INTERPRETATION NOTE: NO. 72 (2 of 3)

4.5 Reduction of the value of private use on assessment
The value of private use calculation (that is, fixed % per month x determined value of the motor vehicle or actual costs incurred under an “operating lease” plus fuel) is based on the assumption that the motor vehicle is only used for private purposes (the employee does not use it for any business purposes) and that the employer bears all of the operating expenses.
The Act, however, recognises that employees may use the motor vehicle for business purposes and may bear some of the costs associated with the motor vehicles. Accordingly, the Act provides that the value of private use may be reduced in specific circumstances at the end of the tax year when the employee submits a tax return and is assessed – see 4.5.1 – 4.5.3.
None of these reductions may reduce the value of private use to a value which is less than zero.

4.5.1 Right of use of more than one motor vehicle for private purposes
An employer may grant an employee the right to use more than one motor vehicle at the same time. Each motor vehicle represents a separate taxable fringe benefit and on a monthly basis the employer will have to calculate the value of the taxable benefit for each motor vehicle, as discussed in 4.3 and 4.4, for employees’ tax purposes (see 4.8).
However, if the Commissioner is satisfied that during the year of assessment the employee used each motor vehicle primarily for business purposes, the value of private use on all the motor vehicles will be deemed to be that of only the vehicle having the highest value of private use or such other motor vehicle as the Commissioner may direct. “Primarily for business purposes” means that more than 50% of the total distance travelled during the tax year in the motor vehicle concerned was for business purposes. This reduction is claimed in the tax return and is not available if the employee applies the business use or expense reductions in 4.5.2 or 4.5.3.
In order to qualify for this reduction, employees must maintain actual records of business travel, generally done in the form of a logbook.

Example 7 – Employee has the use of more than one company car

Facts:
Company ABC provided one of its employees, Z, with the use of a company car in 2009. During the 2013 tax year, Z had the use of the motor vehicle for the full year but was also granted the use of a new company car on 15 February 2013.
The 2009 company car cost Company ABC R200 000 (including VAT). Z travelled 8 000 km during the 2013 year of which 6 500 km were for business purposes.
The 2013 company car cost Company ABC R300 000 (including VAT). Z travelled 500 km during the month of February of which 300 km were for business purposes.
Company ABC is not entitled to an input tax claim for VAT.
Z maintains a logbook detailing business-related travel.

Result:
The 2009 company car was used 81% for business purposes (6 500 km / 8 000 km) and the 2013 company was used 60% for business purposes (300 km / 500 km).
On the basis that accurate logbooks were kept and that both motor vehicles were primarily used for business purposes, at year-end when submitting a tax return, Z may elect to calculate the cash equivalent of the taxable value of the benefit for both motor vehicles on the highest calculated value of private use of the two motor vehicles. Z may, however, only do this if the business reduction (see 4.5.2) or cost reduction (see 4.5.3) alternatives are not applied.

Value of private use for February 2013
The value of the private use for February 2013 is equal to the value of private use for the 2009 company car from 1 February 2013 to 14 February 2013 + the highest calculated value of private use of the 2009 and 2013 company car from 15 February 2013 to 29 February 2013.

Value of private use of the 2009 company car from 1 February R 3 500
2013 to 14 February 2013 (3,5% x R200 000 x 14 / 28)
Value of private use from 15 February to 28 February 2013:
• 2009 company car = 3,5% x R200 000 x 14 / 28 = R3 500
• 2013 company car = 3,5% x R300 000 x 14 / 28 = R5 250
• Therefore, highest value of private use for the period R 5 250
Value of private use 1 February to 28 February 2013 R 8 750

Value of the taxable benefit for February 2013
Value of the private use February 2013 R 8 750
Less consideration (nil)
Cash equivalent of the value of the taxable benefit for February 2013 R 8 750

Value of the taxable benefit for the 2013 tax year

Value of private use 1 March 2012 to 31 January 2013 (3,5%
x R200 000 x 11 months) R 77 000
Value of private use for February 2013 R 8 750
Less consideration (nil)
Cash equivalent of the value of the taxable benefit for the 2013 tax year R 85 750

