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If you rent company cars from a third party, calculate tax as follows...

by , 13 June 2014
If your employees use company cars for business purposes, you must tax this fringe benefit correctly.

If you don't, you're opening the door to a potential 10% tax penalty for under-deducting Pay As You Earn (PAYE).

Do you really want to go down that road with SARS?

Continue reading to find out how to tax your employee correctly if you rent (through a rental agreement or operating lease) company cars from a third party.

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- How often your employees should hand in their logbooks?
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Handle tax as follows if you rent company cars from third parties

The Practical Tax Loose Leaf Service says, if your company doesn't buy its company cars, but rents them from a third party, calculating the taxable fringe benefit value is easy. It's simply the monthly value you pay (including Vat) to rent the car.

Here's an example of the tax treatment of company cars from third parties:

Magnatech LTD rents a car from Carent Co for R7 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's 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.

It's that simple. Now that you know how to handle tax when you rent company cars from a third party, make sure you comply to avoid penalties.

If you want to find out how to tax your employee if:

  • He didn't start using the company car until midway through the month;
  • He uses the car more than 80% for business travel;
  • He gets the use of more than one company car; or
  • He pays the maintenance, fuel and licensing costs – instead of the company

Check out the Practical Tax Loose Leaf Service.

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