Will your loan benefit attract a tax? Beware, the rules have changed!

It’s common for employers in Ghana to give loans to their employees at rates far lower than those of the banks and financial institutions. Prior to 1st January 2016, the benefits inherent in such loan benefits were not taxed. This situation changed with the passage of the Income Tax Act, 2015 (Act 896).

Under the Income Tax Act 2015 (Act 896), loan benefits in respect of employee loans may be taxable if they do not meet the criteria for exempting such benefits from tax.

What is a loan benefit to an employee?

A loan benefit arises when the interest rate charged on the employee loan is less than the market rate. The benefit is the difference between the market interest rate and the interest rate charged on the loan. The law defines the market interest rate, for tax computation, as the rediscount rate of the Bank of Ghana prevailing during the duration of the loan.

For Example:

On 1st January 2016, Company A gives Kofi, an employee, a loan. The terms of the loan are:

Loan amount – GHC 1000

  • Interest rate – 5%
  • Duration – one year
  • The Bank of Ghana (BOG) rediscount rate at the time of the loan is 20%. The interest benefit is BOG rediscount rate of 20% minus the interest rate of 5% on the loan –15% (20% – 5%). Kofi saves GHC 150 interest because he borrowed from his employer.

When is a loan benefit not taxable?

Loan benefits are not taxable if the loan meets the following conditions:

  • The term or the duration of the loan does not exceed twelve (12) months.
  • The total outstanding loans of the employee, at any time during the previous twelve (12) months, does not exceed three (3) months basic salary. Basic salary excludes other allowances and benefits in kind.

If the employee’s loan meets the two conditions above, the loan benefit is not taxable. If the loan does not meet any of the two conditions above, the loan benefit is taxable.

How does this affect employees?

If the total outstanding loan exceeds three (3) months basic salary, or the loan duration exceeds twelve (12) months, the loan benefit is taxable. The additional tax on the loan benefit will reduce the employee’s take home pay.

How does this affect employers?

The administrative cost of managing employee loans will increase, as the employer must put in additional procedures to compute loan benefits and related taxes.

What’s more, there exists the risk that the employer may not accurately compute tax on loan benefits, and so becomes liable for taxes not withheld.

Recommendations to employers

Is giving staff loans a deliberate strategy for attracting and retaining staff, or an accidental one?

Ask yourself: Can you achieve the same goals with a package that does not include loans?

If you can, then we recommend that you do not give loans to staff because it can result in high administrative cost and liability for taxes on loan benefits. It also reduces cash available to run the business.

If you must, for any reason, give staff loans, the loans advanced should not be more than three (3) months basic salary, and should be repaid within a year. Do not advance new loans until the existing loans have been fully repaid.

Written by Tom Asaam

Tom is a Manager in the Tax Unit of SCG Chartered Accountants.