INTERPRETATION NOTE: NO. 72 (1 of 3)
INTERPRETATION NOTE: NO. 72
DATE: 22 March 2013
ACT : INCOME TAX ACT NO. 58 OF 1962 (the Act)
SECTION : PARAGRAPH 7 OF THE SEVENTH SCHEDULE TO THE ACT
SUBJECT : RIGHT OF USE OF MOTOR VEHICLE
CONTENTS
PAGE
Preamble ………………………………………………………………………………………………………………2
1. Purpose………………………………………………………………………………………………………2
2. Background ………………………………………………………………………………………………… 2
3. The law……………………………………………………………………………………………………….2
4. Application of the law……………………………………………………………………………………. 3
4.1 Taxable benefit……………………………………………………………………………………………. 3
4.2 Value of the taxable benefit …………………………………………………………………………… 3
4.2.1 Value of private use……………………………………………………………………………………… 3
4.3 Fixed percentage per month x determined value ………………………………………………. 4
4.3.1 Fixed percentage…………………………………………………………………………………………. 4
4.3.2 Per month……………………………………………………………………………………………………5
4.3.3 Determined value ………………………………………………………………………………………… 5
4.4 Vehicle held under an operating lease…………………………………………………………… 10
4.5 Reduction of the value of private use on assessment ………………………………………. 10
4.5.1 Right of use of more than one motor vehicle for private purposes ……………………… 11
4.5.2 Reduction for business use …………………………………………………………………………. 12
4.5.3 Reduction when the employee incurs expenditure in relation to the motor vehicle… 13
4.6 Circumstances under which the value of private use is deemed to be nil…………….. 17
4.6.1 Available for use by employees in general……………………………………………………… 17
4.6.2 Nature of employee duties…………………………………………………………………………… 18
4.7 Consideration ……………………………………………………………………………………………. 19
4.8 Employees’ tax ………………………………………………………………………………………….. 19
4.9 Sundry provisions………………………………………………………………………………………. 21
4.9.1 Transfer of employer’s rights and obligations under a lease ……………………………… 21
4.9.2 Motor vehicle rented to the employer by the employee, his or her spouse or child – section 8(1)(b)(iv) ……………………………………………………………………………………. 21
4.9.3 Company car and travelling allowance in respect of the same motor vehicle……….. 22
4.9.4 Acquisition of an asset – paragraph 2(a) and 5(2) …………………………………………… 22
5. Conclusion ……………………………………………………………………………………………….. 22
Annexure A – The law…………………………………………………………………………………………… 24
Annexure B – Extract of income tax regulation: Fixing of rate per kilometre in respect of motor vehicles for the purposes of section 8(1)(b)(ii) and (iii) with effect from 1 March 2012……………………………………………………………………………………………………………………29
Annexure C – Extract from the Value-Added Tax Act No. 89 of 1991……………………………. 30
Preamble
In this Note unless the context indicates otherwise –
• “employee” includes the holder of any office; and
• “paragraph” means a paragraph of the Seventh Schedule to the Act;
• “section” means a section of the Act;
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the income tax consequences that arise for an employee when an employer (or an associated institution in relation to an employer) grants that employee the right of use of a motor vehicle, commonly known as a “company car fringe benefit”, with specific reference to the latest legislative amendments to the Fourth and Seventh Schedules to the Act.
2. Background
Employers often grant employees a travelling allowance or the use of an employer-provided motor vehicle (or both) by virtue of the employees’ employment, as a reward for services rendered by the employees or due to the employees’ duties. The right of use of a motor vehicle provided by an employer to an employee for private or domestic purposes is regarded as a taxable benefit in the hands of the employee. The value of this benefit is included in the employees’ gross income under paragraph (i) of the definition of “gross income” in section 1(1).
Paragraph 2(b) read with paragraph 7 deals with the cash equivalent of the value of this taxable benefit.
The latest legislative changes to employer-provided motor vehicles (company cars) are effective from 1 March 2013 and are applicable to years of assessment commencing on or after that date (that is, from the 2014 year of assessment).
