3.7 Inclusion of the Fringe benefit amount into Remuneration
The income value of the fringe benefit is calculated by using one of the two formulas described above.
The legislation provides that business travel expenses can be claimed by the employee against the income value at the end of the tax year by submitting a logbook and/or proof of paying the full amount towards the running costs of the company car (explained in a section that follows).
However, the payroll needs a remuneration value to be able to calculate PAYE.
Confirming the trend to align the travel allowance and company car provisions as closely as possible, a seemingly small but very significant change was made to both the company car and the travel allowance requirements for the 2011/12 year of assessment.
From 1 March 2011, the the Fourth Schedule definition of remuneration gives the employer the option to include either 80% or 20% of the income value of the fringe benefit for the private use of a company car into remuneration as a provision towards the potential deduction of business travel expenses on assessment if the company car is used for business travel.
The ‘80%/20%’ provision is worded as follows:
“Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of the amount of such allowance or advance must be included”.
Inclusion rate of 80%
The default (and the ‘no risk’) option for the employer is to use the 80% inclusion rate.
However, if the 80% option is used for employees who travel ‘substantially’ for business purposes, the employee will be taxed on 80% of what is in the main the employer’s business travel expense. This is obviously unfair to the employee who must wait for about 6 months into the new tax year to get a refund of the tax owing to him.
In this case, the 20% inclusion rate can be applied if it the circumstances described in the ‘80%/20%’ provision above justify its application.
Inclusion rate of 20%
There is a risk to the employer (in terms of paragraph 5 of the Fourth Schedule) of applying the 20% option when it shouldn’t have been applied. If it turns out later that more than 20% of the travel was private travel and the employer should have applied the 80% inclusion rate, penalties, and interest on the untaxed 60% portion could be the unpleasant result.
The temptation to understate the remuneration value by incorrectly applying the 20% inclusion rate is increased by the fact that remuneration is not only used to calculate employees’ tax, but also for UIF contributions as well as for the skills development levy calculations, and at some stage in the future, the Compensation Fund’s annual Return of Earnings declaration as well.
To make an informed decision on which inclusion rate to use, the employer should check the private and the total kilometer values for a recent period of the year (the longer the period, the better). Calculate the private use percentage value by dividing the private kilometers by the total kilometers, and if the private ratio is less than 20%, then the 20% inclusion rate can be safely used.
The kilometer details and the calculation should be retained in case of a query by SARS.
Inclusion rate of 100%
Many employers (and employees) prefer to tax the fringe benefit in full in the payroll, knowing that a refund will be granted to the employee on assessment for any business travel expenses.
Some employees don’t want to bother with a logbook, or even if he does maintain a logbook, would prefer to get a refund on assessment rather than having to pay SARS at the end of the year.
Paragraph 2(2) of the Fourth Schedule provides that an employer may, at the written request of any employee, deduct or withhold additional amounts of employees’ tax from an employee’s remuneration.
This is known as ‘voluntary’ tax in the payroll world, and it is a very valuable option to be aware of.
Employees who want to avoid an assessment payment at the end of the year, can make use of this option to pay more PAYE during the year.
Alternatively, employees may request in writing that the employer includes 100% of the income value of the fringe benefit in their remuneration.
The SARS Interpretation Note # 72 confirms that if there is no business travel, then 100% of the income value can be included in remuneration for PAYE purposes as described above.
Note: This concession only applies to the company car fringe benefit, and not to travel allowances.
‘Average’ or ‘Retrospective’ calculations
The legislation provides for only two options –
1. 80% (the default or standard rate), or
2. 20% (the concession rate for employees who travel less than 20% for private purposes.
The employer is allowed to exercise his 80%/20% choice every month should the circumstances justify it. Normally the inclusion rate would not be changed so often, but two or three changes per year because of circumstances that change, are possible.
For example, a salesman on the road for the first 6 months of the year is promoted to sales manager for the last 6 months of the year and is then mostly desk bound. While traveling extensively for business in the first 6 months, a rate of 20% was applied. After becoming more desk-bound for the last 6 months, 80% was (correctly) used.
The mathematical result of 20% for 6 months and 80% for 6 months is that over the full year, an average inclusion rate of 50% was effectively applied.
However, remember the wording of the provision in the legislation that reads as follows –

Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of such allowance or advance must be included:

This provision clearly states that either 80% or 20% must be applied for a year of assessment.
Applying the letter of the law as it stands would mean that the inclusion rate that is valid at the end of the tax year must be applied retrospectively back to the start of the tax year by the payroll.
However, a retrospective calculation will cause problems –
1. If the first portion of the year was taxed using 20%, and the remainder using 80%, it will mean that in the final tax year end calculation, tax on 80% for the period that was initially correctly taxed on 20% will be withheld in the last pay period of the year, resulting in cash flow problems for the employee.
2. If the first portion of the year was taxed using 80%, and the remainder using 20%, it will mean that in the final tax year end calculation, the extra tax for the initial period that was correctly calculated on 80% will be ‘illegally’ re-calculated using 20% in the final tax calculation, and the tax ‘given back’ to the employee.
This is an example of the law not contemplating the reality that employees’ tax is calculated during the tax year, and not in one big ‘grab’ at the end of the tax year.
Skills Development levy and UIF contributions
The Skills levy and the UIF contribution calculations are both based on Fourth Schedule remuneration.
The higher the remuneration value (i.e., 80% or 100%), the higher the cost to the employer of these statutory fees, limited only by the UIF threshold. These two statutory payments are a cost of employment for the employer, despite their social benefits.
If the numbers are large, lower employment costs might tempt employers to place themselves at risk by applying the 20% inclusion rate when the rate should be 80%.
3.8 Tax certificate reporting
The income value of the company car fringe benefit must be reported on tax certificates.
There are two codes to differentiate between a fringe benefit calculated for the private use of a company-owned motor vehicle and the private use of a vehicle rented by the company:
1. Code 3802: “Use of motor vehicle acquired by employer NOT via Operating Lease”
2. Code 3816: “Use of motor vehicle acquired by employer via Operating Lease”
This income value will be used as the starting value for the income tax calculation on assessment.
3.9 Fringe benefit ‘No value’ concessions
The fringe benefit value of the private use of a company car is deemed to be nil for two circumstances –
1. ‘Pool cars’ and
2. ‘Standby vehicles’.
‘Pool Cars’
The value of the private use of the motor vehicle by an employee is deemed to be nil (i.e., no fringe benefit value and no PAYE), if all three of the following conditions are satisfied:
1. The motor vehicle is used by employees in general for business travel and is not allocated to a particular employee, and
2. Private use of the motor vehicle by the employee is “infrequent or merely incidental to business use”, and
3. The motor vehicle is not normally kept at or near the residence of the employee when not in use outside of business hours.
‘Pool cars’ are vehicles owned or rented by the employer that are made available to employees in general (i.e., not allocated to one employee for exclusive use) for business travel during working hours.
In the normal course of events, the vehicles are used during the day for business purposes, returned to the employer during or at the end of the day, and parked at the employer’s premises while the employee travels home by his own means.
Occasionally, the day’s business trips are extended beyond normal working hours, and for practical reasons the employee takes the pool car home.
The difficulty in applying the ‘no value’ concession is because of the rather convoluted wording of the third condition. The interpretation of this point is that the vehicle can be kept at the employee’s residence only when it has been used for business purposes outside of normal hours.
If this is the case, then the ‘no value’ concession will still apply.
Taxable Scenario
An employee has a temporary problem because his own vehicle is in the garage for repairs, and the employer allows the employee to use a ‘pool car’ to travel from work to home and back again while his car is in the garage.
In this case, point 3 is not complied with because there is no business use outside of business hours to justify the use of the vehicle to go home, yet it is used for this private travel.
Result: A pro rata portion of the fringe benefit value for a full month of the private use must be calculated.
‘Standby’ or ‘Tool of Trade’ Vehicles
The value of private use of the motor vehicle by an employee is deemed to be nil, if –
1. The nature of the employee’s duties is such that the employee is regularly required to use the motor vehicle for the performance of those duties outside normal hours of work; and

