SAQ #2: Can you address the Concessionary Loan Tax and give an example of how it is calculated?

5 Steps to calculate the taxable value of concessionary loan benefit

1. Check whether the employer is a Specified Financial Institution

2. Calculate the Prescribed Rate below which interest will be concessionary

3. Establish whether any loans to employees are exempted from treatment as concessionary loans

4. Establish the concessionary Loan Principal Outstanding at the beginning of the month

5. Calculate the Taxable Value of Concessionary Loan to each employee

Step 1 Check whether the employer is a Specified Financial Institution

A loan will only be regarded as a concessionary loan for employment tax purposes if it is issued to employees or directors of a Specified Financial Institution.

Among other things, a Specified Financial Institutions include:

• Banks

• Building Societies

• Insurance Companies

• Trusts

• Any other entity licensed under the Banking Act or Financial Institutions Act

If the employer is not a Specified Financial Institution (SFI) or within a group which has a SFI, no need to go any further. However, if it is, proceed to step 2.

Step 2 Calculate the Prescribed Rate below which interest will be concessionary

Only loans at interest rates below the Prescribed Rate will be regarded as concessionary for employment tax purposes.

The Prescribed Rate (PR) is currently the lower of the following two:

a) 9% per annum; and

b) the weighted average interest rate on six-month treasury bills plus 2%

For example, if the weighted average treasury bills rate as per Bank of Jamaica is 3%, then then (b) would be 5%. And since (a) is 9% and (b) is 5%, the lower of the two, the PR is 5%.

If the company is lending to its employees at above the prescribed rate (PR), there is no need to go further. However, if the company is lending below the prescribed rate, go to step 3.

Step 3 Establish whether any loans to employees are exempted

If a loan or any part of it to any employee is exempted by the act, it should not be treated as a concessionary loan.

Loan or loans are not to be treated concessionary loans (exempted) if they are for the purposes listed below but only if the principal balances outstanding are below $4.5m:

• Land

• House or furniture for owner’s residence

• Motor Vehicle for private use

• Education or Training

• Emergency or Compassionate Loan

The principal balances for loan or loans to employees exempted above should be excluded from the calculation of concessionary loan benefit. Only proceed to step 4 if concessionary loan balances are identified.

Step 4 Calculate the Prescribed Rate below which interest will be concessionary

List Principal Outstanding (P) at the beginning of the month for all Concessionary Loans to employees.

1. Ensure that only loans at rates higher than the prescribed rate are included

2. Ensure that all exempted amounts are excluded from the list of principal balances

Step 5 Calculate the Taxable Value (V) of Concessionary Loan(s) to Each Employee

The formula to calculate the taxable value (V) of a concessionary loan(s) to each recipient is as follows:

V = [P PR 1/12] – I (interest actually paid)

Where total principal outstanding on loans to an employee is $10M at the beginning of the month for which payroll taxes are being calculated and $4.5 million of that amount qualifies for exemption, P = $5.5m.

If the Prescribed Rate is 5% as per Step 2, then PR is 5%.

If interest was calculated at 3.5% per annum and interest is subject to salary deduction, then I = $16,041.67

V = [P PR 1/12] - I

Therefore, V = [$5,500,000 0.05 1/12] - $16,041.67

V = $6,875

The taxable value of the concessionary loan of $6,875 will be added to the employees taxable emoluments for the month and subjected to PAYE, and all employer’s and employee’s statutory contributions and

taxes, including NHT, NIS, Ed. Tax, HEART.

Disclaimer: The positions included in this article are general in nature and may not match the specific circumstance of any particular company. These positions may not be in agreement with that of the Tax Authority and likewise, the positions of a Tax Authority may not be in agreement with the ruling of a Revenue Court. We cannot guarantee that at the time you read this article, or position will still be applicable or appropriate because tax laws are subject to continual change, at times on a retroactive basis. Should the law or its interpretation change, our position may change too. Please therefore ensure that you seek advice before application to any particular unique circumstance.