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Warning: Tax your employee's private use of the company car correctly or face a hefty penalty from SARS

by , 11 April 2013
'Before you consider handing your top exec the keys to a company car, it's important for you to know how to treat the car on your payroll. If you don't know when and how the car is taxed, you could end up under-deducting PAYE - and a 10% penalty from SARS is inevitable,' warns the Practical Tax Loose Leaf Service. Read on to find out how your company should tax your employee's use of the company car so you can avoid hefty penalties.

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

  1. Calculate the value of the fringe benefit. 'That's 3.5% of the determined value of the car, each month,' says the Practical Tax Loose Leaf Service.
  2. 'Calculate the employees' tax (PAYE) on this fringe benefit. It's 80% of the fringe benefit value,' explains the Loose Leaf.
  3. Deduct the PAYE from the employee's monthly salary.

Here's a practical example by the Practical Tax Loose Leaf Service on how to tax your employee's use of a company car

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.



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