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Company cars: Two unusual scenarios of private use and how to tax them correctly

by , 11 October 2013
If your employees use company cars, you'd better make sure you're taxing them correctly. If you don't, you're opening the door to a potential 10% tax penalty for under-deducting your employees' tax. Read on to discover the two unusual scenarios of company car private use and how to tax them correctly.

The Practical Tax Loose Leaf Service defines a company car as a car your company provides your employee for business and sometimes private use.

What's private use?

This refers to any travelling NOT carried out for business purposes. This includes the trip between home (place of residence) and your office or place of employment.

There are two unusual scenarios of private use that could arise. This is if:

  • Your employee uses the car more than 80% for business travel
  • Your company only rents the car and doesn't own it.

Here's how to tax your employee for private use in these two situations

#1: Your employee uses the car more than 80% for business travel

Let's say you have a team of consultants who spend their days travelling between clients' premises. They only stop in at the office once or twice a week to chat to you and keep you updated.

You decide to give each consultant a company car and you know that more than 80% of the car's use will qualify as business use.

How do you tax this perk?

The private use of company cars is a fringe benefit. But because your employees use the cars so heavily for business, you can reduce the fringe benefit from 80% to 20%.

Here's an example of how to tax an employee who uses the car more than 80% for business travel: ABC Consulting decides to provide Tom, their top rep with a company car. The car costs ABC ConsultingR500 000 (including Vat).

The monthly income tax value of the fringe benefit is as follows: R500 000 x 3.5% = R17 500. Normally, in this case, his taxable fringe benefit value for employees' tax is R14 000 (i.e. 80% of R17 500).

But Tom has kept an accurate logbook. It proves that more than 80% of his travel in the car is for business purposes.

ABC Consulting can reduce the taxable fringe benefit value from 80% to 20%. That means Tom will be taxed on R3 500 (i.e. R17 500 x 20%) every month on the company car perk. If Tom was taxed at an average rate of 35%, you need to deduct R3 500 x 35% = R1 225 PAYE each month.

Caution: Don't apply the 20% taxation option if your employee can't prove the 80% business use of the car rule. SARS will disallow this and slap you with penalties.

Make sure ALL your employees keep an accurate logbook, so you can justify all your actions.

#2: What if your company only rents the car and doesn't own it?

If your company doesn't buy its company cars, but rents them from a third party, calculating the taxable fringe benefit value is easy. Simply use the monthly value paid (including vat) to rent the car, says the Practical Tax Loose Leaf Service.

Here's how to treat tax if your company only rents the car and doesn't own it: Let's say Magnatech LTD rents a car from Carent Co forR7 000 (incl vat) a month. Magnatech lets their employee, Ms Marks use the car as a company car and pays for all her petrol (R3 000 per month).

What is the taxable fringe benefit value?

Ms Marks will be subject to monthly PAYE on R7 000 + R3 000 = R10 000 per month. If Ms Mark's average tax rate is 35%, then Magnatech must deduct R10 000 x 35% = R3 500 PAYE per month.

Well there you have it. By knowing how to correctly tax your employees for company cars, you'll be sure to avoid a 10% tax penalty for under-deducting your employees' tax.
 



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