to tax. For the purposes of discussion herein this formulation will be referred to as the causation test.8

The causation test is an eminently fair test which requires that if the immediate cause of the payment or benefit is the employment of the taxpayer, then that benefit or payment is taxable. However, there is no Singapore case law authority applying the causation test.9 In fact in a local case which involved

the taxation of redundancy payments, C.G.I.R. v. T.10 Lord Wilberforce, delivering the judgement of the Privy Council observed, on a provision word for word the same as Section 10(2)(a), that chargeability to tax depended on “whether the money was paid ‘in respect of employment’”. In that case the Privy Council could have, but did not allude to the causation test in determining whether a sum of money was a gratuity paid or granted in respect of employment preferring instead to accept the proposition that where a sum of money is paid under a contract of employment it is taxable even if it was received at or after the termination of the employment.11

It is this writer’s view however that the charge to tax for employment income is much wider than that under the causation test. The House of Lords in that case was dealing with a provision contained in the Ninth Schedule to the Income Tax Act 1952 which read “Tax under Schedule E shall be annually charged on every person having or exercising an office or employment…in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom…”. The benefits under the English Act must arise from (as opposed to being ‘in respect of) the employment. It appears that this is not a question of semantics and that there is a narrow distinction between the two phrases. Both Australian and Canadian courts have held, in the...