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Company Cars – Have You Considered this?

06 May 2011   (0 Comments)
Posted by: Author: Hennie van Deventer
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Company Cars – Have You Considered this?

By now, all employers providing company cars to their employees would have incorporated the amendments (effective 1 March 2011) to the company car regime.
We have, however, identified a few things that are of interest in relation to the following.
• Determined value
• Maintenance plans
• Tool of trade vehicles

Determined value

The determined value in relation to a motor vehicle acquired under a bona fide sales agreement (or exchange) is said to be the original cost to the employer (importantly it excludes finance charges and interest).

Employers should be aware that the cost referred to above includes value added tax (VAT) despite the Income Tax Act (the Act) not specifically stating that it does.The reason being that by implication, VAT is included in the cost to the employer.The Explanatory Memorandum to the Amendment Bill also clarifies this, saying the cost must include VAT.

Importantly, employers should be aware that the method in calculating the determined value has changed meaning that the amendments also apply to vehicles purchased prior to 1 March 2011. Furthermore, the Act states that where the vehicle is not acquired under a sales agreement or lease, the retail market value should be used as the determined value. This seems a little harsh on the employees of motor manufacturers who are provided with company cars.

The Act does provide for some potential leeway and we suggest that the subject matter experts are contacted in this regard.

Maintenance plans

The Act allows the fringe benefit rate to be reduced from 3.5% by a further 0.25% where the cost of the vehicle includes a full maintenance plan.

Employers should note that a ‘maintenance plan’ means that the provider of the vehicle has a contractual obligation to underwrite the maintenance of the vehicle for a period of at least three years and a distance of not less than 60 000 kilometres.

An interesting point that arises is the reference in the Act to "in the ordinary course of trade with the general public...” when referring to the contractual obligation of the provider.It is not uncommon for employers to lease the vehicles from a bank and for the bank to provide a maintenance plan in terms of the lease agreement.

It is submitted that the bank is the provider and has a contractual obligation to maintain the vehicle. However, is it the bank’s ordinary course of trade with the general public to provide vehicles or is it simply a place where people deposit money?

Tools of trade

Employees using their vehicles as so-called tools of trade, qualify for a reduced inclusion of the fringe benefit for employee’s tax purposes in that only 20% of the rate will be taxed on the proviso that the employer is satisfied that at least 80% of the usage will be for business purposes (ie a 0.7% inclusion rate).

No guidelines have been given to determine the 80% business use threshold. But employers making use of tracking systems are likely to base this determination on the previous year’s business travel by the particular employee, thereby attempting to satisfy the South African Revenue Service that the 80% business use threshold would be reached during the current year of assessment.

As always when dealing with tax matters, it is recommended that employers seek advice in the event of uncertainty.

Source: By Hennie van Deventer (TaxTalk)


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