4.5.2 Reduction for business use
SARS will, upon assessment of the employee’s liability for normal tax for the year of assessment, reduce the value placed on the private use of the motor vehicle if it is proved to the satisfaction of the Commissioner that a taxpayer has kept accurate records of the distances travelled for business purposes.
The amount of the business use reduction is determined by applying a ratio of business kilometres travelled to total kilometres travelled in the motor vehicle to the value of private use. Namely, business reduction = (business mileage / total mileage) x value of private use.
The answer (which is the value of the business use) is then subtracted from the value of private use on assessment.
It is crucial that employees keep accurate records (for example, in the form of a logbook) of business mileage travelled. SARS will not permit a reduction for the business use of the motor vehicle if accurate records are not kept.
Logbooks must include, at a minimum, the following information:
• The odometer reading on the first day of the tax year.
• The odometer reading on the last day of the tax year.
• For all business travel –
the date of the travel;
the kilometres travelled; and
business travel details (where and reason for trip).

It is not necessary to record details of private travel (for example, that the recipient went to the movies on “x” date and the distance travelled was “y” kilometres) or daily opening and closing odometer readings. A logbook which taxpayers may use is available on the SARS website (www.sars.gov.za).
The accurate determination of what constitutes business travel is critically important and is determined by looking at the purpose of the trip and assessing whether it is for business purposes or private purposes.

Example 8 – Business use reduction

Facts:
Employer DEF purchased a motor vehicle for R300 000 (VAT inclusive) for the sole use by the General Manager, C, as from 1 March 2012. C maintains a logbook indicating 40 000 km travelled, of which 10 000 km are business kilometres. The employer pays all costs. C pays DEF R1 000 per month for the use of the motor vehicle. The employer was not entitled to an input tax claim for VAT.

Result:
The value of the taxable benefit for C will be determined as follows:
The monthly private value of the fringe benefit is R300 000 x 3,5% R 10 500
Annual value of private use (R10 500 x 12) R 126 000
Less: Business use reduction R (31 500)
= value of private use x business km / total km
= (R126 000 x 10 000 km / 40 000 km)
Adjusted value of private use R 94 500
Less: Consideration R (12 000)
Cash equivalent of the value of the taxable benefit R 82 500
(that is, the value of the benefit subject to income tax on assessment)

4.5.3 Reduction when the employee incurs expenditure in relation to the motor vehicle
An employee who bears the full cost of the licence, insurance or maintenance of the motor vehicle or the full cost of the fuel for the private use of the motor vehicle, may be entitled to a reduction of the value of private use provided the Commissioner is satisfied that accurate records of distances travelled for private purposes have been retained.
The reductions discussed in this paragraph are not applicable if the vehicle is held by the employer under an “operating lease”.
The logbook referred to in 4.5.1 and 4.5.2 is an acceptable record to SARS of private mileage travelled. Note that this reduction can only take place upon assessment for normal tax.
The employee bearing the “full cost” means that the employee must bear 100% of the cost, without any form of reimbursement, for the entire period the employee had the use of the motor vehicle during the year of assessment.
An employee who bears the full cost of the above-mentioned expenses may receive an allowance for the expenditure from his or her employer. The receipt of the allowance does not alter the fact that the employee has borne 100% of the expense. The allowance is fully taxable without any allowable deductions,5 however when calculating the value of private use for the company car fringe benefit, an employee may be entitled to claim a deduction if the employee does not receive any reimbursement (full or partial) from the employer.
5 See 4.9.3 which refers to a “travel allowance”, but the same principle applies equally to specific allowances, for example, a maintenance-focussed allowance.
Licence, insurance and maintenance costs
An employee who bears the full cost of the licence or insurance or maintenance may obtain a reduction for the private element of the relevant full costs incurred by applying a ratio of private mileage travelled over total mileage travelled to the actual costs incurred. Namely:
Expense reduction = (private mileage / total mileage) x full cost of licence, insurance or maintenance (as appropriate).
The expense reduction is subtracted from the value of private use on assessment.

