Proposed tax changes to company cars
31 March 2015
Posted by: Author: Doné Howell
Author: Doné Howell (Grant Thornton Johannesburg)
With the continued review of tax legislation, whether prompted by the Davis Commission’s mandate or simply by a need to correct anomalies in current drafting, more and more tax changes seem unavoidable. One such change was introduced from 1 March 2015 to eliminate the inequities and anomalies in determining the taxable benefit arising from an employee’s right to use a company car.
Employees who are required to travel for business purposes and make use of a company car, are subject to fringe benefit tax of 3.25% (if there is a maintenance plan in place) or 3.5% (with no maintenance plan) of the "determined value of the company car.
The changes introduced on 1 March, will only affect employees using company cars ‘acquired’ after 1 March 2015, i.e. the calculation of the taxable benefit for existing company cars will not be affected by the proposed change.
Company cars acquired before 1 March 2015
The "determined value” of company cars acquired prior to 1 March 2015, is defined as:
- the original cost of the vehicle paid by the employer (excluding any finance charge or interest payable), if the car was purchased through a bona fide arm’s length agreement of sale or exchange
- the cash value of the car, if this car is financed through a lease as is described in paragraph (b) of the definition of ‘instalment credit agreement”
- the retail market value of the car, on the first date that the employer obtained the right to use the vehicle, if the vehicle is financed through any other type of lease agreement but not an ‘operating lease’ or
- the market value of the car, at the time that the employer first acquired the vehicle or right use of the vehicle, will apply to all other circumstances not described above.
For employees of new and used car dealers or employees in the motor vehicle rental industry, SARS accepted that the "determined value” of the company car was equal to the average cost of all stock in trade or rental vehicles on hand at the end of the employers’ preceding year of assessment.
Furthermore, in the past, the determined value of motor manufacturers’ company cars was equal to the cost of manufacture of a car. Currently however, these cars’ determined value is equal to the market value, or ‘Dealer Billing Price’ of the car at the time the employer first obtained the right to use it and that.
Company cars acquired after 1 March 2015
From the above it is clear that the ‘determined value’ will differ greatly depending on the means of acquisition of the car or the nature of the employer’s business. In an effort to align the determined value for all employers and employees, the definition of determined value will be actual retail market value of the car, including VAT but excluding finance charges and interest, regardless of the type of acquisition or the nature of the employer’s business.
The impact of a company car on the employee’s tax
If the vehicle was acquired under an operating lease (as defined) before 1 March 2015, the monthly taxable value used to determine the employee’s taxable benefit, is equal to the employer’s actual cost incurred under that operating lease and the cost of fuel in respect of that vehicle.
For vehicles acquired or financed after 1 March, the employee will be taxed on the new deemed value, i.e. retail market value including VAT but excluding finance charges and interest less any consideration paid by the employee towards the cost of the vehicle.
80% of the taxable benefit will be subject to monthly PAYE but the percentage may be reduced to 20% if the employer is satisfied that at least 80% of the use of the company car will be for business purposes.
One submission of the employee’s personal tax return he/she will be permitted to claim as a tax deduction his/her proven business kilometers. SARS will reduce the value placed on the private use of the car by the proven business kilometers, provided it is substantiated by an accurate and detailed logbook of business kilometers travelled.
This article first appeared on gt.co.za.