Johannesburg, 9th March, 2011 – Amended legislation has resulted in an increase in the percentage rate used to calculate the monthly fringe benefit for all company cars and a radical change in the taxation of company cars from 1^st March 2011, making the keeping of a log book essential, if employees are to see any tax benefit.

This is according to Ron Warren, Executive Chairman of payroll software company, NuQ, who says that new tax regulations for company cars which fall under the recently legislated Taxation Laws Amendment Act, 2010 and the Taxation Laws Second Amendment Act, 2010, represent administration headaches for businesses.

In the 2011 tax year the deemed business kilometres travelled concession for travel allowances (those exceeding 18 000 but not exceeding 32 000 kilometres) was repealed, and taxpayers seeking to claim expenses against a travel allowance had to maintain travel log books showing actual business use.

Similar changes are now required for the employer company car fringe benefit and Warren says that both sets of rules must roughly reach the same tax outcome so as to prevent ‘arbitrage’, according to the explanatory memorandum on the Acts.

“In the past, company cars were viewed as being beneficial because employees did not have to record the kilometres they travelled for business,” he says. “The new legislation changes this making them a more troublesome fringe benefit. Tax deductions allowed on both the travel allowance and the company car will now be calculated in the same way, and employees have to keep a log book to show their business travel and their fringe benefit will be adjusted in line with what the log book says.”

He explains that the business kilometres actually travelled as evidenced by a log book are now valued in exactly the same way for a company car as they are for a travel allowance, using the same cost table published by the Minister.

Under the new legislation, Warren says that another major change is that the percentage rate used to calculate the monthly fringe benefit for all company cars (including the first) has been raised to 3,5% per month of the vehicle’s determined value (instead of 2,5% for the first car in terms of the previous legislation).  This rate is reduced to 3,25% per month if a maintenance plan was purchased at the same time as the car was purchased.

He says that under the amended law, the cost of a maintenance plan, VAT and any other taxes, such as the carbon emissions tax (which were excluded in the past ) will have to be included in the “determined value” of the car on which the 3,5% or 3,25% is calculated.

Under the new legislation, Warren says that SARS has also changed the percentage of the company car fringe benefit that is to be subjected to PAYE. Now, 80% of the benefit (of the full fixed 3,5% or 3,25% determined value of the vehicle) will be taxed per month, on the assumption that the employee will submit a log book at the end of the year.  This also assumes that the business usage of the car will be only 20%, so that the remaining 80% must be subjected to employees’ tax, as is also the case with travel allowances. 

Having said this, Warren points out that if employers are satisfied that at least 80% of the use of the car for a year of assessment will be for business purposes, then only 20% of the value of the calculated fringe benefit will be subject to PAYE. (A similar change has been made to the percentage of a travel allowance to be subjected to PAYE.)

Final adjustments for actual business kilometres and private payment of expenses will occur on assessment and Warren warns that employees could find themselves having to cough up at the end of the year if their log books don’t prove business use.

The challenge for businesses is the fact that the the Act states employers must use either 20% or 80% for the whole year. “This is problematic because this does not cover situations where certain employees’ circumstances may change during the year and they move from one category to the other,” he says.

“These employees would therefore be over or under taxed and would have to recover or pay the difference at the end of the tax year.”  However, SARS have verbally advised that they will accept changes from 80% to 20% for a part of the year, even though the Act itself does not permit this.

The new legislation also requires that if employees receive a travel allowance and they have a company car the 100% of the allowance must be subjected to PAYE, and no deductions will be permitted on assessment.

Another problem which Warren says will arise, is that of some top executives driving company cars who may not want to fill in travel logs. “These executives who do not keep travel logs will end up paying tax on 100% of this fringe benefit.”

“The tax assessment is based on the presumption that all employee use is deemed to be private unless the contrary is proved,” says Warren.  “This presumption matches the current travel allowance rules, which require a log book to prove business use.”

On assessment employees can claim certain employee paid operating expenses against the company car fringe benefit according to the specified formula.