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Did you know: When the value of your company car goes down, so does your employees' tax bill?

by , 10 June 2014
Last year your company bought a company car and you paid R 200 000 for it. Since then, your employee Mark, has had full use of the car and he's taxed on it as a taxable fringe benefit.

But have you thought about the fact that the company car is a depreciating asset?

Assets, such as a company car, have a depreciation rate of 15% each year. This means Mark is probably paying more tax than he should be.

Here's how you can use the car's value depreciation to shrink Mark's tax bill down to size.

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Two types of depreciation you can use to shrink a tax bill

According to the Practical Tax Loose Leaf, there are two types of depreciation. 
 
Straight-line: This means each year you'll write off an amount from the asset's value. You can also claim this annual write-off instalment as your wear and tear tax allowance.
 
Reducing balance: Here you'll deduct the depreciation (15% each year) from the book value of the asset. This means each year the book value of the asset will drop. This will be the better method of depreciation to use on your company car.
 
But, how can you use this to reduce Mark's tax?
 

Here's how to use the depreciation of your company car to reduce Mark's tax
 

Normally the value of a company benefit, such as a company car, is 3.5% of its determined value. So Mark would pay around R7 000 a month on its original value.
 
But since the car's depreciated by 15% or R30 000, its new value is R170 000. This means Mark should pay 3.5% of R170 000 and his tax should be around R5 950.
 
There you have it: It's important to remember that your employee pays tax based on the value of the asset. As its value decrease, so must your employee's tax
 


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