The recently released Taxation Laws Amendment Bill 28 of 2010 ("TLAB") contains revised amendments to the tax treatment of company cars and a change to the PAYE treatment of travel allowances in certain circumstances.
The main differences between the TLAB and the previous version of the much debated provisions in the Draft Bill relating to company cars, include the introduction of an employees' tax (PAYE) concession for so-called "tool of the trade" company cars and travel allowance users. In addition, the revised proposals contain a reduction in the taxable value of a company car from the initial proposal of 4% per month of the determined value to 3.5% per month, and a reduced rate of 3.25% applicable where the motor vehicle is acquired with a maintenance plan.
The proposed changes summarised below are effective from 1 March 2011 (that is, the 2012 tax year).
As per the previous Draft Bill, VAT must be included when calculating the "determined value" of the motor vehicle for fringe benefit tax purposes.
However, unlike the Draft Bill, which proposed a taxable value of private use equal to 4% per month of the determined value of the vehicle, the revised proposals in terms of the TLAB provide that the taxable value of the private use of the vehicle be increased from the current rate of 2.5% to 3.5% per month.
In addition, if the motor vehicle is the subject of a maintenance plan at the time the employer acquired the motor vehicle or the right of use thereof, the rate of 3.5% will be reduced to 3.25% of the determined value of the motor vehicle.
A "maintenance plan" in relation to a motor vehicle is defined as a contractual obligation undertaken by a provider in the ordinary course of trade with the general public to underwrite the costs of all maintenance of that motor vehicle, other than the costs related to top-up fluids, tyres or abuse of the motor vehicle, for at least a period of not less than three years and a distance travelled by the motor vehicle of not less than 60 000 kilometres from the date that the provider undertakes the contractual obligation. The definition provides that the contractual obligation may terminate at the earlier of -
- the end of the period of three years; or
- the date on which the distance of 60 000 kilometres is travelled by that motor vehicle.
In terms of the PAYE treatment of company cars, the general rule to be introduced is that 80% of the taxable value of the motor vehicle must be included in the employee's remuneration and subjected to PAYE.
However, probably as a result of representations made in respect of the Draft Bill, the TLAB introduces a concession for "tool of the trade" vehicle users. If the employer is satisfied that at least of 80% of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20% of the taxable value of the fringe benefit must be included in the employee's remuneration and subject to PAYE. A logbook will be required to substantiate this.
On assessment of the taxpayer by SARS, adjustments to the taxable benefit will be made where the employee has used the vehicle for business travel purposes or has borne the cost of certain expenses, provided accurate records of distances travelled for business purposes have been kept. These adjustments are as follows:
- Where the vehicle has been used for business travel, the taxable value of the vehicle will be reduced pro rata to the ratio of business kilometres travelled to the total kilometres travelled during that year of assessment.
- Where the employee bears the full cost of the licence, insurance, or maintenance of the vehicle, the taxable value of the vehicle will be reduced by a pro rata portion of the cost of the licence / insurance / maintenance (as the case may be) in the same ratio as the number of private kilometres travelled relative to the total kilometres travelled during that year of assessment.
- Where the employee bears the full cost of fuel, the taxable value will be reduced by an amount determined for the total kilometres travelled for private purposes by applying the rate per kilometre for fuel in the gazetted table of deemed costs (used to calculate the travel allowance deduction).
It is interesting to note that the new provisions do not specify what is regarded as travelling for private purposes in calculating the above adjustments. Presumably the same rules will apply as those applicable to travel allowances i.e. private travelling includes travel between the employee's place of residence and his place of employment or business or any other travelling done for private or domestic purposes.
In terms of the PAYE treatment of travel allowances, it is proposed in the TLAB that, where an employer is satisfied that at least 80% of the use of a motor vehicle for a year of assessment will be for business purposes, then only 20% of the travel allowance must be included in the calculation of the employee's remuneration for PAYE purposes.
While the reduction of the initial proposal of a 4% rate to calculate the taxable value of company cars to 3.5%, and the introduction of PAYE concessions for tool of the trade car users must be welcomed, the reality is that most employees will suffer a substantial increase in the tax attributable to their company cars next year.
This is due to the combination of the higher determined value computation (including VAT) and the increase in the monthly fringe benefit rate from the current 2.5% to 3.5%, which will result in negative monthly cash flow implications for employees, even taking into account the 80% inclusion into remuneration.
In addition, employees with company cars will be obliged to keep a logbook in order to substantiate a reduction in the taxable value on assessment and avoid an additional tax payment on assessment.
It seems as though the fringe benefit value attributable to a company car could still well exceed the actual costs of the vehicle.
Also, employers will have to be very diligent to ensure that appropriate mechanisms are put in place to ensure that at least of 80% of their employees' use of their motor vehicles is for business purposes in order to reduce the inclusion rate to 20%. If this determination is found to be incorrect, employers could be exposed to the underpayment of employees' tax. This is an ongoing risk, especially in light of the South African Revenue Service's current focus on employees' tax audits.