Example 9 – Employee bears part of the maintenance costs

Facts:
Z, an employee of Company Y, has been granted the right to use Company Y’s motor vehicle. Company Y is responsible for all licence, insurance and fuel costs. In relation to maintenance costs, Company Y introduced a company policy aimed at encouraging employees to look after company motor vehicles which stipulates that employees are responsible for any maintenance expenses in excess of R2 000 a year. Z maintains a logbook.
During the 2013 year of assessment, the maintenance costs totalled R2 500. Z agreed with Company Y to pay R500 over five months with the first payment of R100 per month due at the end of March 2012.

Result:
Z will not be entitled to a deduction for the R500 because Z has not borne the full cost of maintenance on the company car.
Fuel costs
An employee who carries the full cost of fuel for private purposes is entitled to a reduction for the private element of the fuel cost based on the deemed rate per kilometre for fuel, as fixed by the Minister of Finance in the Gazette.6 This deemed rate per kilometre is applied to the total private kilometres travelled in the motor vehicle. Namely:
Private fuel reduction = private mileage x deemed fuel rate per kilometre as per the Gazette.
Upon assessment, the private fuel reduction must be deducted from the value of private use.
The determination of whether an employee has borne the full cost of fuel only takes place on assessment. The employee is responsible for making this determination (provision is made in the ITR12 income tax return).

Example 10 – Employee bears costs

Facts:
Y, an employee of Company ABC, has been granted the right to use Company ABC’s motor vehicle. The motor vehicle was acquired by Company ABC at a cost of R400 000 (including VAT) and included a maintenance plan. Y maintains a logbook which proves that 36 000 km were travelled during the year of assessment, of which 17 000 km are business kilometres. Y is responsible for all licence, insurance and fuel costs incurred on the motor vehicle, which amounted to R650, R16 200 and R30 000, respectively. Y also pays Company ABC R1 000 per month for the use of the motor vehicle. Company ABC is not entitled to an input tax claim for VAT.
Y had the use of the motor vehicle for the full year of assessment. 16
Result:
The cash equivalent of the value of the taxable benefit for Y is calculated as follows:

The monthly value of private use is R400 000 x 3.25% R 13 000
Annual value of private use (R13 000 x 12) R 156 000
Less: Business use reduction R (73 667)
= value of private use x business km / total km
= (R156 000 x 17 000 km / 36 000 km)
Less: Licence cost reduction R (343)
= actual costs x private km / total km
= (R650 x 19 000 km / 36 000 km)
Less: Insurance cost reduction R (8 550)
= actual costs x private km / total km
= (R16 200 x 19 000 km / 36 000 km)
Less: Maintenance cost reduction R (0)
= not applicable as Y did not bear the full maintenance costs
Less: Fuel cost reduction: R (22 667)
= private km x fuel rate per kilometre per Gazette
= (19 000 km x R1,193ª)
Adjusted value of private use R 50 773
Less: Consideration R (12 000)
Cash equivalent of the value of the taxable benefit R 38 773
(that is, the value of the benefit subject to income tax on assessment)

ª As per the cost table in Annexure B.

Note: The cash equivalent is calculated at 3,25% because the motor vehicle was subject to a maintenance plan at the time of acquisition. Y did not therefore incur the full cost of maintenance and may not claim a reduction in respect of any maintenance costs.

Example 11 – Employee receives a travel allowance and pays the costs

Facts:
Y, an employee of Company ABC, has been granted the right to use Company ABC’s motor vehicle. The motor vehicle was acquired by Company ABC at a cost of R400 000 (including VAT) and included a maintenance plan. Y maintains a logbook which proves that 36 000 km were travelled during the year of assessment, of which 17 000 km are business kilometres. Y is responsible for all licence, insurance and fuel costs incurred on the motor vehicle, which amounted to R650, R16 200 and R30 000 respectively. Y also pays Company ABC R1 000 per month for the use of the motor vehicle. Company ABC pays all employees who travel for work (including Y) a travel allowance of R2 000 per month. Company ABC is not entitled to an input tax claim for VAT.
Y had the use of the motor vehicle for the full year of assessment.

