Here lies the legendary company car…RIP my friend

SARS has released a draft Taxation Laws Amendment Bill which sets out the proposed amendments in relation to company cars effective 1 March 2011. Employees have been holding their breath since March anticipating that SARS had forgotten about the Budget speech announcement but it looks like the days of company cars may be numbered.

The proposed amendments to the legislation affecting company cars are as follows:

• Company cars will be taxed at a rate of 4% of the determined value of the car on a monthly basis. This constitutes a 1.5% increase from the current rate of 2.5%;
• The determined value of the company car will now include the costs of a maintenance plan and VAT. Currently, SARS allows the maintenance cost to be offset against the determined value. In addition, currently the determined value of the car excludes VAT; and
• Employers will be required to withhold employees’ tax at a rate of 80% on the fringe benefit (effective 1 March 2011). Currently, employers withhold employee’s tax on 100% of the fringe benefit.
As can be seen, the changes are considerable. The biggest surprises are not only the rate at which the company car will be taxed on a monthly basis, but also the inclusion of VAT which effectively increases the determined value by 14%!

Should the Bill be enacted, employees who are provided with company cars will be taking home less on a monthly basis.

As an example, Jane the FD has a company car valued at R300 000 (excl VAT). Currently her fringe benefit is R7 500 on a monthly basis (R300 000 x 2.5%). In terms of the proposed legislation, Jane’s new fringe benefit will be R13 680 which will then be subject to 80% employees’ tax bringing it down to R10 944 (((300 000 x 114%)x4%)x80%) . Applying a marginal rate of 40%, Jane could be taking home approximately R1 377 less per month.

Fortunately, employees do have the ability to claim some of the tax back, provided they maintain proof of business expenditure, presumably in a logbook. On submission of the individual’s tax return, the individual could claim the ratio of business kilometres travelled over the total mileage against the fringe benefit calculated, to potentially qualify for a tax refund.

For those individuals who opted for a company car as opposed to a travel allowance because of the paperwork, unfortunately, it looks like they will need to maintain a logbook in order to be able to claim a portion of their tax back. For those who choose not to maintain a logbook, or do not use their company car for business travel, they will have to bear the brunt of the proposed legislation (to the extent enacted in its current form). These individuals will get a rude awakening on assessment when they will need to pay in taxes (i.e. the 20% untaxed amount). For those individuals who maintain a logbook, they will need to justify at least 20% of the fringe benefit amount in order to break even and not pay any taxes on assessment. At the end of the day, it looks like SARS has every intention to strictly tax everything that moves.

TAXtalk: www.taxtalk.co.za.