3. The law
For ease of reference, the relevant sections of the Act relating to the taxation of the company car fringe benefit are quoted in Annexure A.
4. Application of the law
4.1 Taxable benefit
A taxable benefit arises when an employer, or associated institution in relation to the employer, has granted an employee the right of use of a motor vehicle1 for private or domestic purposes and such use has been granted –
1 A “motor vehicle” includes a motor cycle.
2 See 4.4 for a definition of an “operating lease”.
• free of charge; or
• for a consideration payable by the employee which is less than the value of the private or domestic use.
For a taxable benefit to arise the employee must have been given the right to use the company car for private or domestic purposes. The absence of such private use means a taxable benefit does not arise.
Private use includes travelling between the employee’s place of residence and place of employment unless the employee is a “Constitutional Court judge” or a “judge”, as defined in section 1 of the Judges’ Remuneration and Conditions of Employment Act, 2001. Travel by Constitutional Court judges and judges between their home and the court over which they preside is deemed to be business travel for a state-owned vehicle.
Interpretation Note No. 14 (Issue 3) “Allowances, Advances and Reimbursements” (20 March 2013), discusses and provides examples of what constitutes business travel and private travel. The same principles apply to distances travelled in company cars.
An employee will be deemed to have been granted a taxable benefit if as a result of the employee’s employment, the employer directly or indirectly grants a relative of the employee or another person a benefit, which if granted directly to the employee would have constituted a taxable fringe benefit. In this Note a benefit granted to an employee will include direct and indirect benefits falling within this category.
4.2 Value of the taxable benefit
The cash equivalent of the value of the taxable benefit, which is included in gross income, is equal to:
Value of private use less any consideration given by the employee to the employer for the private use (excluding any consideration given for the cost of licences, insurance, maintenance or fuel)
4.2.1 Value of private use
The value of private use is equal to –
• where the vehicle is held by the employer other than under an “operating lease”:2
Fixed percentage per month x the determined value of the motor vehicle
OR
• where the employer holds the vehicle under an “operating lease”:
Actual cost incurred under the operating lease + cost of fuel incurred on the same vehicle
These aspects are examined in more detail below.
4.3 Fixed percentage per month x determined value
4.3.1 Fixed percentage
The fixed percentage is generally 3,5% per month. However, the fixed percentage may be reduced to 3,25% of the determined value per month if the motor vehicle was the subject of a maintenance plan when it was acquired by the employer.
A maintenance plan is –
• a contractual obligation undertaken by the provider in the ordinary course of trade with the general public;
• to underwrite the costs of all maintenance of that motor vehicle (other than top-up fluids, tyres or abuse of the motor vehicle);
• for a period of at least three years or a distance of 60 000 kilometres, whichever comes first.
In order for the fixed percentage to be reduced, the maintenance plan must commence at the same time that the motor vehicle is acquired by the employer. A motor vehicle is not the subject of a maintenance plan if the maintenance plan is either a top-up or an add-on plan that was taken out after the acquisition of the motor vehicle. In these circumstances the rate of 3,5% must be used.
Example 1 – Value of private use if maintenance plan is included
Facts:
Employer XYZ grants the right of use of a motor vehicle to its employee from 1 March 2012. The employer purchased the motor vehicle for R250 000 (including VAT). XYZ was not entitled to an input tax claim for the VAT. The motor vehicle comes standard with a maintenance plan at no extra charge. The employee pays R500 per month for the use of the motor vehicle.
Result:
The “determined value” of the motor vehicle is R250 000.
The monthly value of private use is R250 000 x 3,25% R 8 125
Less: Consideration paid by employee for benefit R (500)
Cash equivalent of the value of the taxable benefit per month: R 7 625
The rate does not increase to 3,5% once the maintenance plan expires, but remains at 3,25%.
