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Be aware of company car changes in the new tax year

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A significant change resulting from the recent budget speech announcement by the Minister of Finance, Pravin Gordhan, is the manner in which the value of company cars will be determined. The budget speech also addressed travel allowances and the importance of keeping a detailed logbook.

“In the new tax year, the value will be the cost of the car, excluding finance and interest charges. This means that VAT and any maintenance plan purchased is included in the original cost, and company car values will have to be re-calculated from 1 March 2011,” says Grant Lloyd, MD of Pastel Payroll, part of the Softline Group and Sage Group.
The fringe benefit value of a company car is calculated at 3.5% if the vehicle was not subject to a maintenance plan at the time it was acquired by the employer, and at 3.25% if there was a maintenance plan.
The fringe benefit that is calculated must be reduced by any payment made to the employer by the employee other than the cost of licences, insurance, maintenance and fuel, which can no longer be deducted during the year, only upon assessment.
Lloyd says SARS has now moved to ensure that use of company cars and claiming of travel costs by employees using a company vehicle is more accurately represented by implementing the new requirement.
“While the car tax benefit used to be taxed at 100%, the onus is now on employers to apply either an 80% or a 20% tax rate when including the new fringe benefit value of a company car into an employee’s remuneration for the calculation of PAYE in the payroll.
“This means that the responsibility rests with the employer to indicate what percentage of the mileage the car will travel will be for business purposes,” says Lloyd.
If 80% of the total kilometres travelled are for business purposes, then the employer is permitted to subject only 20% of the allowance to the employee’s tax.
Only one taxable percentage may be used during the year of assessment. Should an employer decide to change the percentage during the year from 20% to 80%, the fringe benefit amounts for previous periods must be recalculated.
Most companies would like to know when to apply the 20% or 80% rule. Lloyd suggests that companies refer to the previous year of assessment to get an indication of the total kilometres travelled per employee, and identify the percentage of business kilometres that was travelled, to assist with the calculation in the new tax year.
Calculation method: E = (A x B) x C – D
Where:
* A – determined value of the vehicle (including VAT) of the time of purchase.
* B – percentage factor (depending on the maintenance contract, which is either 3.5% or 3.25%).
* C – estimated percentage of business travel (80/20 rule).
* D – amount paid by the employee to the employer towards the use of the vehicle.
* E – cash equivalent value of the taxable fringe benefit.
Examples of calculations are illustrated below:
* Scenario A, where business travel is equal or greater than 80% of the total kilometres travelled. Employee A receives the use of a motor vehicle with a value of R120,000.00 (including VAT) and business travel is equal to or more than 80% of total kilometres travelled. The vehicle value did not include a maintenance plan at the time of purchase.
Calculation: (R120,000.00 x 3.5%) x 20% = R840.00 (taxable fringe benefit value for the use of the motor vehicle).
Employee B receives the use of a motor vehicle with a value of R120,000.00 (including VAT) and business travel is equal to or more than 80% of total kilometres travelled. The vehicle value included a service plan at the time of purchase. Calculation: (R120,000.00 x 3.25%) x 20% = R780.00 (taxable fringe benefit value for the use of the motor vehicle).
* Scenario B, where business travel is less than 80% of the total kilometres travelled. Employee C receives the use of a motor vehicle with a value of R120,000.00 (including VAT) and business travel is less than 80% of total kilometres travelled.
The vehicle value did not include a service plan at the time of purchase. Calculation: (R120,000.00 x 3.5%) x 80% = R3,360.00 (taxable fringe benefit value for the use of motor vehicle).
Employee D receives the use of a motor vehicle with a value of R120,000.00 (including VAT) and business travel is less than 80% of total kilometres travelled. The vehicle value included a service plan at the time of purchase. Calculation: (R120,000.00 x 3.25%) x 80% = R3,120.00 (taxable fringe benefit value for the use of motor vehicle).