The fringe benefit will allow employers to deduct tax from an employee's Pay As You Earn (PAYE) for the use of a company car within certain guidelines.
The fringe benefit tax on company cars may lead to an increase in car sales during the first quarter of the year before the new tax benefit comes into effect on 1 March 2015, according to head of Gumtree automotive, Jeff Osborne.
"The impact of the taxation remains to be seen, and it should vary for both companies and employees. We do know that there will be no impact for employees who currently have company cars or are issued with company cars before the date the measure comes into effect," Said Osborne.
Automotive industry benefits
Osborne believes that these changes in the fringe benefits tax for company cars will result in increased car sales prior to the implantation date of 1 March.
"We can reasonably expect that companies wanting to avoid the tax will rush to purchase new vehicles before its implementation on 1 March. If industrial relations remain stable and we continue to see a healthy demand from the car rental industry as tourism and business travel expands, we should see positive growth in 2015, despite the slight decrease in new vehicle sales from last year."
Car values
When determining the taxable amount to be paid, the value of the vehicle needs to be determined first.
Osborne points out that car manufacturers and other operators in the automotive industry purchase vehicles at a discounted price. This means that their calculation will be based on a lower amount.
This will place people outside of the automotive industry at a disadvantage as the value of their vehicle is calculated at a higher cost, which increases the amount of tax that will owing on the vehicle.
To combat this disadvantage, the retail market value will be used when calculating the value of cars.
Automotive manufacturers will provide price lists that will be used as the measurement for new cars, and the insurance industry will supply guidelines where second hand vehicles are involved.
These changes will only apply to vehicles that are purchased or manufactured on or after 1 March 2015.
The current monthly company car fringe benefit is calculated as 3,5% of the determined value of the vehicle, where currently the value is determined by the way in which the vehicle was purchased, either new or second hand.
What is a fringe benefit?
A fringe benefit (taxable benefit) refers to payments that employers make to employees in a form other than cash.
In other words, it is a collection of benefits that an employer provides, such as a company car or accommodation, that are exempt from tax as long as they meet certain conditions.
These conditions are laid out in the SARS 'Guide for employers in respect of fringe benefits'.
According to the Legal & Tax, Tax Guide 2014/2015, "A taxable benefit is deemed to have been granted by the employer to the employee if such a benefit is granted as a reward for services rendered or to be rendered."
Determining factors
The new fringe benefit taxes will be determined by several factors:
- Where the company owns the vehicle, the taxable value is 3,5% of the determined value per month of each vehicle.
- If the vehicle is part of a maintenance plan at the time when it is purchased, the taxable value if 3,25% of the determined value.
- If the company is renting the vehicle, the monthly taxable amount is the actual costs that to the company through the lease, as well as the fuel costs for the vehicle.
In short, the new company car fringe benefit means that additional tax may be deducted from an employee's PAYE if the car is used within certain situations.
The Tax guide states that employer contributions to the benefit of an employee will be taxed as a fringe benefit "in the hands of the member." This means that the taxable amount to be deducted from the employee's PAYE, the amount deducted will either be the cash value of the contribution made to the employee or through a special formula, depending on the situation.
With regards to the company car fringe benefit, an employer must withhold an employee's tax on 80% of the taxable value of the fringe benefit.
If the employer is convinced that the employee has used the vehicle for business purposes at least 80% of the time, this may be lowered to tax being withheld on 20% of the taxable fringe benefit.
For more information see page 18 of the Legal & Tax, Tax Guide 2014/2015.