4.3.2 Per month
The value to be placed on the private use of a motor vehicle is determined for each month or part of a month during which an employee was entitled to use the motor vehicle for private purposes. A “month” is defined in paragraph 1 as any of the 12 portions into which any calendar year is divided.
An employee, who only had the use of a motor vehicle for part of a month, must apportion the private value according to the number of days that the employee had the use of the motor vehicle. For example, if an employee is first granted the right to use a motor vehicle in the middle of a month (for example, 15 June), the value of private use must be based on the total number of days that the employee had the right to use that motor vehicle. In other words, 15 days in June divided by the total number of days in that month, that is, 30 days.
The value of private use of the motor vehicle may not be reduced if, for whatever reason, the employee does not temporarily use the motor vehicle for private purposes.
Example 2 – Temporarily not used for private purposes
Facts:
Employee Z has the use of a company car. During the 2013 tax year, Z had a serious car accident and did not drive the motor vehicle for three months while it was being repaired and while Z was recovering from injuries. During the three-month period the motor vehicle was parked in the office garage for part of the time and at Z’s house for part of the time.
Result:
The three-month period represents a period when Z temporarily did not use the motor vehicle for private purposes. The value of private use for those months may not be reduced to take account of the period when Z did not use the motor vehicle.
Example 3 – Temporarily not used for private purposes
Facts:
Employee Z, who lives and works in Johannesburg, has the use of a company car. Z goes to Kenya for two months and had to return the company car to the employer for use by other employees during the two-month absence.
Result:
During the two-month period, Z did not have the right of use of the motor vehicle because the benefit was given to other employees. The fringe benefit ceases for the period Z is away.
4.3.3 Determined value
“Determined value” in relation to a motor vehicle means –
• the original cost to the employer (excluding any finance charge or interest payable) if the motor vehicle was acquired under a bona fide agreement of sale or exchange concluded between parties acting at arm’s length;
• the “cash value”3 of the motor vehicle if the motor vehicle is or was held under a lease contemplated in paragraph (b) of the definition of “instalment credit agreement”;4
• the retail market value of the motor vehicle (at the time the employer first obtained the right to use the motor vehicle) if the motor vehicle was held or held and then acquired by the employer under any other lease (other than an “operating lease”); or
• the market value of the motor vehicle at the time when the employer or associated institution first obtained the motor vehicle or the right of use thereof, if the motor vehicle was acquired or held in any other case.
The original cost includes the cost of add-on items, for example, tow bars, media players, air conditioners, smash-and-grab window tinting and security alarms. The original cost does not include the cost of insurance products such as the monthly service fee for vehicle tracking or roadside assistance.
With effect from 1 March 2011, any VAT borne by an employer must be included in the determined value of the motor vehicle. Any determined value calculation performed after 1 March 2011 will include VAT borne by an employer even if the motor vehicle was acquired before 1 March 2011 and irrespective of the fact that, if applicable, the determined value calculation for previous months did not include VAT. ‘Borne’ means that if VAT was applicable the employer was not entitled to an input tax credit for the related VAT. The VAT component must, however, be excluded if the employer was entitled to a deduction of VAT input tax, for example, if the employer is a car dealer that is a registered VAT vendor.
The determined value of the motor vehicle is reduced when the employee is first granted the right of use of the motor vehicle 12 months or more after the employer first acquired the motor vehicle or the right of use thereof. The reduction is by means of a depreciation allowance of 15% according to the reducing-balance method for each completed 12-month period from the date the employer acquired the motor vehicle.
Example 4 – Depreciation allowance
Facts:
An employer, Company XYZ, purchased a motor vehicle for R228 000 (VAT inclusive) on 1 January 2010. An employee who subsequently resigned initially used the motor vehicle. The right of use of the motor vehicle was then granted to another employee, A, on 1 April 2012. Company XYZ was not entitled to a VAT input tax credit on the acquisition of the motor vehicle.
