Outsmarting the taxman on company cars and allowancesBusiness travel
MY WIFE and I have to change our present car schemes offered by our employers.
My wife received a company car four years ago. The cost of the car was R86 000 including tax.
The company recently did away with the car scheme and introduced a car allowance. My wife intends buying her car and using it under the new scheme. When she completes her tax return, what value will she have to use?
Secondly, I am in the process of changing jobs. I received a car allowance from my previous employer. My new employer offers only a company car scheme. I don't want to sell the car I'm driving now - it is two years old and cost R96 000 (including VAT).
Does my new employer have to buy my car from me or does the car remain my property if I use it for business purposes? Again, what value do I use in my tax return?
Lood van Rooyen, tax consultant of KPMG, replies: If your wife's car was bought at a market-related price from the employer, then this price, including VAT, is the value used to calculate the cost per kilometre in a tax return.
If your wife purchased the car at less than the actual market value, then the value is the market value of the car when she first started using it (R86 000 inclusive).
In the latter instance, however, your wife becomes liable for fringe benefits tax.
About your car, if you decide not to sell it to your employer and you do not earn a commission or a travel allowance as part of your salary package, the use of your car does not have any tax implication, even though you use it for business.
If you decide to sell the car to your employer, you become liable for tax on the benefit of using the car for private purposes. The value of this benefit is the cost of the car to the employer at market value (excluding finance charges, interest and VAT).
When I received my first quarterly statement, I learnt that my capital now stands at R304 094. Is this a good investment, and will I get my R350 000 back?
Vernon Cresswell, director of Fincorp, replies: I imagine the purpose of the investment was to provide you with a regular income and to leave you with some capital after five years. Although you will not pay tax on the capital portion of your monthly income, there is tax payable on the income portion of this money.
The most important aspect of this investment is the performance of the underlying growth portion. Obviously, with the stock market turmoil over the past few months, I imagine the portfolio would have come down in value.
Without knowing your circumstances and objectives, it's difficult to say whether this was a good investment.
It is income-producing and provides you with a monthly income for five years. It is attached to a growth portion which, at 15%, usually returns the original capital invested.
If interest rates do drop, this "guaranteed" income flow becomes more valuable because the level of income (in real terms) does not fall.
The problem, though, is the growth portion would have to produce a return of about 15% a year for the next five years for you to get back R350 000. (Note that R350 000 will have depreciated materially in real terms in five years' time.)
Overall, if you need income and are happy to receive (in real terms) less than you invested when the term ends, this investment is not bad.
However, it appears that about R25 000 was "allocated" to entry costs - 7% of the capital invested. This is rather expensive.
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