Unlocking hidden costs of employee benefits

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Benefits-in-kind are non-monetary benefits that employees receive from employers in addition to salary. The sky is the limit when it comes to benefits or reimbursement of these benefits – these can be medical benefits, accommodation rental, flights, insurance, training, discounted goods, company car, interest free loans, gifts, and the list can go on.

It is widely known that some industries (e.g. Tech companies) can get creative with benefits, and we have noticed other industries riding this trend as well. These benefits-in-kind can be crucial for attracting and retaining talent, and improving the work environment. Nowadays, they are an essential part of any compensation package.

From the employer’s perspective, rolling out benefits may sometimes be a tedious exercise, especially so from a reporting perspective as the obligations (and exemptions, if any) differ from jurisdiction to jurisdiction.

Here, we focus on the payroll and tax reporting requirements for benefits in Singapore.

Singapore is possibly one of the easier locations to run payroll as there is no tax nor payroll withholding. With this simplicity, it may be easy for employers to become complacent when processing payroll and employment income tax reporting. Errors can creep in and accumulate over time, multiplied by the number of employees that are involved.

When you don’t know what you don’t know

Most businesses are confident that their payroll teams are well-aware of the reporting requirements – if employees get paid on time, they’re doing it right. But we have had several eye-opening discussions where those managing payroll have neglected to consider remuneration outside of cash amounts paid through payroll. 

IRAS defines taxable employment income – “Generally, all gains and profits derived by an employee in respect of his employment are taxable, unless they are specifically exempt from income tax or are covered by an existing administrative concession”. Gains and profits include non-cash compensation granted in respect of employment.

Employers must declare the benefits-in-kind unless these are granted administrative concessions or exempt from income tax. This is usually how under-reporting happens as who owns the process of reporting these – should this be the payroll team (as one would expect) or tax team? Are the right teams aware if processing is done by a third party or if overseas payroll is maintained for expatriates? 

Payroll teams may not handle benefits given that these usually do not go through payroll and may even be outsourced to a third-party provider. These providers may not be equipped with the appropriate tax knowledge either. In-house tax teams are usually corporate tax specialists or tax generalists and whilst they may be able to “sniff out” issues, they may lack in-depth knowledge on tax or CPF reporting requirements. 

With a possible gap in communication or process cohesiveness, organisations may see potential misreporting occur. Not forgetting a key form of remuneration, equity reporting, which is a whole other conversation that organisations need to have on how, when, and who to own the process of reporting this in Singapore and other relevant jurisdictions. 

Taxable vs non-taxable, and CPF?

Even with a process owner, as not all benefits are taxable nor reportable, how can teams ensure compliance?

Over-reporting may still occur where finance teams err on the side of caution and report everything that they process. This often erroneously includes business expenses or exempt items (e.g. gifts not exceeding SGD 200). Whilst IRAS does not penalise over-reporting, the employees are being taxed unnecessarily.

Tax and CPF rules are not always aligned, adding to the complexities of correcting misreporting when CPF contributions are involved.  For most instances, CPF contributions are not due on benefits-in-kind provided. However, if these taxable benefits are provided via reimbursements, this sometimes becomes a cash wage for CPF purposes and therefore subject to CPF contributions. There are also situations where benefits may not be taxable but are subject to CPF.

Unfortunately, there is no shortcut to this categorisation. We recommend that companies fall back on consulting a professional from time to time. 

Recent trends

Coming out of the pandemic and coupled with the work-from-home or office debates, there have been shifts in benefits being provided. In fact, work-from-home and work-from-anywhere is its own complex animal in itself, potentially creating multi-jurisdictional reporting, taxes and social security for both the company and the individual. 

Companies are also increasingly recognising the reporting complexities and are taking more proactive steps in seeking advice at the early stages to ensure wage types and tax codes are tagged accurately, minimising retrospective headaches.  

So, what are the advantages to early housekeeping? In our last article, CPF rules are changing in September, time to review your payroll, we shared examples of how small errors can snowball. We are seeing more questions from the tax authorities querying what types of benefits are being provided to employees and the corresponding reporting positions taken.

Although some are more well-known benefits, others are unique or so industry-specific that even the IRAS or CPF Board may not have guidance readily available. Queries or random audits from the authorities can be an avenue to an even deeper dive into a company’s reporting practices and can be a long and administratively challenging process. 

What can you do

Given that the payroll teams are often tasked with the employment income reporting role, it is important for these teams to stay current with legislation changes and to clarify reporting requirements.

We strongly encourage payroll teams to play a proactive role in conducting periodic reviews of its pay codes and how they are being tagged for CPF and tax purposes. It is also important for communication to be improved amongst the different teams – payroll, benefits, finance and equity teams, to facilitate accurate reporting for CPF and tax purposes.