Result:
The “determined value” to be used to calculate the value of the taxable benefit is the original cost to the employer (including VAT) less a depreciation allowance of 15% on the reducing balance method for each completed year that Company XYZ had the motor vehicle. The determined value is calculated as follows:
Original cost on acquisition incl. VAT (1 Jan 2010) R 228 000
Less: Depreciation allowance: 1 Jan 2010 to 31 Dec 2010 R (34 200)
(R228 000 x 15%)
R 193 800
Less: Depreciation allowance: 1 Jan 2011 to 31 Dec 2011 R (29 070)
(R193 800 x 15%)
R 164 730
Adjusted “determined value” R 164 730
The determined value is not adjusted for depreciation in the 2012 calendar year because the requirement of a completed 12-month period was not met (only three months were completed).
VAT is included in the determined value calculation as from 1 March 2011 even though the motor vehicle was purchased before that date because the employer was not entitled to a VAT input tax claim at the time of purchase. For purposes of calculating the determined value, VAT is included in the cost of the motor vehicle and is also subject to the depreciation allowance.
A motor vehicle that was acquired by an employer from an associated institution in relation to that employer retains its original determined value if the employee concerned had, before the acquisition, enjoyed the right of use of that motor vehicle. The “original determined value” is the determined value that was calculated when the employee first obtained the right of use of the motor vehicle. The effect of this provision is that the value of private use included in the employee’s gross income will not change.
Example 5 – Employee and motor vehicle both transferred
Facts:
Company ABC is an associated institution in relation to Company DEF. Company ABC acquired a motor vehicle (at a cost of R250 000, including VAT) on 1 March 2010 and immediately granted the right of use of this motor vehicle to its employee, T. Company ABC was not entitled to an input tax claim for the VAT. On 1 June 2012, T was transferred to Company DEF together with this motor vehicle which Company DEF acquired from Company ABC for R140 000.
Result:
The “determined value” for Company ABC at the date T first obtained the right of use of the motor vehicle was R250 000 (adjusting for the inclusion of VAT as required from 1 March 2011). The determined value will remain R250 000 for Company DEF because T previously enjoyed the use of the motor vehicle under Company ABC, which is an associated institution in relation to Company DEF.
Original cost to the employer
Employees of dealers in new and used motor vehicles and employees of employers in the motor vehicle rental industry may use several “company motor vehicles” over short periods. In these circumstances, as an alternative to determining the actual cost of the particular motor vehicle used during each period, SARS will accept that the cost of the motor vehicle is equal to the average cost of all stock in trade or rental vehicles on hand at the end of the immediately preceding year of assessment of the employer. The method of calculating the average cost must be appropriate to the dealer’s circumstances. For example, if the dealer sells new and used motor vehicles but employees only have the use of new motor vehicles or only have the use of used motor vehicles then it may be appropriate to have an average cost for new motor vehicles or an average cost for used motor vehicles.
The average cost of a motor vehicle may not be used if a specific employee is granted the right of use of a specific motor vehicle or if the right of use of a motor vehicle has been granted to a specific employee as a reward for performance or a motivational tool. SARS is of the view that an employee, who has been granted the right of use of a motor vehicle for a period of time which is not considered to be short, will have been granted the use of a specific motor vehicle.
The facts of each case must be considered in deciding whether the period that the employee has the use of a particular motor vehicle is short.
Example 6 – Motor vehicles used by employees of dealers
Facts:
Z Cars (Pty) Ltd (Z Cars) has a pool of demo vehicles that are used to take potential customers for test drives. In addition, the pool demo vehicles are generally available to and are used by all employees all the time.
Employees do not have the dedicated use of a particular demo vehicle and use whichever motor vehicles are available. They accordingly use a variety of motor vehicles over a short period. Salesperson X, for example, uses on average three different motor vehicles in a month.
In addition to its standard and luxury motor vehicle range, Z Cars recently entered the superior luxury market and sells a top brand sports car. The sports car is not part of the pool of demo vehicles. Salesperson Y was, however, awarded the right of use of a sports car for a month as a reward for being the salesperson with the highest total sales value in February 2013.
