What you need to know about Company Cars.
Tuesday, 09 July 2019
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Posted by: Author : Lizbe Murray
Author : Lizbe Murray
How much of a perk is use of a company car? We explore how tax is calculated on this fringe benefit and the effect this may have on an employee's PAYE situation.
One of the perks you may be offered as part of your employment package is the use of a company car. Although most people see this as a great bonus, many employees don’t realise that they will be taxed on this perk. In simple terms, employees are taxed on the right to use the vehicle for private purposes, for instance, to go shopping or to get to and from work.
In this article, we look at how the employee benefit is calculated, deductions allowed, exceptions where the use of a company vehicle will not be taxed, and the duties of the employer.
Tax treatment of employee benefits
An employee benefit, also called a fringe benefit, is any payment made to an employee in a form other than cash. These include things like purchasing an asset from the company at a lower price than market value, using residential accommodation for free or at a fee lower than market rental, medical aid contributions made to the employee’s medical scheme, free holidays, and of course, using a company vehicle.
In simple terms, an employee benefit is any favourable treatment employees get from the employer as a reward for their services rendered. The employee is taxed on this benefit as if they received the benefit in cash. It is the employer’s responsibility to determine the value of the fringe benefit, include it on the employee’s payslip, and deduct PAYE from it every month.
Using a company car for private purposes
Determining the value of the vehicle
First, the employer needs to determine the value of the vehicle. This is called the determined value. The way this value is calculated changed over the years, but for this article, we only focus on the current treatment to avoid any confusion.
As a general rule, the retail market value of the car is used, including VAT but excluding finance charges and interest.
- If the employer bought the vehicle, the determined value is the purchase price, including VAT.
- If the employer acquired the vehicle under a lease, the retail market value should be used.
- For vehicle manufacturers, dealers, and rental companies, the dealer billing price, including VAT, is taken as the determined value. In other words, the recommended selling price of a motor vehicle as determined by the manufacturer or importer. These companies acquire the vehicles at much lower costs than retail, which is why the dealer billing price, and not the cost to the company, is used to promote fairness.
- If the employer places a limit on the vehicle value that the employee can choose from but the employee requests a more expensive car and also makes a contribution to cover this difference each month, the determined value of the vehicle is the original value or limit set by the employer.
- If the employee starts using the vehicle 12 months or more after the vehicle was acquired by the company, a depreciation allowance can be deducted to decrease the value. The depreciation allowance is calculated according to the reducing balance method at 15% for each completed period of 12 months.
EXAMPLE:
Employee A is granted the right to use an employer-provided vehicle 30 months after the company bought the vehicle. The vehicle was purchased for R200 000 (including VAT). The value of the vehicle is calculated as follows:
Step 1: Calculate the depreciation allowance
Year 1: (R200 000 x 15%) R30 000
Year 2: (R200 000 - R30 000) x 15% R25 500
Total depreciation allowance R55 500
Step 2: Calculate the value of the vehicle
Purchase price less total depreciation allowance
R200 000 - R55 500 = R144 500
Note that depreciation is only calculated on 24 months. The remaining six months are disregarded.
Calculating the employee benefit
Once the value of the vehicle is determined, the next step is to calculate the benefit on which the employee is taxed. That is calculated as 3.5% of the determined value per month OR 3.25% of the determined value per month, if the purchase price includes a maintenance plan.
The employee benefit can be apportioned if the vehicle was used for less than a full month.
EXAMPLE:
Employee A started using the company vehicle on 10 April. The vehicle was purchased without a maintenance plan. The employee benefit for April is calculated as follows:
Determined value x 3.5% x 21/30
= R144 500 x 3.5% x 21/30
= R3 540.25
The fringe benefit of R3 540.25 should be included in the employee’s payslip for April.
The taxable portion of the employee benefit
The next step is to calculate the portion on which PAYE should be deducted. Remember that the employee is taxed on the personal use of the vehicle, and since the employee would typically use the vehicle for business purposes as well, PAYE is not calculated on the total benefit.
As a general rule, PAYE is calculated on only 80% of the benefit. From our example above, PAYE will only be calculated on R2 832.20 (R3 540.25 x 80%).
Should the employee use the vehicle primarily for business purposes, the percentage on which PAYE should be calculated may be reduced. If the employer is satisfied that at least 80% of the use of the vehicle is for business purposes, then employees' tax can be calculated on only 20% of the fringe benefit. From our example above, PAYE will be calculated on R708.05 (R3 540.25 x 20%).
The employer should include the benefit on the payslip every month, and PAYE should be deducted as shown above. The total amount of the fringe benefit for the tax period should be included in the IRP5.
The relevant tax codes are as follows:
- For an employer-owned vehicle: 3802
- For a vehicle acquired under an operating lease: 3816
Deductions allowable against the employee benefit
When employees submit their yearly tax returns, the employee can claim a tax deduction for the portion that the car was used for business purposes. That is calculated by reducing the fringe benefit in the same proportion of business kilometres travelled to the total distance travelled.
CALCULATION:
Assume the total fringe benefit for the year is R80 000. The employee travelled a total of 50 000 km, of which 40 000 km was for business purposes. The deduction that can be claimed against the fringe benefit is R64 000 (80 000 x 40 000 / 50 000).
Note that you can only claim a deduction if you kept a detailed logbook, showing as a minimum the date, purpose of travel, and the business kilometres travelled. Travel between your house and place of work is regarded as private travel, and not for business.
Exceptions to the rule
In certain cases (below), no fringe benefit needs to be calculated:
- The vehicle is available and used by other employees.
- Private use is infrequent.
- The vehicle is not usually kept at or near the employee’s residence outside of business hours.
- The employee’s duties require the use of the vehicle for work purposes after hours, and the employee is not allowed to use the vehicle for private purposes, other than travelling between home and work.
Is a company car always beneficial to an employee?
An employer-provided vehicle may not always benefit an employee. Sometimes, you may pay more tax on the use of a company vehicle than on a travel allowance. That all depends on the price of the vehicle and the number of kilometres travelled.
As a rule of thumb, if you travel more than 60% for business purposes, a company car is almost always better. However, this is not always the case, and it is advisable to calculate and compare different options.
Other factors to consider are whether the employee already has a vehicle that can be used and, if not, if they want to purchase their own vehicle or not. Also keep in mind that if you travel extensively for business, wear and tear on the vehicle will increase and you may need to replace it sooner than anticipated. Additionally, the type of company vehicle available may not be to your taste. For instance, you may be offered a bakkie but since you have kids you prefer a family vehicle instead.
An employee does not always have the option to choose between a company car or a travel allowance – it mostly depends on the employer. If it is standard practice to provide their employees with company cars, you may be expected to go for this option. Many employers do not offer company cars at all, or they may only offer these to their executive team or to their reps who frequently travel for business purposes.
If you do have a choice, it is best to ask your employer to calculate different scenarios for you so that you can make an informed decision.
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This article first appeared on the July/August 2019 edition of Taxtalk Magazine.
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