Company car fringe benefit

2008-04-23 00:00

In any employment, employers and employees will seek to agree on a salary package that will be beneficial to both parties. Salary packages comprise of a cash element and a fringe benefits element. Fringe benefits generally do not represent an amount received by or accrued to an employee as a fringe benefit usually cannot be converted into money.

As the employee receives a benefit, such a benefit must be valued for the purposes of determining the employee’s salary package. The Seventh Schedule to the Income Tax Act No. 58 of 1962, as amended, contains the administrative and legislative provisions with regards to fringe benefits. The Seventh Schedule specifies how the benefits are to be valued. An important point to mention is that all fringe benefits will be included in the gross income.

One of the more common fringe benefits enjoyed by employees is the right of use of a motor vehicle. The SA Revenue Service (Sars) has issued a Draft Interpretation Note (DIN) that is currently circulating for public comment. The purpose of DIN is to provide guidance on the position relating to the taxing of the company car fringe benefit where an employee has been granted this benefit by his employer. It must be remembered that an employee is granted this fringe benefit by virtue of her/his duties stipulated in her/his employment contract. The company car fringe benefit relates to the amount of private usage enjoyed by the employee.

In order to compute the fringe benefit, the employer must determine the value of the vehicle. Essentially, the value is the original cost to the employer excluding finance charges, interest and Value Added Tax. The DIN also specifies situations where the vehicle has been leased by the employer. The determined value of the vehicle is reduced by a depreciation allowance of 15% for each completed 12-month period, in the case where the employee is granted the right of use of the vehicle more than 12 months after the employer first acquired the vehicle.

The fringe benefit is based on 2,5% of the determined value of the vehicle. In certain circumstances, where the employee has the right of use of more than one vehicle, the fringe benefit is increased to four percent of the determined value of the second and subsequent vehicles.

The following are circumstances under which the value of the fringe benefit may be reduced:

o If the employee bears the cost of all fuel used for private purposes, the monthly value is reduced by 0,22%.

o If the employee bears the full cost of maintenance, the monthly value is reduced by 0,18%.

It must be noted that the above relates to situations where the employee is not in receipt of a travel allowance.

If the employee proves to Sars that he uses the company vehicles (in the case of more than one) for more than 50% business use per vehicle, Sars will deem the fringe benefit to be based on 2,5% of the highest determined value of the vehicle. Where an employee has retained records proving that he has travelled less than 10 000 private kilometres during the year of assessment, a lesser value may be used as the fringe benefit.

Employers must also remember to account for the VAT element on the right of use of the motor vehicle. Employees must remember that where they are granted use of a company vehicle and receive a travel allowance for the same vehicle, they may not use the deemed rate per the Cost Scale Table to determine the business portion. Instead, employees must claim actual expenses incurred by them in respect of that vehicle, and such expenses must be claimed against the travel allowance. Employers must ensure that the correct information is reflected on the IRP 5 certificate to avoid any unnecessary queries from Sars.

Nolan Daniels

Tax Compliance Manager

083 776 2271

nolan.daniels@kpmg.co.za

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