5 August 2010

More changes to company car fringe benefits

On 3 August 2010 the Standing Committee on Finance (SCOF) reported back on responses received from various stakeholders with regards to the 2010 Taxation Laws Amendment Bill (the Draft Bill). One aspect of the Draft Bill that entertained numerous responses was that relating to the proposed overhaul of company car taxation.

The Draft Bill proposed 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. Subsequent to comments received, the new proposal is that the fringe benefit rate will only be increased to 3,5% of the 'determined value' of a vehicle per month. For monthly PAYE withholding purposes only 80% (being 2,8%) of the monthly fringe benefit will be included in remuneration, subject to further reductions depending on the circumstances discussed below.

The SCOF further accepted that the inclusion of a maintenance component in the 'determined value' of a vehicle could amount to 'double counting' and have proposed that, in the event of a maintenance contract being included in the purchase price, the fringe benefit value must be reduced from 3,5% to 3,25%. Unfortunately, taxpayers were not as lucky with reference to the inclusion of VAT in the 'determined value' of a vehicle and the effects of depreciation. The SCOF stated that no account should be taken of vehicle depreciation so as to align the company car provisions with that of travel allowances, where calculations are based on the presumed residual value of a vehicle.

Special concessions have further been made to employees who use vehicles as so-called 'tools of trade'. The SCOF made specific reference to sales representatives and assessors who spend most of their time on the road away from home. Comments received by the SCOF highlighted the fact these types of employees will be severely prejudiced from a monthly cash flow perspective if the tax relief available to them, in the form of deductions, is only available on assessment once a year. The new proposal allows an employer to reduce the monthly fringe benefit percentage to 0,7% of the 'determined value' of the vehicle (being 20% of 3,5%), but only where the employer is satisfied that the vehicle will not be used more than 20% for private purposes. Where there are no proper grounds for using the reduced rate of 0,7% the employer will become jointly liable for any tax shortfall.

Other notable rejections included a proposal to allow expatriate employees working in South Africa a 24-month tax free window period, similar to that currently available for housing benefits.

Although the revised proposals provide welcome relief for many employees from a cashflow perspective, it does increase the compliance burden on employers, having regard to the calculations that must be done in deriving at monthly cash equivalent of the fringe benefit. The effect of the new proposals on existing payroll systems should not be discounted.

Ruaan van Eeden, Senior Associate, Tax

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