Days of company cars numbered: Ernst & Young

The days of company cars may be numbered, Ernst & Young says, following a release of a draft Taxation Laws Amendment Bill.

The bill sets out the proposed amendments in relation to company cars effective from March 1, 2011.

Vedika Andhee, tax director at Ernst & Young, said employees had been holding their breath since March anticipating that the SA Revenue Service (Sars) had forgotten about the Budget speech announcement.

“However, it looks like the days of company cars may be numbered,” Andhee said.

According to the proposed amendments, company cars would be taxed at a rate of four percent of the determined value of the car on a monthly basis.

“This constitutes a 1.5 percent increase from the current rate of 2.5 percent,” Andhee said.

Furthermore, the determined value of the company car would now include the costs of a maintenance plan and VAT.

“Currently, Sars allows the maintenance cost to be offset against the determined value and currently the determined value of the car excludes VAT.”

Andhee said employers would be required to withhold employee’s tax at a rate of 80 percent on the fringe benefit effective March 1, 2011.

Currently, employers withhold employee’s tax on 100 percent of the fringe benefit.

“As can be seen, the changes are considerable and 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 percent.”

Andhee said that should the bill be enacted, employees who were provided with company cars would be taking home less on a monthly basis.

“Fortunately, employees do have the ability to claim some of the tax back, provided they maintain proof of business expenditure, presumably in a logbook.”

On submission of the individual’s tax return, the individual could claim the ratio of business kilometres travelled over the total mileage against the fringe benefit calculated, to potentially qualify for a tax refund.

“For those individuals who opted for a company car as opposed to a travel allowance because of the paperwork, unfortunately, it looks like they will need to maintain a logbook in order to be able to claim a portion of their tax back.”

Those who chose not to maintain a logbook, or did not use their company car for business travel, would have to bear the brunt of the proposed legislation.

“These individuals will get a rude awakening on assessment when they will need to pay in taxes.”

Andhee said those individuals who maintained a logbook would need to justify at least 20 percent of the fringe benefit amount 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,” she said.