New Company Car Legislation Is a Nightmare
30 April 2011
Posted by: Author: Ron Warren
New Company Car Legislation Is a Nightmare
Employees can expect to pay more tax on their company cars from March 2011.In some cases, a LOT more…
Amended legislation announced in last year’s Budget has resulted in an increase in the percentage rate used to calculate the monthly fringe benefit for all company cars and a radical change in the taxation of company cars from March 1 2011.This makes the keeping of a log book essential if employees are to see any tax benefit.
In the 2011 tax year that has just ended on 28 February 2011, the deemed business kilometres concession for travel allowances(those exceeding 18 000 but not exceeding 32 000 kilometres) was repealed, and taxpayers seeking to claim expenses against a travel allowance had to maintain travel log books showing actual business use.
Similar changes are now required for the employer company car fringe benefit, and both sets of rules must roughly reach the same outcome so as to prevent ‘arbitrage’.In the past, company cars were viewed as being beneficial, because employees did not have to record the kilometres they travelled for business.The amended legislation changes this,making them a more troublesome fringe benefit.
Tax deductions allowed on both the travel allowance and the company car will now be calculated in the same way, and employee shave to keep a log book to show their business travel and their fringe benefit will be adjusted in line with what the log book says.
The business kilometres actually travelled, as evidenced by a logbook, are now valued in exactly the same way for a company car as they are for a travel allowance,using the same cost table published by the Minister of Finance.Under the new legislation,another major change is that the percentage rate used to calculate the monthly fringe benefit for all company cars (including the first)has been raised to 3.5% per month of the vehicle's determined value(instead of 2.5% for the first car interms of the previous legislation).This rate is reduced to 3.25% per month if a maintenance plan was purchased at the same time as the car was purchased.
Under the amended law, the cost of a maintenance plan, VAT and any other taxes, such as the carbon emissions tax (which were excluded in the past) will have to be included in the "determined value” of the car on which the 3.5% or 3.25% is calculated.SARS has also changed the percentage calculated for the company car fringe benefit. Now,80% of the benefit (of the full fixed3.5% or 3.25% determined value of the vehicle) will be taxed per month, on the assumption that the employee will submit a log book at the end of the year. This assumes that the business usage of the car will be only 20%, so that the remaining 80% must be subjected to employees' tax—as is also the case with travel allowances.
Having said this, if employers are satisfied that at least 80% of the use of the car for a year of assessment will be for business purposes, then only 20% of the value of the calculated fringe benefit will be subject to PAYE.A similar change has been made to the percentage of a travel allowance to be subjected to PAYE.
Final adjustments for actual business kilometres and private payment of expenses will occur on final assessment, and employees could find themselves having to cough up at the end of the year if their log books don't prove business use.
The challenge for businesses is the fact that the Act states that employers must either use the 20% or 80% for the whole year.This is problematic, because it does not cover situations where certain employees’ circumstances may change during the year and they move from one category to the other.
These employees would therefore be over- or under-taxed, and would have to recover or pay the difference at the end of the tax year.However, SARS has verbally advised that they will accept changes from 80% to 20% for a part of the year, even though the act itself does not permit this.The new legislation also requires that if employees receive a travel allowance and they have a company car, 100% of the allowance must be taxed.
Another problem which will arise, is that of some top executives driving company cars who do not want to fill in travel logs.These executives who do not keep travel logs will end up paying tax on the full fringe benefit.The tax assessment is based on the presumption that all employee use is deemed to be private unless the contrary is proved.This presumption matches the current car allowance rules, which require a log book to prove business use.
On assessment, employees can claim certain employee-paid operating expenses against the company car fringe benefit,according to the recommended formula.
Source: By Ron Warren (Tax breaks)