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Outpacing the taxman in a car chaseFROM next month the Receiver of Revenue will be taking 50% more tax from you for private use of your company car, if you are fortunate enough to have one. The rate of valuation for fringe benefits tax purposes goes up from 1.2% to 1.8% of the capital value of the car, which is the original cost if you were the first user, or a lesser figure if you took over the vehicle from a previous user in the company. So if your car has a capital value of R100 000, the fringe benefit value will go up from R1 200 to R1 800. If your marginal rate of tax is, say, 45% (reached at a taxable income of R8 333 a month), the monthly PAYE deduction in respect of your company car will increase from R540 to R810. If you get a car allowance instead of a vehicle, you will also pay more tax, although the increase is not so harsh. In his budget, Finance Minister Trevor Manuel announced an increase in the deemed distance for private travel from 12 000km to 14 000km a year. He also announced a hike in the rate of withholding tax for car allowances, up from 35% to 40%. Note that this is not necessarily the rate at which you have to pay tax on such an allowance but, like ordinary PAYE, it is a credit to be set against your liability for the whole tax year when it's reconciled at the year end. In the light of the tax changes, should you opt for a company car, or an allowance, assuming you have any choice in the matter? If you do a substantial amount of travel, from a purely tax point of view you'd be better off with an allowance. The greater the distance travelled each year, the larger the advantage of an allowance, and vice versa. However, tax isn't the only consideration. When you drive a company car, you won't benefit when the time comes to replace it. If your company gives you the vehicle or sells it to you at a book value which is less than market value, the difference will be a benefit on which you'll be taxed. If you use a travel allowance to finance the purchase of your own car, however, there is no unpleasant tax implication once you have finished paying for it. What is more, you can choose the make, model and colour you like and can afford, and you do not lose it should you leave the company's employ. You replace it when you wish, and if there is any profit when you sell, it's yours. Of course, there are disadvantages, too. As an individual buyer and owner, there is no "big brother" (your company) to use its buying power to get you better deals on initial purchase, maintenance and insurance. In fact, you've got to meet all the running and upkeep costs out of your own pocket, and at times those costs could be much more than you are receiving as an allowance (if you have to replace a gearbox, for example).
Company cars have always been, and continue to be, an attractive perk for employees who in fact do no business travel at all, as the tax value of their private use, even at next month's higher levels, is considerably less than the cost would be if they had to pay it out of their own pockets. Finally, here's a useful tip if you're a businessperson or senior executive in a position to manipulate your fringe benefits. Think about granting yourself a car allowance, while giving your spouse a company car. Even though this is really a second car in the family paid for by the company, it will escape the newly punitive tax on second cars at 4%, and will be taxed only at 1.8%. ý Martin Spring is editor of Personal Finance Newsletter
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