IN recent times, recruitment and retention of high quality staff has become one of the greatest challenges for Singapore's human resource (HR) professionals. As the labour market continues to tighten, competitive salaries alone may not be enough to address the talent crunch. To differentiate themselves from other employers, companies may need to go the extra mile by offering novel and creative remuneration to sweeten the deal.
Non-cash benefits, also known as benefits-in-kind, might include the provision of accommodation, a car, mobile phones, free meals, interest- free loans, free or subsidised health and dental insurance, and gifts for special occasions. But for the creative HR professional, the possibilities are endless.
An attractive array of benefits can set a company apart as an employer- of-choice. The question is which benefits will give companies the best mileage with employees, while keeping the administration, reporting and tax costs in check.
Benefits needn't become an additional cost to the employer. While some benefits, such as medical and overtime transportation have become institutionalised as a standard employee benefit on top of salary, employers and employees should also consider the possibility of replacing cash salary with non-cash benefits where it is attractive to do so, for tax or other reasons.
"Salary sacrificing" or "flexible benefits" provide a forum for employees and employers to tailor a remuneration package to match the individual needs of the employee, taking advantage where possible of any tax or cost benefits, while keeping within an overall remuneration budget for the employer. While not a new concept in the global compensation and benefits market, this has not been highly developed in the local compensation market. But are there benefits to be found that could bring benefits back to the negotiation table in 2008?
Benefits, whether in cash or kind, are taxable in the hands of employees, according to section 10(2) of the Singapore Income Tax Act. Employers are obligated to declare these benefits in Appendix 8A of Form IR8A, which sets out the return of an employee's remuneration in a prescribed format.
However, certain benefits-in-kind, including those typically provided to expatriates, such as housing, car and home leave passage benefits attract generous concessionary tax treatment. In addition, the Inland Revenue Authority of Singapore (Iras) has issued a list to clarify benefits that are eligible for an administrative concession or are exempt from income tax. Health-related benefits such as hospitalisation and dental benefits, benefits which foster camaraderie among staff such as sponsored group outings and special events such as Family Day or the Corporate Dinner and Dance are exempt from taxation.
In addition, childcare subsidies for employees who send their children to licensed childcare centres, club subscriptions for employees' official or business use and interest-free or subsidised loans can be provided as tax-exempt benefits.
Top-tier benefits
These benefits may require certain conditions to be met to attract the concession. For example, only interest- free and subsidised loans provided directly by employers to employees who do not have substantial shareholdings, or control or influence over the company will be tax exempt. Loans to substantial shareholders or directors will continue to be subject to tax.
Benefits-in-kind can be divided into several categories, or "tiers", indicating their degree of attractiveness as compensation.
Benefits-in-kind in the top tier are those that are valued by employees and attract tax savings. In short, the benefit is one that is desired by most employees, and the cost to the employer and employee is less if it is provided by way of benefits-in-kind, as compared to the employee receiving cash income then buying the same product/service themselves. Such benefits must also be attractive to the employer because they are easy to execute and administer.
A standard benefit in many companies' employment packages, medical benefits are highly valued by most employees, attract tax concessions, and with the possibility of outsourcing administration to medical services companies, can be relatively easy to administer from an employer's perspective.
Another highly valued benefit is the provision of childcare subsidies. While this benefit is targeted at a defined demographic, it can be a differentiating factor for organisations with a large percentage of working mothers in their workforce. Employers may be able to further extend this benefit by negotiating group rates at a facility convenient to the employee's workplace.
Interest-free or low interest loans are also popular with employees. As there is a large difference between interest rates offered on deposits, and interest rates charged on personal loans, there exists the opportunity for far greater benefit than just the tax saving. Even where the employer uses borrowed funds, the interest rates available to the employer may be considerably lower than what is available to the employee.
As a simple example, an employee who takes out a $10,000 commercial personal loan for one year at 15 per cent interest will pay $1,500 interest (assume simple interest). If the employee is subject to a marginal tax rate of 14 per cent, he would need to earn $1,745 in pre-tax income (assume employee's income is above CPF threshold) to pay that interest. Assume that the employer can earn interest of 2 per cent from a bank on its cash deposits. It offers its employees loans at 2.5 per cent, which takes into account the interest earned will be taxable. To pay this interest of $250, the employee must have pre-tax income of $290. This combination of tax treatment and interest rate differences provides an overall benefit of $1,455 to the employee, at no or little cost to the employer.
The second tier of benefits-in-kind includes those that might not attract any tax benefit, but are attractive to employees to receive and for employers to provide. An employer might be able to take advantage of their corporate purchasing power to obtain a benefit for its many employees at a greater discount than each employee could command on their own.
As an example, a company might arrange for discounted corporate travel rates to be available to its employees through its corporate travel programme. Although there is no tax saving associated with the benefit, the value to the employee is in the lower cost and convenience.
It will be important for companies to look for hidden costs of benefits. For example, although the formula used to calculate the taxable value of a car benefit is arguably beneficial to the employee, the provision of a car and its related expenses such as maintenance costs are not tax deductible to the company. In determining the cost to company of such benefits, the cash cost must be grossed up by the applicable corporate tax rate.
From the employee's perspective, a company provided car can be an attractive option as the personal responsibilities of car ownership are transferred to the employer.
Salary sacrifice
In a salary sacrifice, the employee bears the cost to company of providing the benefit, by sacrificing part of their compensation that would have otherwise been received as cash.
When comparing a company car to personal car ownership, employees should work out the total cost of each to evaluate which is more favourable.
Even further up the compensation food chain are prestige benefits such as the provision of private club membership for personal use. Rather than offering any tax saving or cost saving, such benefits might be given for prestige value only.
Of course, in today's workplace, one size does not fit all so it is important that benefits are offered in flexible packages for different employees' needs.
Employers should strive to provide benefits which are sure-fire hits with potential recruits and existing employees.
Badly structured employment packages are a drain when it comes to tax planning, administration and reporting. As such, companies and employees must evaluate their options carefully when it comes to structuring an efficient employment package.
In working out a benefits package for employees, companies should be mindful of all the costs involved. These include the tax deductibility to the company and other administrative costs such as the costs of executing and reporting of these benefits, which may require hiring additional benefits administration staff in HR.
So is cash or kind better? In some cases when employees choose concessionary benefits-in-kind over cash, they will pay less tax. But this also means that companies bear the administration burden of executing and reporting these benefits. In addition, where there are significant cost savings available to the corporate purchaser, this alone may make simple benefits financially attractive to employees.
Employees who are eligible for Not Ordinarily Resident (NOR) status may prefer to receive benefits in the form of a cash allowance as they could enjoy potential tax savings due to the time apportionment basis of assessment available under the NOR taxpayer concession scheme. However, the quantum of tax savings derived would be dependent on factors such as whether the benefit receives a tax concession as well as the percentage of business days spent outside Singapore and the quantum of salary.
While employers may go to greater lengths to recruit and retain workers by offering more crowd-pleasing benefits in their compensation package, they should also remain mindful of the costs involved in the administration and tax reporting of these benefits. Indeed, they need to strike a balance between differentiating themselves as an attractive employer and maintaining simplicity in compensation design.
Wu Soo Mee and Grahame Wright are directors, human capital tax services at Ernst & Young