Result:
Allowance included in taxable income
(section 8(1) – no deduction for costs incurred) R 24 000
The cash equivalent of the value of the taxable benefit for Y,
which will also be included in taxable income, is calculated as follows:
The monthly value of private use is R400 000 x 3,25% R 13 000
Annual value of private use (R13 000 x 12) R 156 000
Less: Business use reduction R (73 667)
= value of private use x business km/total km
= (R156 000 x 17 000km / 36 000 km)
Less: Licence cost reduction R (343)
= actual costs x private km/total km
= (R650 x 19 000km/36 000km)
Less: Insurance cost reduction R (8 550)
= actual costs x private km / total km
= (R16 200 x 19 000 km / 36 000 km)
Less: Maintenance cost reduction R (0)
= not applicable as Y did not bear the full maintenance costs
Less: Fuel cost component R (22 667)
= private km x fuel rate per kilometre per Gazette
(19 000km x R1,193ª)
Adjusted value of private use R 50 773
Less: Consideration R (12 000)
Cash equivalent of the value of the taxable benefit R 38 773
(that is, the value of the benefit subject to income tax on assessment)

ª As per the cost table in Annexure B.
The cash equivalent is calculated at 3,25% because the motor vehicle was subject to a maintenance plan at the time of acquisition. Y did not incur the full cost of maintenance and may not claim a reduction in respect of any maintenance costs.

4.6 Circumstances under which the value of private use is deemed to be nil

4.6.1 Available for use by employees in general
The value of private use of the motor vehicle by an employee is deemed to be nil, if all three of the following requirements are met:
• The motor vehicle is available and used by employees of the employer in general (that is, the motor vehicle is a pool car generally used by employees for business purposes and which is not allocated to a particular employee);
• The private use of the motor vehicle by the employee is infrequent or merely incidental to business use; and
• The motor vehicle is not normally kept at or near the residence of the employee when not in use outside of business hours.

4.6.2 Nature of employee duties
The value of private use of the motor vehicle by an employee is deemed to be nil, if –
• the nature of the employee’s duties are such that the employee is regularly required to use the motor vehicle for the performance of those duties outside normal hours of work; and
• 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.

For this purpose, “normal working hours” are considered to be the regular, usual or typical hours that the employee who is provided with the right of use of the motor vehicle renders his or her services. Normal working hours will, therefore, be different for each person and must be determined with reference to a particular employee’s terms and conditions of employment.
The no-value rule will only apply if the use outside of an employee’s normal working hours occurs “regularly”. The Concise Oxford Dictionary7 defines “regularly” to mean “done or happening frequently”. What constitutes regular performance of duties outside normal work hours is not standard and must be assessed on a case-by-case basis taking into account the particular job and its responsibilities. A motor vehicle that is only used occasionally outside normal work will not be frequent enough to constitute regular use.
7 Concise Oxford English Dictionary. Edited by Catherine Soanes, Angus Stevenson. 11th ed. rev. New York: Oxford University Press, 2006.
The onus rests on an employer to prove that the requirements for the nil value provisions have been met.

Example 12 – No value is placed on the private use of a company motor vehicle

Facts:
Y is employed by Superior Lift Maintenance Pty Ltd (Superior Lift Maintenance) as a lift engineer and lift maintenance expert. Y works 8am – 4pm, Monday to Friday, and is always on call after hours for emergency lift repairs. Superior Lift Maintenance has provided Y with the use of a company car as Y is regularly called out after normal working hours to conduct emergency lift repairs. Y uses the company car when attending to any work call.
Y is allowed to use the motor vehicle to travel between work and home and to park it at home when not using it for work. Y has a private motor vehicle for other private travel and the logbook indicates that Y rarely uses the company motor vehicle for any private travel (other than home to office and vice versa).

Result:
Y will not qualify for a nil value of private use under the provision discussed in 4.6.1 because the motor vehicle is not available to or used by employees in general and the motor vehicle is kept at Y’s home outside office hours.
However, Y may qualify for a nil value of private use under the provision discussed in 4.6.2 because the nature of Y’s duties regularly requires Y to go out to clients after normal work hours. Y’s private use is limited to travelling between work and home.

