Company car tax boon

Johannesburg - Recipients of company cars may see an increase in their take-home monthly pay, consultancy Ernst & Young said on Tuesday.

In a statement Vedika Andhee, director for tax, said the provision of a company car had a fringe benefit tax attached to it.

"It was announced earlier this year that the SA Revenue Service (Sars) will be reconsidering the value of the fringe benefit.

"Currently, company cars are taxed at a rate of 2.5% of the 'determined value' of the motor vehicle," she said.

The concept of 'determined value' was comprehensively defined in the Income Tax Act but would generally be the original cost of the vehicle to the purchaser.

"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 three to six year warranty and a maintenance contract."

Andhee said the vehicle's selling price would therefore have this maintenance contract built in.

"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."

She said that as an illustration, where the employee did not receive a travel allowance and bore the full cost of maintaining the company vehicle, the value of the private use of the company car - or the fringe benefit - had to be determined by deducting 0.18% from 2.5%.

"The fringe benefit is calculated at a rate of 2.32% of the determined value of the vehicle on a monthly basis," she said.

Arguably, in situations where a maintenance contract was included in the purchase price, the determined value should be reduced by the cost of the maintenance contract.

Andhee said the reduction in the percentage points could not, however, be used as it only applied in instances when the employee bore the full cost of maintaining the vehicle.

"Assume that a company purchases a car for R250 000 (excl VAT etc).

"The car has a three-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."

Andhee said that this amounted to a reduction in the fringe benefit of R12 000 per annum or 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," she said.

"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."

Andhee said in light of Sars's ratification of the method, it would be wise for employers to request that the dealership provided 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," she said.

- Sapa