PAYE on loans based on BOB’s MP rates
PAYE on loans offered to employees used to be determined using the Bank of Botswana (BOB) bank rate but that has now changed to the BOB’s Monetary Policy rate, effective this year. We understand that the Monetary Policy Rate was last increased on 25 August 2022 to 2.65%.
The prime rate is the rate at which banks use when lending to customers, which is higher than the BOB’s rate. It is known that most employers provide their employees with interest free loans or under arrangements where the interest rate is below the BOB’s monetary policy rate. Such facilities are generally applauded for improving employee moral as well as ensuring that employees are financially stress free so that they focus on production.
However, employer provided free loans or low interest-bearing employer loans technically trigger a taxable benefit in the hands of the employee which is now determined using the monetary policy rate. We no longer talk of the bank rate for purposes of determining PAYE. Keep on reading and allow us to help you understand the new developments in determining the loan benefit. In this article, words importing the masculine shall be deemed to include the feminine.
Enter loan benefit
As alluded to above, employees who enjoy interest free loans or low interest-bearing loans from their employers are liable to tax for not paying any interest or paying a lower interest on such loans, respectively. Technically, the advantage or benefit of not paying interest at all or paying a lower interest fits in the wide ambit of taxable benefits enjoyed by employees. Specifically, the Income Tax Act states that employees are taxed on the positive difference between the prevailing commercial rate of interest and the interest charged by the employer.
In essence, interest free loans bear a 0% interest. Therefore, the taxable benefit accruing to the employee is technically the value of the prevailing interest rate of the loan amount. Conversely, a loan benefit on low interest-bearing loans is determined as the positive difference between the preferential employer rate and the prevailing interest rate, with the loan amount being the tax base. Previously, the deemed loan benefit was ascertained using the prevailing bank rate as determined by the BOB. Let us now have a look at the current changes and what this entails.
The change
As alluded to above, previously, the prevailing interest rate for determining PAYE on staff loans was dependent on the bank rate. This has now changed as the BOB now issues what is known as the Monetary Policy rate. Essentially, this means that employers are now required to determine the deemed loan benefit based on the prevailing monetary policy rate at the time of disbursing the loan to the employee. Accordingly, employers who do not wish for their employees to be taxed on the deemed benefit should offer interest bearing loans to their employees at the prevailing monetary policy rate at the time the loan is issued.
Conclusion
It is imperative that employees and employers understand the new changes applicable on determining the deemed benefit from interest free loans or low interest-bearing loans.
The determination of the prevailing rate is now benchmarked against the monetary policy rate. Accordingly, the deemed benefit will be the difference between the employer preferential rate and the monetary policy rate.
However, no taxable benefit arises where the loan is provided by a financial institution under an arrangement facilitated by the employer.
Contacts: You may contact us at +267 71 81 58 36 or +267 393 9435 or jhore@aupracontax.co.bw or www.aupracontax.co.bw. This article is of a general nature and tax advice is recommended if decisions are to be made. If you require to join our free Tax WhatsApp groups or to know more about our 9 Tax e-books, please send us a text on the numbers above.