Drive your company car and pay less tax!

Company cars have been on the SARS watch list for some time. However, the reality of the situation is that individuals will continue receiving company cars and it is likely, with the amendment to the travel allowance legislation, that there may be a marginal increase in the number of company cars that are provided.

The provision of a company car has a fringe benefit tax attached to it (to account for the private element). It was announced earlier this year that SARS will be re-considering the value of the fringe benefit (although legislation has yet to be introduced addressing this aspect). Currently, company cars are taxed at a rate of 2.5% of the “determined value” of the motor vehicle. The concept of “determined value” is comprehensively defined in the Income Tax Act but would generally be the original cost of the vehicle to the purchaser (where the sale occurs between parties acting at arm’s length).

The original cost of the vehicle excludes any finance charge, interest, VAT etc. In the current economic environment, when acquiring a motor vehicle from a dealership, it is a common selling point that the vehicle comes with a 3/5/6 year warranty and a maintenance contract. The vehicle’s selling price would therefore have this maintenance contract built in (although the breakdown of this cost is not specifically stipulated on the invoice).

One way of reducing the tax on a company car is to reduce the determined value of the car or to reduce the percentage points applicable to the determined value. As an illustration, where the employee does not receive a travel allowance and bears the full cost of maintaining the company vehicle, the value of the private use of the company car (i.e. the fringe benefit) must be determined by deducting 0.18% from 2.5% (i.e. the fringe benefit is calculated at a rate of 2.32% of the determined value of the vehicle on a monthly basis).

Arguably, in situations where a maintenance contract is included in the purchase price, the determined value should be reduced by the cost of the maintenance contract. The reduction in the percentage points cannot however be utilised as it only applies in instances when the employee bears the full cost of maintaining the vehicle.

Assume that a company purchases a car for R250 000 (excl VAT etc). The car has a 3 year maintenance contract which costs R40 000 and this cost is built into the purchase price. The determined value to be utilised in computing the fringe benefits tax would be R210 000. This amounts to a reduction in the fringe benefit of R12 000 per annum (R1 000 per month)!
There are those who would argue that the determined value cannot be reduced in this way. However, it appears that SARS approves of the method stated above. They have specifically stated in the Employer Guide that “Where a motor dealer includes a maintenance contract in the purchase price of a vehicle, the value of the maintenance contract should be excluded from the calculation of the value of the benefit received by an employee when the right of use is granted to such employee.”

In light of SARS ratification of this method, it would be a wise idea for employers to request that the dealership provide them with a breakdown of the purchase price separating the maintenance contract from the actual cost of the motor vehicle. The fringe benefit will therefore be much lower once the maintenance cost is removed. At the end of the day, recipients of company cars may have smiles on their faces as they will be seeing a greater take home pay on a monthly basis!

Disclaimer
The information contained in this article / publication provides general guidance. It is not intended to constitute substantive information and cannot replace the specific advice which should be sought from an appropriate professional advisor in relation to the actual facts of a matter, before taking any particular course of action.

TAXtalk: www.taxtalk.co.za.

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