One of Z Cars’ top branch managers, Manager A, does not like potential daily motor vehicle changes and is granted permission to use a pool demo vehicle for a month before rotating it with another pool demo vehicle. Z Cars agreed that Manager A could rotate motor vehicles he uses on a monthly basis because he is their top manager and Z Cars wants to retain Manager A’s services.
Result:
Z Cars may use the average cost method for calculating the determined value for Salesperson X because the motor vehicles Salesperson X uses are part of the pool of demo vehicles which are available to and used by all employees all of the time.
In relation to Salesperson Y’s right of use of the sports car, the determined value will be equal to the actual cost of the motor vehicle because Salesperson Y was awarded the dedicated use of the sports car for a month as a reward for performance.
In relation to Manager A the determined value will also be equal to the actual cost of the motor vehicle because under the circumstances the one month period is considered to be of sufficient duration to constitute the granting of the right of use of a specific motor vehicle to a specific employee.
Cost for Z Cars excludes VAT as Z Cars is a motor dealer and will be entitled to a VAT input tax claim on motor vehicles purchased from manufacturers.
In the past, manufacturers of motor vehicles have been permitted to use the cost of manufacture as the determined value of a motor vehicle. Manufactured motor vehicles are, however, not acquired under an agreement of sale or exchange. Accordingly, the determined value of a manufactured motor vehicle will be equal to the market value of the motor vehicle at the time the employer first obtained the right to use the motor vehicle. This paragraph takes effect from the date of this Note.
SARS will accept the “Dealer Billing Price” of the motor vehicle as the market value of the vehicle in the case of manufacturers of motor vehicles.
In certain circumstances, an employee may make a contribution towards the cost of a motor vehicle. For example, an employer may place a limit on the cost price of the motor vehicle but allows the employee to select a motor vehicle that exceeds that limit on the basis that the employee contributes the difference between the full cost price of the motor vehicle and the limit set by the employer. In these circumstances when determining “the original cost to the employer”, the employer may deduct the employee’s contribution from the full cost price of the motor vehicle.
In the context of determined value, “cost to the employer” is only relevant when the employer acquired the motor vehicle under an agreement of sale or exchange. In all other situations, the determined value is equal to either the “retail market value”, the “cash value” or the “market value” of the motor vehicle. The determined value may not be reduced by any contribution paid by the employee towards the cost of the vehicle.
Use of the same vehicle by more than one employee
The grant of a right to use a motor vehicle is the fringe benefit that is subject to taxation. An employer who allows more than one employee to use the same motor vehicle for private or domestic purposes is granting each of the employees a right to use the vehicle. Each employee must therefore be taxed on the full value of the benefit as calculated under 4.3 or 4.4 (assuming the no value rules in 4.6 do not apply).
4.4 Vehicle held under an operating lease
The number of vehicles held by employers under “operating leases” has increased.
An “operating lease” relates to moveable property and is defined in section 23A. In order for a vehicle lease arrangement to constitute an “operating lease” the lease arrangement must contain the following elements:
• The employer must lease the vehicle from a lessor in the ordinary course of the lessor’s business (not being a banking, financial services or insurance business);
• The vehicle must be available to lease to the general public for a period of less than a month;
• The costs of maintaining the vehicle (including any repairs to the vehicle necessary due to normal wear and tear) must be borne by the lessor; and
• Subject to the claim a lessor may have against a lessee for failing to take proper care of the vehicle, the risk of loss or destruction of the vehicle must not be assumed by the lessee.
Any lease which does not satisfy these requirements (for example, a “finance lease”) is not an “operating lease”, as defined.
The value of private use of a vehicle which is held by the employer under an “operating lease” and which was concluded by parties who are not connected persons and who transacted at arm’s length is –
• the actual cost incurred by the employer under the operating lease; and
• the cost of fuel in respect of that vehicle.
In circumstances where the above-mentioned requirements are not met, the fixed percentage per month of determined value method must be used to calculate the value of private use (see 4.3).
