3. Tax Calculation Principles
The tax calculation rules are based on the following two important principles:
1. The employer pays for all purchase costs as well as all running expenses, and
2. The company car is used for private travel only.
These two principles are the starting point of the tax calculation rules. There are exceptions and special cases to these principles that modify the tax calculation rules.
The use of a company car for private travel results in a taxable fringe benefit that is included in the employee’s gross income under paragraph (i) of the definition of “gross income”.
The rules to determine the cash equivalent income value of the taxable fringe benefit are provided in paragraph 2(b) read with paragraph 7 of the Seventh Schedule.
The Fourth Schedule then includes the income cash value of the fringe benefit into remuneration after allowing in the payroll for a reduction of either 80% or 20% as a provision to make provision for business travel expenses on assessment if the company car is used for business travel.
The final reduction of the income cash value for business travel expenses is done at the end of the year in the assessment process before income tax is calculated.
Taxable Fringe Benefit
When an employer (or an associated institution in relation to the employer) grants an employee (or a relative of the employee), the right to use a motor vehicle for private travel, a taxable fringe benefit must be calculated in the payroll, reduced in value if the employee pays the employer a consideration for the private use.
Private Travel
The Seventh Schedule ‘defines’ private travel to be the travel between the employee’s ‘place of residence’ and the ‘place of employment’.
There is one exception to the ‘private travel’ definition that only applies to company cars (it does not apply to travel allowances and travel reimbursements): if the employee is a “Constitutional Court judge” or a “judge”, their travel between their home and the court over which they preside is deemed to be business travel if a state-owned vehicle is used for the travel.
Value of the taxable benefit
The cash equivalent value of the taxable benefit is calculated in one of two ways:
1. Where the vehicle is owned by the employer, the income value of the fringe benefit is equal to: Fixed percentage per month x the determined value of the motor vehicle
2. If the vehicle is rented via an “operating lease”, the income value of the fringe benefit is equal to: Actual cost incurred under the operating lease plus the cost of fuel incurred on the same vehicle
The cash value of the fringe benefit can be reduced by any consideration paid by the employee to the employer (excluding any consideration paid for the cost of licences, insurance, maintenance, or fuel).
One of the fundamental differences between a travel allowance and a company car, is that the value of the travel allowance that is taxed in the payroll is to a very limited extent, subject to the employer’s discretion, while the employer cannot fiddle with the value of the company car without being non-compliant.