An amended tax act has removed certain lucrative tax benefits, reports Rowan
A NUMBER of tax consulting firms have had to scrap a company car scheme which they marketed as part of their attractive executive employment packages, after amendments to the Income Tax Act.
Gareth Beaver, a tax consultant at Ernst & Young explained the tax benefits the package had offered prior to the changes. A firm would lease a vehicle from a financial institution and allow the employee to use it. The employee would then pay the company a rental on that car and receive a car allowance equal to the rental amount. (The rental would cover both running and fixed expenses of that vehicle.)
The employee would be taxed on the portion of the allowance used for private use only. “Through this system the rental amount cancels out the fringe benefit of the company car as every cost the employee bears reduces the fringe benefit value of the car,” says Beaver.
Since the beginning of September, this has changed. “You can’t have a travel allowance and receive a company car and avoid paying the fringe benefit tax on that company car,” explains tax consultant Mark Goulding.
The amendment stops the employee from reducing the amount of tax he has to pay on his fringe benefits by the rental costs he pays to the company. In effect, the employee is now taxed on the fringe benefit of the car and on a car allowance if received.
Members of the scheme are advised to use either a company car or receive a travel allowance, or pay tax on both benefits, says
And the amendments don’t stop at that. Previously when employees moved from one subsidiary to another within a large group, their company car would be sold to their new employer at a lower price. This would reduce the value of the employee’s monthly fringe benefit and subsequently the tax. Now the benefit is calculated on the market value of the car at the time the employee first used it.
Executives who use more than one company car have also been affected. In the past if they were granted the right of use of more than one company car, they were required to include in their taxable income 1,2 percent of the “determined value” of the various motor vehicles available for use by them.
Today, this percentage applies for the first car while a rate of two percent has to be added to their taxable income for every other car they use.
The final amendment applies when an employer buys a moveable asset to sell to the employee. The fringe benefit value used to be the cost of the asset to the employer which was often almost nothing, because of the nature of items such as finance lease agreements.
These agreements give the company the option of buying an asset for the cost price minus the lease payments after leasing it for a certain period.
“If the company paid R10 for a car after a lease agreement expired and sold it to the employee, the fringe benefit value was R10. Now the fringe benefit value to be added to the employee’s taxable income is the fair market value of the asset,” reports Goulding.