A company car is a car provided by your company for the business and sometimes private use of an employee. Usually, the company covers all the costs of the car, from the cost of its purchase to its maintenance costs.
But did you know that 'your employee's private use of the company car is a perk otherwise known as a fringe benefit. You must deduct PAYE on the private kilometers the employee travels in the company car. These private kilometers are referred to as the private use of the car, by the employee,' explains the Practical Tax Loose Leaf Service.
It's crucial you tax your employee's private use of the company car correctly.
Getting it wrong could result in your company facing a 10% tax penalty for the under deduction of PAYE.
Follow these three steps to tax your employee's private use of the company car correctly
ABC Consulting buys a new car, for Jason. The car costs ABC Consulting R500 000 (including Vat). The monthly income tax value of the fringe benefit is: R500 000 x 3.5% = R17 500.
ABC Consulting will calculate the PAYE as follows: 80% of R17 500 = R14 000. The company will deduct R14 000 from Jason's salary each month. The R14 000 is the value of the fringe benefit, which must be added to his taxable income and PAYE calculated at the employee's applicable tax rate.
For example, if the employees tax rate is 40%, the additional PAYE that must be deducted is 80% of R17 500 = R14 000 (fringe benefit value) x 40% (employee's tax rate) = R5 600. This is the additional PAYE that Jason will pay for the right of use of your company.
There you have it! Knowing how to tax your employee's private use of the company car correctly will ensure you avoid a 10% penalty from SARS if you get it wrong.