4.7 Consideration
“Consideration”, defined in paragraph 1, does not include any consideration in the form of services rendered by the employee. It would generally include any form of compensation, reimbursement, payment or recompense given by the employee to the employer for being given the right of use of the motor vehicle. The most common form of consideration involves a cash payment by the employee to the employer.

4.8 Employees’ tax
Taxable benefits are included as “remuneration” in the Fourth Schedule to the Act and are subject to the deduction of employees’ tax. In order to more closely align the travel allowance and company car taxation rules, the definition of “remuneration” in the Fourth Schedule to the Act was amended with effect from 1 March 2011 to include 80% of the cash equivalent of the taxable benefit as remuneration. This reduced inclusion for the right of use of a motor vehicle (previously 100% was included) takes into account potential adjustments for business travel on assessment for normal tax.
However, in the event that an employer is satisfied that at least 80% of the use of the motor vehicle during a year of assessment will be for business purposes, only 20% of the cash equivalent of the taxable benefit is included as remuneration and is subject to employees’ tax.
This does not mean that only a portion (80% or 20%, as the case may be) is subject to income tax. The full taxable benefit (that is, 100%) is potentially taxable when the employee or office holder submits an annual tax return and the employee is unable to claim sufficient reductions for business travel or the cost of the expenses borne. It is only for the purposes of employees’ tax that 80% or 20%, as the case may be, is subject to tax.
Employers that are satisfied that at least 80% of the use of the motor vehicle is for business purposes should include only 20% of the cash equivalent in “remuneration”. The word “satisfied” suggests that the employer must actively look into the facts of each employee’s circumstances and objectively weigh up and apply its mind to whether or not the employee would qualify.
Employers can satisfy themselves that employees will use their vehicles for at least 80% business use by –
• regularly reviewing employees’ logbooks which detail business and private travel; and
• taking into consideration changes in the role or function of the employee.

Example 13 – Determination of whether an employer can be satisfied that an employee will use the company car for business purposes at least 80% of the time

Facts:
M is employed by JKL (Pty) Ltd. In terms of M’s employment duties M is required to provide services to all of JKL (Pty) Ltd’s clients who are based in Gauteng. During the previous full year of assessment M maintained a logbook which disclosed the distance travelled as 61 015 km, of which 53 092 km were attributable to business travel. M and the financial director of JKL (Pty) Ltd agree that M’s functions will remain much the same during the current year of assessment.

Result:
Determination of expected percentage business travel:
53 092 km / 61 015 km = 87%
87% of M’s travel in the previous year of assessment was conducted for business purposes. As the logbook discloses more than four months of accurate data and M’s job profile and responsibilities are not expected to change, JKL (Pty) Ltd is likely to be satisfied that at least 80% of the use of M’s motor vehicle for the current year of assessment will be for business purposes.
Accordingly, only 20% of the cash equivalent of the value of the taxable benefit must be included in M’s remuneration for employees’ tax purposes. The full cash equivalent of the value of the taxable benefit will need to be included in M’s taxable income when submitting the tax return (subject to qualifying for any of the reductions discussed previously).

The method set out above is not the only method that an employer can use to assess whether an employee will travel more than 80% for business purposes. There may be other acceptable methods that an employer can use to satisfy itself of the 80% requirement based on the particular employee’s circumstances. SARS will, if applicable, consider whether other methods applied by an employee demonstrate that the employer did in fact properly apply its mind to the particular case. For example, with new employees or employees who change job positions, a prior year logbook may not necessarily be appropriate.
If employees’ tax has been withheld on 20% of the cash equivalent of the value of the taxable benefit and the circumstances change such that the employer realises that the employee will no longer use the vehicle more than 80% for business purposes, the inclusion rate must be adjusted to 80% immediately in the month that the circumstances change. The inclusion rate need only be adjusted from the month during which the employer reasonably became aware of the change in the employee’s circumstances and not for the entire year of assessment.
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 relevant for employees who are concerned that they will not be able to claim a sufficient reduction for business use discussed in 4.5.2 or as a result of incurring the expenses discussed in 4.5.3 with the result that they may be burdened with an unexpected tax cash flow on assessment. Employees in this situation may request that the employer include 100% (or any percentage above 80%) of the cash equivalent of the value of the taxable benefit in their remuneration as opposed to the 80% required by legislation. Employees must submit the request in writing to the employer before the employer implements the increased employees’ tax withholding.
4.9 Sundry provisions

