Why you need to tax the employee's private use of a company car correctly
A company car is a taxable fringe benefit. This is because it has the following three elements (Paragraphs 1 and 2 of the Seventh Schedule of the Income Tax Act
There's an employment relationship between you and your employee.
Your employee gets this benefit because it's a perk of his job.
You reward his services.
Now you know why you should tax your employee's private use of the company car, let's look at the four steps you must follow to do this correctly.
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Four steps to tax employee's private use of a company car
- Calculate the value of the fringe benefit. That's 3.5% of the determined value of the car, each month.
The determined values is the original cash cost of the car including VAT, but excluding finance charges or interest. It includes the cost of the maintenance plan, if the car is subject to this maintenance plan when you bought it.
- Multiply the determined value by the appropriate fringe benefit percentage to get the monthly fringe benefit value. 3.5% for a vehicle without a maintenance plan or 3.25% if vehicle is subject to a maintenance plan for not less than 3 years/or 60 000km.
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Two more steps to tax employee's private use of a company car
- Include 80% of the fringe benefit value in your employee's monthly PAYE calculation as taxable income.
But, if you're sure that at least 80% of your employee's total annual travel will be for business purposes, then you only need to include 20% of the fringe benefit value in his monthly PAYE calculation as taxable income.
- Deduct the PAYE from the employee's monthly salary.
Now you know the basic tax treatment of company cars. But do you know how to tax the employee if:
1. He didn't start using the company car until midway through the month?
2. He uses the car more than 80% for business travel?
3. He gets the use of more than one company car?
4. He pays the maintenance, fuel and licensing costs – instead of the company?
5. The company rents the company car (through a rental agreement or operating lease) instead of buys it?
In chapter C05: How to tax a company car, we show you exactly how to tax your employee if you have one of these scenarios.
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