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How cars are taxed or untaxed

posted 3 Aug 2010, 01:20 by Carl Nielsen   [ updated 3 Aug 2010, 01:22 ]
As promised, some details on changes in taxes around motor vehicles, and an
attempt at a synopsis on how it all works, which I hope you'll find useful.

The question of how cars are taxed can be divided into 2 broad categories
based on who owns the vehicle: the employer or the employee. For those of
you who are sole proprietors, in respect of your own vehicle, this question
perhaps has no meaning but it is answered for you: you may do things as if
it is an employer-owned vehicle. We'll deal with that situation first, often
referred to as a company car.

COMPANY CARS

The company car provision kicks in where you're an employer owns a vehicle
which it lets its employee use. In this case, the default situation is that
the employer is entitled to claim as a tax-deduction all the costs involved
in running the vehicle including a wear & tear allowance and including
finance charges should the vehicle be financed, or lease payments should it
be leased. The employee, subject to certain exceptions, is taxed on what is
called a fringe benefit, calculated at 2.5% per month of the value of the
vehicle (the value is a defined thing in terms of the law, but basically
boils down most of the time to the cost of the vehicle excluding VAT). 2.5%
per month multiplies out to 30% per year, which is pretty significant and so
it kinda sucks. If the same employee is given a second vehicle, e.g. a
director given a vehicle for his wife, or indeed a 3rd, 4th, 5th... vehicle,
the percentage is 4%: pretty huge.

A small adjustment can be made reducing the fringe benefit where the
employee is required to pay in for petrol or maintenance, but it is minor
and not worth bothering about. Far more interesting are the situations
whereby you can get out of the fringe benefit altogether. These are premised
on the fact that the fringe benefit is intended to put a value on the
*private use* of the vehicle. So, if there is no private use, there is no
value and the benefit falls away. The only way that this can be achieved is
to prevent the private use of the vehicle. Most obviously, if the vehicle
stays at the business premises so that the employee is required to use his
own transport to get to and from work and for his personal travel. A
sneakier option is to implement a policy whereby employees are forbidden
from using the vehicle for private use. They must sign acknowledgement of
this, and the policy must be genuine, policed and implemented (i.e. not a
sham) or SARS will ignore it.

The situation regarding company cars is touted to change, I believe from 1
March 2011. The revisions are two-fold:

First, the rate that will apply is now 4% for the first vehicle, and I
believe the same for the rest (I might be wrong here: I can't remember if
they said they were considering increasing the rate for additional vehicles.
Quite likely I guess!)

Second, there will be a way to reduce the taxable benefit to the extent that
the vehicle is actually used for business. This will require a logbook of
business travel, and if I remember correctly an apportionment of the rand
value of the fringe benefit will then be made on the basis of the ratio of
business to private travel. So, if you actually use the vehicle 80% of the
time (or of the kilometers actually!) for business, only 20% of the fringe
benefit will ultimately be taxed. In terms of the monthly PAYE tax for
employees, the proposal is that only 80% of the 4% will be taxed then, the
balance to be taxed on assessment: allowing a bit of a buffer for the
potential business travel deduction.

Oh, I just remembered: there is a third leg to the proposal: they want to
bring VAT into the vehicle cost as well as the cost of a maintenance plan.
So that fringe benefit value is just looking higher and higher!!!

TRAVEL ALLOWANCES

The second broad category is where an employee owns his own vehicle. In this
case, we are already living under the new dispensation: it kicked in from 1
March.

The changes since 1 March are pretty small, but with far-reaching effect. So
what I'll do is sketch the old system and then the understanding of the new
system will be pretty straight-forward (as much as these things ever are!)

So, on the old system, the idea was that the costs of the vehicle, being
privately owned, were borne by the employee not the company. To the extent
that the vehicle was used for legitimate business however, it was fair that
this should be paid by the employer without penalising the employee. Hence,
a tax-free payment by the employer to the company to cover that cost is
reasonable. In terms of the tax law there are 2 ways to do this and then a
combination of them both. In practice, employers might make payments with
reference to specific costs (e.g. paying employees petrol or maintenance for
them) - especially popular when the employee in question is a member or
director of the CC/company - but these schemes generally slot into the ways
that the taxman recognises somehow.

The 2 options basically are: reimbursive or "the rest". Under a
reimbursement scheme, the employee keeps a track of business km travelled
and is reimbursed at a rate per km for those km. For purposes of calculating
PAYE, these amounts never have tax deducted. However, if the rate exceeds
R2.90 per km or the total km's in a year exceeds 8000 or the employee is
getting any other allowance for his vehicle costs (including, for example
the company paying his petrol) then the reimbursements are subject to tax on
assessment. However, the employee might get some deductions against them and
we'll get that.

"The rest" option usually takes the form of a set monthly "travel allowance"
often done on a salary sacrifice or package basis (i.e. it's actually salary
by another name). However, payments of fuel and maintenance for the employee
would also fall into this scheme. And as mentioned, if reimbursements exceed
the limits mentioned above, they'll also get considered under this category.
A set month travel allowance is subject to PAYE. I seem to think payment of
fuel etc is also subject to PAYE. If anyone seeks specific advice on this,
I'll look it up for you. Up to 28 Feb 2010, only 60% of the amount was
subject to PAYE so as to provide a buffer for a probably expense claim on
assessment. The full amount would be taxable on assessment after the
taxpayer has determined the amount that he can deduct.

Regarding that deduction, the idea is to work out the cost of using the
vehicle for business purposes. This is calculated by the formula: business
km X rate per km. Up to Feb 2010, there were 2 ways of calculating each
component of the formula
   Business km: (a) keep a log book OR (b) assume the first 18000km are
private, the next 14000km are business and the rest are private.
   Rate per km: (a) keep a record of your expenses and divide by total km OR
(b) use a formula supplied by SARS

This is the point where I can mention the change. Basically, option (b) on
the calculation of business km is scrapped. You now must keep a logbook
record in order to get a benefit. Also, anticipating fewer people
legitimately qualifying for the benefit, and simultaneously improving cash
flow, SARS went ahead and increase the PAYE component to be applicable to
80% of a fixed allowance.

SUMMARY

So what does this all mean. Well, for those in receipt of travel allowance
(except a reimbursive allowance less than the limits I mentioned) you MUST
now keep a logbook of your travel. I guess those being reimbursed are
already having to do so, cos how else would they know how much reimbursement to
get. And, for now, those with company cars don't need to bother, but from next
year, the tax on your company car will be a bit crazy but with the option to
reduce it by... keeping a logbook.

Finally then, what is a logbook. Well, it ain't defined so the line I take
is that it needs to provide sufficient detail to achieve what it sets out to
do, and that is to distinguish business and private travel. Hence, I believe
that a record of just business travel is sufficient (then the private travel
is the balancing figure). The log should record each trip, who it was to,
where they are, what the opening and closing mileage on the odometer was
before and after and from that, the mileage actually travelled. SARS has a
logbook available for download. I'll try to get a copy and put it on my
website (www.dfs.co.za).

Signing off then, with a last word: errors and omissions excepted! I hope
everything I've said is right, but with tax you can never be sure.
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