4.9.1 Transfer of employer’s rights and obligations under a lease
An employer is deemed to have granted an employee the right to use a motor vehicle if the employer leased a motor vehicle and subsequently transferred its rights and obligations under that lease to the employee. The deemed right of use arises on the date the rights and obligations were transferred to the employee and continues for the remainder of the period of the lease. The cash equivalent of the value of the taxable benefit is calculated as discussed above, however, it is noted that –
• any rentals becoming payable by the employee under the lease shall be deemed to be consideration payable by that employee for the said right, for example, if the value of private use of the motor vehicle amounts to R2 500 and the employee pays a monthly rental (under the lease) of R1 900, the value of private use to be included in the employee’s income will be R600 per month (R2 500 less R1 900);
• the determined value of the motor vehicle shall be deemed to be the retail market value at the time the employer first obtained the right of use of the motor vehicle under a finance lease or the “cash value” thereof under a lease contemplated in paragraph (b) of the definition of an “instalment credit agreement” (see 4.3.3); and
• if the employee acquires the motor vehicle at the end of the lease the employee may have received an additional taxable benefit (see 4.9.4).

4.9.2 Motor vehicle rented to the employer by the employee, his or her spouse or child – section 8(1)(b)(iv)
In circumstances when –
• a motor vehicle which is owned or leased by an employee, his or her spouse or his or her child (whether directly or indirectly by virtue of an interest in a company, trust or otherwise) has been let to the employer or an associated institution; and
• the employer then grants the right of use of that motor vehicle back to the employee concerned,
• the sum of the rental paid by the employer, plus any expenditure on the motor vehicle borne by the employer, will be deemed to be a travelling allowance in the hands of the employee.

In such a case –
• the deemed travelling allowance less the deductions permitted under section 8(1) must be included in the employee’s taxable income;
• the travel allowance is ‘remuneration’ in the hands of the employee and must be included in the monthly employees’ tax calculations;
• no deductions may be claimed against the rental income under the general deduction formula; and
• the motor vehicle is not treated as a company car in the employee’s hands.

4.9.3 Company car and travelling allowance in respect of the same motor vehicle
Generally, an employee who is granted a travelling allowance may claim a deduction for the portion of the allowance expended during the year of assessment for business purposes. The amount of the deduction is determined using actual costs or a deemed rate per kilometre.
A deduction is not, however, available when an employee is granted the right of use of the employer’s motor vehicle and a travelling allowance in respect of the same motor vehicle. In this situation the employee is not permitted to claim any deduction for business travel against the travel allowance. Any adjustments to taxable income must be made to the cash equivalent of the value of the taxable benefit of the company car under the business use reductions set out in 4.5.2.
The treatment of allowances and the allowable deductions are discussed in detail in Interpretation Note No. 14 (Issue 3) (20 March 2013).
4.9.4 Acquisition of an asset – paragraph 2(a) and 5(2)
In some circumstances, employers allow employees to acquire a motor vehicle that they previously had the right to use. Generally, should the disposal to the employee occur for no consideration or for consideration that is less than the market value of the motor vehicle, a taxable benefit will arise under paragraphs 2(a) and 5(2). Paragraph 2(a) applies when an employee acquires an asset from the employer, an associated institution or any person by arrangement with the employer.
The taxable benefit is equal to the value of the motor vehicle less any consideration paid by the employee. The value of the motor vehicle is equal to market value at the time it was acquired by the employee or if it was specifically acquired by the employer to dispose of to the employee then the cost thereof or if the employer is in the motor industry and the vehicle constitutes trading stock then the lower of cost or market value.
Any consideration paid by the employee for the use of that motor vehicle whilst it was a company car may not be offset against the taxable benefit arising on acquisition.