13 May 2010

Company car fringe benefit set to increase

Draft legislation released by Treasury proposes an increase in the taxation of company car fringe benefits from the current 2,5% to 4% of the 'determined value' of a vehicle per month. The change was prompted to prevent any tax arbitrage with the use of a company owned vehicle after more restrictive rules were placed on travel allowances.

Company car fringe benefits, as with medical aid contributions and travel allowances, will enter the 'pay tax now claim deductions later' territory from 1 March 2011. This shift in policy essentially provides SARS with an increased cash flow from a PAYE perspective and simultaneously places a larger burden of proof on individual taxpayers wanting to claim deductions on assessment.

Continuing the alignment of travel allowance and company car tax regimes an individual who has been given the use of an employer owned vehicle will now have to claim a deduction on assessment, based on actual business distances travelled and, if applicable, actual expenses incurred on vehicle insurance, licensing fuel and maintenance costs. This places a new compliance burden on employees in receipt of company cars as they will be required from 1 March 2011 to maintain accurate records of expenditure (unless paid for by the employer) and logbooks of business distances travelled, which until recently was only the domain of so called travel allowance employees.

For PAYE withholding purposes the proposed rate of 4% will automatically be reduced to 3,2% of the 'determined value' of a vehicle per month to align its tax treatment with that of travel allowances where currently only 80% of such an allowance is subject to PAYE.

Another significant change to the company car regime is the base from which the fringe benefit will be determined. Generally, the 'determined value' is calculated as the original cost of the vehicle excluding finance charges, VAT and maintenance plan component. This is all set to change from 1 March 2011 on the basis that the VAT and maintenance component will be included in the 'determined value' of the vehicle.

The debate as to whether an employee should be given a travel allowance or a company car has entered new territory with the proposed amendments. Careful planning must be done by employers and employees alike to determine the best fit for their specific circumstances having regard to factors such as vehicle and running costs including actual business distances travelled during a year of assessment. The proposed amendments would also require that existing payroll systems be upgraded to cater for the change in taxation of company car fringe benefits.

Ruaan van Eeden
Senior Associate
Tax

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