Not sure how to tax an employee who started using the company car midway through the month? Use this example
If you give your employee the right to use your company car in the middle of the month, for example on the 15th, you must adjust the taxable value of the fringe benefit using daily apportionment.
This way, you won't tax your employee on the full month's use of the car.
Since this is easier said than done, check out ABC Consulting's example below so you can tax your employee correctly and avoid SARS penalties.
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Here's how ABC Consulting taxed an employee who didn't start using the company car until midway through the month
Experts behind the Practical Tax Loose Leaf Service explain that ABC Consulting bought a new car for Jason in 2011. The car cost R500 000 (including Vat).
The company gave Jason the right to use the car on 15 April 2011. This means in the 2012 tax year, Jason didn't use the car from 1 March to 14 April 2011.
As a result, ABC Consulting calculates Jason's Pay As You Earn (PAYE) as follows:
For March 2011, there'll be no PAYE since Jason didn't use the company car.
For April 2011, Jason only used the car for 16 days. ABC calculated the monthly value of the fringe benefit as follows: R500 000 x 3.5% = R17 500. Jason's PAYE is apportioned as follows: (80% of R17 500) x (30-14 days)/30 days = R14 000 / 30 days x 16 days = R7 466. PAYE at Jason's tax rate is therefore R7 466 x 40% = R2 987.
For months May 2011 to February 2012, the calculation will be as per normal. The monthly income tax value of the fringe benefit is as follows: R500 000 x 3.5% = R17 500. And ABC Consulting will deduct PAYE of R17 500 x 80% = R14 000 x 40% = R5 600.
There you have it. We hope this example has shed some light on how to work out tax for an employee who started using the company car midway through the month.
PS: If you want more assistance on company cars, check out our report: Your guide to taxing company cars and travel allowances. It contains 69 solutions to the most challenging company car and travel allowance questions.
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