5. Determined value
Background
Going back to pre-2014, investigations revealed that certain types of companies were benefiting from a lower determined value than the mainstream of companies, resulting in a lower private use fringe benefit value. This was unfair – two employees with identical cars should not have different fringe benefit values.
Before 2015, the types of companies that benefited from a lower determined value than other companies, were:
1. Motor vehicle manufacturers: Determined value = manufactured cost
2. Importers of Vehicle: Determined value = landed cost
3. Motor Dealers: Determined value = Dealer Billing Price
4. Rental companies: Determined value = Dealer Billing Price
The ‘Dealer Billing Price’ is the manufacturer’s or importer’s recommended selling price of motor vehicles when they sell their vehicles to motor vehicle dealers and rental companies. This is a much lower price than what a customer will pay when purchasing the vehicle from a Motor Dealer (the retail market value).
Amendments 1 March 2015 and the Regulation for Retail Market Value
Paragraphs 7(1)(a), 7(1)(b)(i), 7(1)(b)(ii), and 7(1)(c) of the Seventh Schedule define four methods of acquiring ownership of a motor vehicle, summarised as follows:
1. Acquired (paragraph 7(1)(a)): Acquired by the employer as a result of a cash purchase
2. Current Lease (paragraph 7(1)(b)(i)): Is held by the employer under an on-going financial lease
3. Paid-up Lease (paragraph 7(1)(b)(ii)): Was held by the employer under a financial lease (ownership acquired on termination of the lease)
4. In any other case (paragraph 7(1)(c)): The vehicle was not purchased but sponsored or donated to the employer at ‘no value’ by another person.
Paragraphs 7(1)(a) and (c) were amended with effect 1 March 2015 to add the concept of the “retail market value” of the vehicle that from 1 March 2015 must be used as the determined value of the acquisition of a motor vehicle.
The regulation that specifies how to determine the retail market value of a motor vehicle was published in Government Gazette No. 38744 on 28th April 2015 and was made retrospectively effective from 1st March 2015.
Its provisions were phased in over 3 years, ending with the final position on 1 March 2018 that is still in force today.
Note that vehicles rented from a bona fide rental company in terms of an ‘operating lease’ specified in section 23A(1) are not affected by the changes to the determined value definition, because the ‘determined value’ of the vehicle is not used to calculate the fringe benefit for company cars that are rented by the employer.
Explanation of the Regulation’s Requirements
The rules specified in the regulation that specifies a value to the retail market value are complex and provide for several scenarios differentiated by:
1. Employer Type:
a. Motor vehicle Manufacturer or Importer
b. Motor vehicle Dealer or Rental company
c. All other employers (who are not one of the above).
2. Vehicle Type:
a. New vehicles
b. Used vehicles.
3. Acquisition Value:
a. Purchased for a Value
b. Acquire at no cost (sponsored, donated, etc.).
Within each of the above scenarios, different sets of rules specify whether VAT must be included or excluded from the retail market value and in a few cases in the years between 2015 and 2017, whether to apply a discount percentage.
Finance charges and interest are always excluded from the retail market value.
For companies other than motor vehicle manufacturers, importers, dealers, and rental companies, by applying the regulation rules to the definition of the determined value in the Seventh Schedule paragraph 7(1), the ‘adjusted’ definition of the determined value is as follows (very much simplified):
1. The original cost of the purchase, including VAT, excluding finance charges and interest, or
2. The cash value of an ongoing lease (other than an operating lease), or
3. The cash value of a paid-up lease (other than an operating lease), or
4. In any other case (i.e., not purchased), the market value of the motor vehicle.
Comments on the ‘Original cost’ to the employer
There are some variations to the value of the employer’s ‘original cost’ to be aware of.
Add-on Items
The original cost of the motor vehicle:
• Includes the cost of add-on items such as tow bars, media players, air conditioners, smash-and-grab window tinting and security alarms
• Does not include the cost of insurance products such as the monthly service fee for vehicle tracking or roadside assistance.
Consideration Paid by the Employee
Employees sometimes contribute towards the original cost of a motor vehicle.
For example, employers sometimes place a limit on the cost price of the motor vehicle but allow 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’, the employer may deduct the employee’s contribution from the full cost price of the motor vehicle.
This means that by contributing financially, the determined value is reduced and the monthly fringe benefit value that the employee is taxed on will be reduced accordingly.
Motor Dealers and Motor vehicle Rental Companies
It is common practice that employees of motor dealers in new and used motor vehicles and employees of employers in the motor vehicle rental industry use several ‘company cars’ from the dealer floor for relatively short periods.
In these circumstances, SARS accept that the cost of the motor vehicle used is equal to the average cost of all stock in trade or rental vehicles on the dealer floor at the end of the immediately preceding year of assessment of the employer as an alternative to determining the actual cost of the particular motor vehicle used during each period.
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 are only allowed to use used motor vehicles, then the average cost of the used motor vehicles on the floor must be used as the ‘determined value’.
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 also 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.
It appears that one week is seen to be a ‘short’ period, whereas one month is seen to not be a ‘short’ period.
SARS will consider the facts of each case when deciding whether the period that the employee has the use of a particular motor vehicle is ‘short’.
Depreciation of the Determined Value
The determined value of the motor vehicle can be reduced if the employee is 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.
The determined value of a company car can be depreciated according to specific rules.
The depreciation is calculated according to the reducing balance method at 15% for each completed 12 period between:
1. The date when the employer first acquired the vehicle or obtained the use of the vehicle, and
2. The date that the employee was first granted the right of use of the vehicle.
Note the importance of the word “first” when applying the depreciation calculation.
The important part of the depreciation calculation to be aware of is that the determined value can only be depreciated when the use of the car is moved from one employee to another.
Note that the value of the initial determined value including VAT is depreciated.