Article by: Fourways Accountant: ANNJA LOUCA
Both company cars and car allowances are highly valued employee benefits, and it's important to consider their tax treatment to make the best decisions for both employees and the company. One crucial factor to consider is whether the company allowance value or company car value is more tax-efficient for both parties.
Without calculating this for each employee and employer, I cannot advise on the best option. However, I can highlight key points that can help you start thinking about it.
Due to the impact of COVID-19, employees who received a travel allowance or had use of a company car may face increased tax liabilities. This is because there is a correlation between travel allowances (and company vehicles) received by employees in the current tax year and instances where business travel was not feasible.
In this post, we discuss the general taxation principles of travel allowances and reimbursement of travel expenses claims, as well as how COVID-19 may result in an increased tax burden for employees.
We anticipate that SARS will intensify their audits and verifications as they strive to collect more taxes. We have noticed that some individuals whose taxes we are now filing have a higher tax liability due to fewer business kilometers. SARS does not care and only wants to recover the taxes owed to them.
It is now more important than ever to keep your travel logbook updated and maintained, assess how many private and business kilometers you will travel, and adjust your benefits accordingly.
DEFINITIONS
Car Allowance
A travel allowance is a payment made to an employee for using their own private vehicle, which is added to their salary and affects their gross salary. The allowance can be used to either lease a car or reimburse the usage of a privately owned vehicle. The choice of vehicle is up to the employee. It is important to note that private travel using the vehicle is taxable.
Use of Motor Vehicle/Company Car
The company purchases a car for an employee to use for both business and personal purposes. The car is considered a company asset and is not owned by the employee. The private use of the vehicle is subject to fringe benefit tax.
ALTERNATIVES
Car Allowance
If you travel less than 8000 km per year, it is often simpler to claim reimbursive travel allowance at the approved SARS rate >> PAYE-GEN-01-G03 - Guide for Employers in respect of Allowances - External Guide (sars.gov.za)
The reimbursement is not taxable in the employees’ hands if less than 8000km is travel and R3.82 per km and lower. The employee must maintain a logbook to prove the business km.
Use of Motor Vehicle/Company Car
If a car is used by a group of employees rather than allocated to one specific employee, the private use value can be zero under certain conditions. These conditions include when the vehicle is used by other employees of the employer in general, and private use by the employee is infrequent and incidental to business use, and the vehicle is not typically kept at or near the employee's residence.
Alternatively, if the employee's duties require regular use of the vehicle for work outside of normal hours, and they are not allowed to use the vehicle for private use other than traveling between their place of residence and work, or for infrequent and incidental business use.
These vehicles are commonly known as pool cars. The company can opt to use a vehicle rental company like Avis to provide the cars. This way, the company is not responsible for maintaining the cars, and any damage caused by employees is not the company's problem.
The company leases the cars to employees and ensures that the employees are taxed on the fringe benefit value.
REQUIREMENTS TO FILE TAX RETURN
Car Allowance
Keep a logbook
eLogbook Guide published by SARS
Examples of business travel:
Private travel examples:
Remember: Private travel is taxable. Business travel not is taxed
Use of Motor Vehicle/Company Car
Keep a logbook of private and business km.
To determine the original purchase price and if a maintenance plan was included or not.
TAX FOR INDIVIDUAL
Car Allowance
The tax rate for a travel allowance is 80% when taxed in your personal capacity. However, this rate can be reduced to 20% if the employer is satisfied that a significant amount of business kilometers will be driven. It's important to note that fuel costs cannot be claimed if the employee has not paid for the full cost of fuel, and maintenance costs cannot be claimed if the vehicle is covered by a maintenance plan.
If the vehicle is used for business purposes for less than a full year, the fixed cost must be reduced on a pro-rata basis. To determine the costs that can be claimed against a travel allowance, the actual distance travelled during a tax year and the distance travelled for business purposes, substantiated by a logbook, are used.