2. The employee is not permitted to use that motor vehicle for private purposes other than –
• Travelling between his or her place of residence and his or her place of work; or
• Private use which is infrequent or is merely incidental to its business use.
This ‘nil value’ concession assists the users of vehicles that are regularly used for work outside of normal working hours, and where the private use (other than from home to work), is infrequent or incidental to the business use.
Note that:
1. ‘Normal working hours’ are the hours of the employee who has the right of use of the vehicle, and can therefore vary for different employees
2. The use outside of an employee’s normal working hours must occur regularly – occasional use will not be frequent enough to constitute regular use.
The last requirement is the difficult one:
The private use (excluding travel from the usual place of residence to the usual place of employment) must be
“… infrequent or merely incidental to its business use”.
My opinion is that the ‘nil value’ conditions are met, therefore the concession remains in place, if the private travel:
1. Is in respect of travel from home to work, and back again, OR
2. Is infrequent, OR
3. Is incidental to the business use.
For example, if the employee uses the maintenance vehicle once per year to travel to his annual holiday destination, in my opinion this would be ‘incidental’ and would not invalidate the ‘nil value’ concession.
It is the employer’s responsibility to prove that the requirements for the nil value provisions have been met.
3.10 Reductions to the Fringe Benefit value
There are three ways in which the income value fringe benefit value can be reduced on assessment –
1. An across-the-board reduction for business travel, calculated by reducing the code 3802 fringe benefit value by the ratio of business kilometers divided by total kilometers (from the logbook).

2. If the employee pays in full for any one or more of insurance, licence fee or maintenance expenses, the total expense incurred by the employee is reduced by the ratio of private kilometers to the total kilometers to represent the private portion of the cost, and this value reduces the fringe benefit value

3. If the employee pays the full cost of fuel of the private use of the vehicle, the fringe benefit value will be reduced by a value calculated by multiplying the SARS Cost Scale table fuel rate/km by the number of private kilometers in the logbook.
How the employee (or SARS?) is going to know the value of fuel that was used for the private use of the vehicle in order to be eligible for the fuel reduction, is a mystery.
But this is not new – the old legislation had very similar wording where it provided for the 0,22% monthly relief.
Logbook
It goes without saying that if the employee wants to reduce the income value of his company car fringe benefit on assessment, a logbook must be kept.
All of the reductions listed above are dependent on either the number of business or private kilometers.
Logbooks are therefore required for company cars, travel allowances, but not for travel reimbursements if the full amount of the travel reimbursement is excluded from income (code 3703).
If a logbook is not kept, the employee will not be allowed a reduction to the value of the fringe benefit on assessment and will have to pay to SARS the tax that was not withheld in the payroll. This will result in some very unhappy employees paying the payroll office a visit.
It is not a legal requirement, but more of a moral duty to inform your employees of the consequences of not keeping a logbook.
3.11 Company Cars – Miscellaneous Matters of Interest
Company Cars plus Travel allowances
If the employee is paid a travel allowance –
1. In respect of a company car, the company car is taxed as described in the rules above, but the travel allowance is not administered as a travel allowance and is taxed in full and reported on the tax certificate as either code 3601 (salary) or perhaps better, as code 3713 (taxable general allowance).

2. In respect of another vehicle that is not a company car, then the company car is taxed as described in the rules above, and the travel allowance is taxed and reported as a code 3701 travel allowance. Business travel expenses in respect of the other vehicle can be claimed on assessment against the travel allowance.
VAT on Company Cars
The current calculation is based on a VAT regulation issued in 1991 by the Minister of Finance at the time, Barend du Plessis. This regulation is outdated and has not been aligned with the changes made to the company car provisions in the Seventh Schedule effective from March 2011.
For example, the determined value for the VAT calculation excludes VAT, whereas VAT is included for the fringe benefit calculation. Then the reduction for maintenance costs paid by the employee is based on the outdated 0,18% pm, and further, there is no provision for a reduction if the employee pays for fuel, insurance, or licence expenses.
I have requested SARS to look into this problem, but this was many years ago, and at the time of writing this workbook, there is still no clarity on the matter. Until we get clarity (which is maybe never), I suggest that you continue to calculate the VAT as you always have done in the past. The old calculation is included below.
Assuming that the employer is a registered VAT vendor, the use of a company car is a deemed supply, and VAT is payable. The value of the deemed supply is generally determined with reference to the cash equivalent of the benefit. The value of the deemed supply in respect of a company car is 0,3% pm of the determined value of the motor vehicle where the employer was denied a deduction of input tax on the purchase of the vehicle (for example, a passenger motor vehicle). Otherwise, 0,6% must be used.
The VAT portion of the fringe benefit value is calculated as follows:
1. Determined value (currently excluding VAT) x 0,3% pm x 15 / 115
2. If the vehicle is a commercial vehicle, use 0,6% instead of 0,3%.
3. If the employee bears the full cost of maintaining the vehicle, the value of the VAT supply is reduced by the amount by which the value of the fringe benefit is reduced (currently 0,18%).
Typically, the monthly output VAT on a company car purchased by the employer for R228 000 (including VAT) will be calculated as R73.68 ((R228 000 x 100/114 x 0,3% ) x 15/115).
It is very important to note that the output VAT expense of R73.68 per month may be claimed by the employer as a deduction for income tax purposes.
Ensure that your accounting system allocates this to a tax-deductible expense account.
Summary of the Principles of Company Cars
1. The vehicle is owned or rented by the employer (or an associated institution).

