Use these four steps to tax your employee's private use of the company car
If you give your employee the use of a company car, then you'd better make sure you're taxing it correctly. If you don't, you're opening the door to a potential 10% tax penalty for under-deducting your employees' tax. Don't take that risk. Follow these four steps to ensure you tax employees' private use of the company car correctly.
If you're not sure of how to tax your employee's private use of the company car correctly, don't fret, the Practical Tax Loose Leaf Service has got you covered.
Want to tax your employee's private use of the company car? Follow these four steps
Step1 – Calculate the value of the fringe benefit. That's 3.5% of the determined value of the car, each month.
The Practical Tax Loose Leaf Service says the determined value 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 was subject to this maintenance plan when you bought it.
Keep in mind that the determined value isn't always calculated the same way. The following rules apply:
Where the vehicle is leased: For a normal financial lease, or a lease where you get ownership of the car at the end of the lease, the determined value is the retail market value. When the lease is based on an installment credit agreement, the determined value is the cash value of the car.
If the seller or the supplier is a bank, or a financier, the determined value is the cost to that person. If the supplier is a dealer, then the determined value is an amount equal to or that exceeds the amount the car is normally sold for.
Rented cars: For vehicles the company leases through an operating lease (rents the vehicle and never receives ownership), there's no determined value.
In any other case: The determined value is the market value of the car at the time you first bought the car or the right to use the car.
The determined value of the car includes the value of any original accessories (for example, air conditioner or mag wheels), except security systems.
You must reduce the determined value on cars that you bought more than 12 months before it was given to the employee to use.
If you bought the car longer than 12 months before you gave it to your employee to use, you can depreciate the determined value. If you don't, you could end up deducting too much tax from your employees.
Step2 – Multiply the determined value by the appropriate fringe benefit percentage to get the monthly fringe benefit value.
Step3 – Include 80% (previously 100%) of the fringe benefit value in your employee's monthly PAYE calculation as taxable income. But, if you're absolutely certain 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 your employee's monthly PAYE calculation as taxable income.
Step4 – Deduct the PAYE from your employee's monthly salary.
Remember, if you don't know when and how the use of the company car is taxed, you could end up under-deducting PAYE and a 10% penalty from SARS is inevitable.
So be sure to follow these steps to tax your employee's private use of the company car correctly.