Benefits and Negatives:
One potential downside is when an employee overestimates their business mileage to receive a higher monthly allowance. Since PAYE is calculated based on the estimated business usage, many employees assume that 80% of their travel is for business purposes. However, with fewer business trips being taken during the pandemic, employees may end up paying more PAYE or owing money at the end of the tax year due to insufficient business mileage.
Additionally, travel allowances, reimbursements, and fuel cards do not cover other expenses like vehicle maintenance, insurance, or depreciation. An employee who frequently travels may also need to bear the costs of replacing their personal vehicle earlier than expected.
Use of Motor Vehicle/Company Car
The benefit's cash value accumulates on a monthly basis and requires employee tax deduction.
Benefits and Negatives:
When an employee's business travel exceeds 60%, they lose tax and wear-and-tear benefits for using their private car. Therefore, frequent business travelers may benefit from having a company car.
The employee does not own the car and only pays tax on its usage, which covers the expenses of the vehicle. Consequently, the individual can drive a luxurious car without paying for its expensive bills
TAX FOR THE COMPANY
Car Allowance
The travel allowance paid to employees is considered a valid business expense and is fully tax-deductible.
Benefits and Negatives:
Using a travel allowance provides the advantage of having a clear understanding of the financial impact of employing an individual, as it is a fixed amount. Additionally, the company is relieved of the responsibility of maintaining the company car.
In the event that an employee leaves the company, there is no need to sell the car or make other arrangements for the vehicle. Furthermore, employees do not have the expectation of receiving a company car as part of their employment.
Use of Motor Vehicle/Company Car
When the company owns the vehicle, it incurs a monthly depreciation charge that can reduce its taxable income and decrease the amount of tax payable. Additionally, the monthly interest or leasing charge is tax-deductible for the company and can also reduce its taxable income.
Fuel costs and expenses related to repairs and maintenance on the vehicle are also tax-deductible, which can further reduce the company's tax liability.
Benefits and Negatives:
A negative aspect of owning company vehicles is that they are considered assets that need to be maintained on the company's books. Leasing vehicles for employee use can decrease this risk.
There is an expectation among employees that they will receive a company car as part of their employment package, and failing to meet this expectation could cause dissatisfaction.
On the positive side, having company-owned vehicles on the balance sheet can make the company look more financially stable.
If the vehicles break down frequently, the company is responsible for maintenance and repair costs, which can be a burden.
HOW TO CALCULATE
Car Allowance
The default rule for fixed travel allowances, reimbursements for expenses, and company petrol cards is that 80% of the benefit is subject to PAYE and should be included in the employee's remuneration. This assumes that only 20% of the vehicle's use is for business purposes.
However, if the employer is satisfied that at least 80% of the vehicle's use will be for business purposes, they may reduce the fixed travel allowance, reimbursement for expenses, or company petrol card expenditure to only 20%. This determination must be made monthly.
Use of Motor Vehicle/Company Car
If an employee utilizes a company-owned vehicle, the taxable value of the vehicle should be added to their remuneration on a monthly basis. The fringe benefit value is determined as a percentage of the car's determined value, which is contingent on whether a maintenance plan was included in the initial purchase price. The following percentages apply:
The fringe benefit value is either 80%, 20% or 100% taxable, depending on the proportion of private use:
Conclusion
One helpful approach to deciding which option to choose is to consider the perspective you are evaluating from. In our case, my colleague Esi and I made the assumption that company cars were not the best choice for us. However, after researching and writing this blog, we realized we did not have all the necessary information to make an informed decision.
We are currently gathering data on the costs associated with using our personal cars for business purposes, and we will then use the information in the table above to evaluate our options. It may be that one option works better for Esi and another for me, or we may decide to use a combined approach.
Ultimately, our decision must be based on what is best for the company, as we have a fiduciary duty to all stakeholders involved.
Happy researching!
For more information, please visit our website www.anlo.co.za or give us a call on 011 658-1324