2. When the use of the vehicle is granted to an employee, it is called a ‘company car’.

3. Company cars can be granted to employees even if the employee does not travel for business purposes.

4. The employer must –
a. Establish the determined value of the vehicle
b. Determine the correctly monthly fringe benefit percentage
c. Calculate the income value of the fringe benefit that arises for the private travel use
d. Include a percentage (100% or 80% or 20%) of the income fringe benefit value in remuneration
e. Report the income value of the fringe benefit on tax certificates.

5. The employee should –
a. Record his daily business kilometers in a logbook
b. Record his expenses if he pays the full amount towards licence, insurance, or maintenance costs
c. Record his expenses if he pays the full amount towards fuel costs
d. Claim business travel expenses on assessment by submitting his logbook details in his ITR12
e. Claim running cost expenses on assessment by submitting his logbook details in his ITR12.
Summary of the Tax calculation Principles for ‘purchased’ Company cars
1. The employer pays for all capital and running costs of the vehicle
2. The vehicle is deemed to be used for private travel only and remuneration is determined on that basis
3. Business travel expense reduction is provided for in the payroll by including only 80% or 20% of the income value in remuneration.
The fringe benefit and tax for the use of a company car is calculated and administered by –
1. Calculating the fringe benefit income value by multiplying the vehicle’s determined value by a monthly percentage
2. Including a portion of the fringe benefit’s income value into remuneration
3. Reporting the income value of the fringe benefit on the tax certificate for assessment purposes
4. Subject to a logbook and proof of running costs paid by the employee, the fringe benefit value can be reduced on assessment before the calculation of income tax.
Comparison of the ‘Old’ law to the ‘New’ law
As mentioned earlier in this Chapter, significant changes were made to the legislation that provides for company car administration from 2011, as well as in 2015.
The following table is an analysis done at the time that illustrates the changes and even though this happened ‘way back’, I have included for your interest.
Comparison between the legislation prior to March 2011, and the legislation from March 2011 onwards.
DESRIPTION OF THE REQUIREMENT OLD LEGISLATION
(Up to February 2011) NEW LEGISLATION
(From March 2011)
Determined Value Calculations
VAT VAT is excluded VAT is included
Maintenance Plan Subtract maintenance plan value Rate reduced to 3,25% pm
Depreciation 15% pa per 12 months Unchanged
Fringe Benefit Calculations
Fringe Benefit percentage 2,5% pm or 4,0% pm 3,5% or 3,25% pm
‘80% / 20%’ inclusion options 100% 80% or 20% (100% is allowed)
Reductions to the Fringe Benefit Value
Reduction principle Allowed in the payroll 80% or 20% reduction in payrolls
General private use If less than 10,000 private kms
General business use Reduce: business kms ratio calc.
Employee pays for fuel Monthly rate reduced by 0,22% Reduce: private kms x fuel rate
Employee pays for maintenance Monthly rate reduced by 0,18% Reduce: private kms ratio calc.
Employee pays for licence costs Reduce: private kms ratio calc.
Employee pays for insurance Reduce: private kms ratio calc.
‘No Value’ Concessions
Pool Cars Zero value if criteria are satisfied Unchanged
Tool of Trade vehicles Zero value if criteria are satisfied Unchanged