Tax on the Use of a Company Vehicle – How It Works
Johnny is his company’s top sales rep and his employer decides to grant him the exclusive use of a brand new company car. Besides the use of the vehicle the employer undertakes to pay all maintenance and fuel cost of the vehicle. The cost of the motor vehicle is R350 000 (Vat Inclusive)
Needless to say Johnny is very happy about the use of his new toy.
At the end of the month Johnny receives his payslip and notices that the tax on his payslip is suddenly considerably more. He further notices a strange amount of R9 800 under an entry called Use of Motor Vehicle.
He decides to query this with Joan from the Payroll department.
Joan explains the amount to him as follows:
“Johnny the amount of R9 800 is calculated by multiplying the cost of the motor vehicle to our employer (R350 000) by 3.5% and then multiplying it by 80%, which is the inclusion rate for PAYE purposes . If the purchase price included a maintenance plan the cost would have been multiplied by 3.25%, not 3,5%. Obviously the cost with the maintenance plan would have been higher so the extra 0.25% would not have made any big difference.
Johnny if you paid the fuel the 3.5% would have been reduced by 0.22% and if you paid the maintenance it would have been reduced by an additional 0.18%.”
After seeing Joan Johnny is still not happy and decides to see the financial manager, Mike, to ask what can be done about this.
Mike explains to Johnny that everything Joan said is correct but that he would further like to point out that the R350 000 x 3.5% only have to be included at 20% for PAYE purposes on a monthly basis if more than 80% of the travel is for business purposes. But the employer must be sure that more than 80% of the use of the vehicle will be for tax purposes.
Other points of interest
No fringe benefit tax is payable when a vehicle is classified as a pool vehicle. A pool vehicle is one that is available for general use by all employees during office hours. With a few exceptions the vehicle must remain at work after hours.
Even if an employee doesn’t travel 80% for business purposes, the person can still reduce the taxable portion of the benefit by keeping a proper logbook. This will help to reduce tax at the end of the year when the taxpayer completes his or her tax return.
An employee will get taxed on the original value placed on the vehicle – it is not reduced yearly as the vehicle gets older. So in year five of use the fringe benefit will be the same as in year one although the vehicle is much older. So perhaps it is a good time in year five to re-arrange things for tax purposes. Give us a call if you are in this position.
Tags: tax