There used to be a time when an employer could offer a skilled employee a monthly remuneration package totalling, for example, R1 2 000 that could consist of only R2 000 in salary, from which PAYE was deducted, and a R10 000 car allowance with which he or she could do what they liked, like buying a luxury car that could be stored in the home garage for use over the weekend and a cheap clapped-out sedan or bakkie for use to get to work and back.
Those days when people could do that have disappeared altogether with finance ministers like Trevor Manuel and, more lately, Pravin Gordhan, having plugged various tax loopholes with new definitions classifying vehicle types, ‘business use’ and ‘private use’ and introducing new requirements such as compulsory logbooks.
Making a choice between the company car and a travel allowance is an ongoing question and is not an easy one to make by either an employer or employee. While both may agree on the type and, price bracket of vehicle, when it comes to vehicle ownership, there are a number of tax obligations and requirements linked to each option to be considered – there is no single formula.
The purchase price up front (with or without a fleet discount) plays an important role, but over a period of, say, four to five years, it’s the total cost of vehicle ownership, which includes fuel consumption, maintenance, depreciation and resale values, that should be looked at.
Vehicle prices are easy to get from specialist magazines and manufacturer websites. It is when it comes to running costs, the best source of information is Fleet – or the ,web sites of the AA, Absa, Standard Bank, Bidvest and KPMG, just name just a few.
A major issue today is one of affordability, especially for employees without access to public transport and who use their own cars for private and occasional business purposes, but battle to keep up their payments or cannot afford a new car.
This is reflected in the latest Naamsa stats, which show the new car market had experienced severe pressure during July, 201 6 and at 29 007 units reflected a decline of 7 520 cars or a fall of 20,6% compared to the 36 527 new cars sold in July last year.
Domestic sales of industry new light commercial vehicles, bakkies and mini buses at 13 575 units during July 2016 reflected a decline of 1 490 units or a fall of 9,9% compared to the 15 065 light commercial vehicles sold during the corresponding month last year.
“This is the biggest sales decline since 2009, at the height of the global economic recession,” says Simphiwe Nghona, CEO of WesBank Motor Retail.
“Despite the Rand’s recent strength, what we’re experiencing now are the after effects of the currency’s weakness in months prior. This is compounded by distressed household budgets and low economic growth that is also trending downwards.”
WesBank’s data showed that the average new vehicle being financed in July 2016 was 14,6% more expensive than in July 2015.
Additionally, consumers who are unable to afford new vehicles are forced to hold onto their vehicles for longer WesBank said this period is up to 40 months for July 2016, compared to 38 months in July 2015.
Nedbank reported a 10% increase at the end of June in the number of consumers who are defaulting on payments, as they struggle to cope with rising rates, higher prices and a tough economy.
Consumers were showing defaults on home loans, vehicle loans and their credit cards, Nedbank said. The R 1 8,4-billion in default advances is higher than the R 1 6,7-billion recorded over the same period in 2015.
Figures released by the National Credit Regulator and Statistics South Africa show the majority of indebted consumers already owed 75% of their monthly pay to creditors. South Africans currently owe R 1,63-trillion to lenders, and are some of the most indebted consumers in the world.
According to Debt Rescue CEO Neil Roets, 9,9-million South Africans are highly indebted to the point where they are three months or more in arrears.
The company car option allows the company directors to decide on what type of vehicle suits the company best from both a practical and corporate image point of view, in terms of affordability (budget restraints), as well as the most suitable method of financing the procurement of one or more vehicles.
According to the Practical Tax Loose Leaf Service, ownership is the main distinguishing feature separating a company car from a travel allowance.
Usually, with a company car, the employer will carry the costs of financing, insurance, maintenance and fuel in full and, nowadays, is obliged to tax the employee on the private use of the car via his or her monthly PAYE deduction.
