TAX NEWS - JUNE 2010

South Africa Tax: Company car days may be numbered by proposed tax laws

by SANCHIA TEMKIN, 02 June 2010 -- PROPOSED new tax laws are set to tighten the noose on the abuse of car and travel allowances that have cost the government billions of rand in lost revenue.

The draft Taxation Laws Amendment Bill, which is expected to come into effect on March 1 next year , will sound the death knell for taxpayers using company cars, say tax analysts. "It looks like the days of company cars may be numbered," said Vedika Andhee, a tax director at Ernst & Young, earlier this week.

More than a half-million taxpayers make use of car and travel allowances, one of the two remaining fringe benefits available to them. The other benefit is medical aid.

Under the proposed new legislation, company cars would be taxed at a rate of 4% of the determined value of the car each month. "This constitutes a 1,5% increase from the current rate of 2,5%," said Ms Andhee.

The determined value of the company car would now also include the costs of a maintenance plan and value-added tax . Under the current legislation , the South African Revenue Service (SARS) allowed the maintenance cost to be offset against the determined value.

Employers would also be required to withhold employees' tax at a rate of 80% on the fringe benefit. At present, employers withhold tax on 100% of the fringe benefit.

"The changes are considerable. The biggest surprises are not only the rate at which the company car will be taxed on a monthly basis, but also the inclusion of VAT which effectively increases the determined value by 14%," said Ms Andhee.

Should the bill be passed into law, employees who were provided with company cars would be taking home less each month, she said.

For example, assume a financial director has a company car valued at R300000 (excluding VAT). At the moment , the fringe benefit is R7500 a month.

Under the proposed law, the director 's new fringe benefit would be R13680, which would then be subject to 80% employees' tax, bringing it down to R10944. Applying a marginal rate of 40%, the director could be taking home about R1377 less per month, said Ms Andhee.

Kent Karro, a tax specialist at chartered accountants Horwath Zeller Karro, said employees were able to claim some tax back provided they kept proof of actual business kilometres travelled, presumably by way of a logbook. Mr Karro said there was also a reduction in the case of employee-paid expenses, such as insurance, licence, fuel and actual maintenance costs.

Ms Andhee said taxpayers who kept a logbook would need to justify at least 20% of the fringe benefit in order to break even and not pay any taxes on assessment.

"At the end of the day, it looks like SARS has every intention to strictly tax everything that moves."