According to the KPMG, the monthly taxable value of a company car acquired in any way other than under an operating lease (as defined) is 3,5% of the ‘determined value’ of each vehicle. If the vehicle is subject to a maintenance plan, this amount is reduced to an amount equal to 3,25% of the ‘determined value’ of vehicle.
Depending on the manner in which the vehicle is acquired, the ‘determined value’ is equal to the original cost to employer of purchasing the vehicle (including VAT), ‘cash value’ of the vehicle, the retail market value or the market value of the vehicle at the time when the employer first obtained the vehicle or the right of use of that vehicle.
From March 2015, the ‘determined value’ of vehicles acquired, in any manner other than under an operating lease (as defined), on or after that date, became be the retail market value of such vehicle as determined by the Minister by Regulation.
If the vehicle was acquired under an operating lease (as defined), the monthly taxable value is equal to the actual cost to the employer incurred under that operating lease and the cost of fuel in respect of that vehicle.
Some 80% of the taxable benefit will be subject to PAYE on a monthly basis. The percentage may be reduced to 20% if the employer is satisfied at least 80% of the use of the company car for the tax year will be for business purposes.
The taxable value may be reduced on assessment of the employee’s income tax return in accordance with the ratio of business kilometres travelled to total kilometres travelled. Further relief is available for the cost of licence, insurance.
With a travel allowance, the employer compensates the employee for the business use of his private vehicle.
The employee owns the car and bears the costs of financing, maintenance, fuel and insurance Major issues to be considered include accidents (risk), maintenance and kilometres travelled.
If an employee travels many kilometres (such as a sales representative would), then a company car could be the most cost effective, especially in light of the high fuel price and interest rates. If the employee does not travel long distances on business, then the travel allowance option may be the way to go.
However, the employee must keep a logbook to ensure when he files his annual return, SARS taxes him only on the private use of the car. A logbook confirming business kilometres travelled must be maintained in order to claim any deduction for business kilometres.
PAYE must be withheld by the employer on 80% of the allowance granted to the employee. The percentage may be reduced to 20% PAYE withholding if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes.
Unlike fixed property, a car depreciates all the time. The older it gets, the less its worth. This means the employer can use depreciation to shrink its tax bill over time. The employee will not need to concern himself with depreciation calculations in the case of the company car.
However, if you give him/her a travel allowance as part of a lease agreement in which he/she can acquire ownership of the car tax-free at the end of the lease period, they will have to consider the impact of depreciation on the value of the car.
Asked in an email for general advice on how small operators such as a courier/local taxi/hotel shuttle operator should handle the current tough times, David Molapo, head of Standard Bank Fleet Management said their vehicles are used exclusively to generate revenue for their business and any vehicle downtime therefore means that no money is coming into the business.
“The fleet operator may be tempted to skip vehicle services or to postpone repairs on a vehicle. This could prove more expensive over time as mechanical breakdowns and even accidents may occur as a result.
“Vehicles must therefore be kept in good running condition at all times and services and even repairs can be planned for quiet times.
“Make sure you always understand the running costs of your vehicle fleet. This includes cost of fuel, oil, tolls, services and repairs, tyres, accident repairs, etc. In tough economic times, this becomes even more important, but it must become a habit to monitor these costs on a daily basis.
“Find a service provider that can supply a means to pay for these expenses (for instance fleet fuel cards), but more importantly an easily accessible reporting system that shows you as and when expenses occur. In addition, make use of expert services supplied by such service providers that will help you to for instance minimise maintenance expenses.”
As for the question whether a small business should buy or lease cars and double cab bakkies or provide finance (via a bank) to the employee as a vehicle allowance, Molapo replied: “The nature of the business will help to answer this question and also whether the business is prepared to place the risk of vehicle availability and reliability in the hands of their employees.
“For a small fleet operator direct control may be more prudent and leasing the vehicles can assist in ensuring that running cost is more predictable because the lessor should have systems and reporting in place that will facilitate this.