BACKGROUND BRIEFING FOR JOURNALISTS: MOTOR VEHICLE ALLOWANCE Current situation When working out the taxable portion of a motor vehicle allowance two things must be determined. The first is the number of kilometres travelled on business and the second is the cost per kilometre to do so. The amount calculated by multiplying these two numbers gives the cost of business travel, which is deducted from the total motor vehicle allowance received. The result is the taxable portion of the motor vehicle allowance. The number of kilometres may be calculated using either the deemed distance formula or the actual distance travelled on business. The deemed distance formula takes the first 14 000km of the distance actually travelled in a year – limited to a maximum of 32 000km – as private travel, while the balance is considered to be business travel. The costs per kilometre travelled may be calculated using either the table of deemed costs set by the Minister and published in the Government Gazette or by reference to the actual expenses incurred. This means that there are four ways to calculate the taxable portion of an individual’s motor vehicle allowance. Deemed Costs Actual Costs Deemed Distance DD/DC DD/AC Actual Distance AD/DC AD/AC As far as Pay-As-You-Earn (PAYE) is concerned, 50% of the monthly allowance is subject to PAYE and 50% is not. The PAYE system essentially assumes that half an employees motor vehicle allowance will ultimately be proven to be spent on business and half not. Problems encountered There are several problems with the current situation. The first is that the deemed distance formula treats people who travel extensively for private purposes as having travelled on business. As an example, an employee who has decided to stay in Johannesburg and work in Pretoria will travel 100km a day to work and back, which will amount to over 20 000km a year. Of this over 6 000km is automatically treated as business travel. Any other private travel undertaken after hours or over weekends will also be considered to be business travel. The second is that the deemed cost table assumes that a motor vehicle has no residual value after five years. This is clearly not the case. On the other hand, the variable cost element of the table has not been updated for changes in the costs of fuel and maintenance since 2000. The net effect is that the tables overstate the cost of ownership of a vehicle for business travel. Finally, there is no limit on the cost of a motor vehicle that may be claimed as having been used for business purposes. At some point the expenditure in respect of a vehicle must, as a general rule, be considered as being excessive when compared to its business utility. The result of the above is that motor vehicle allowances are granted to employees not for commercial reasons but for tax reasons. This leads to a loss of revenue for Government, which must be made up elsewhere, and to distortions in household choices. In addition the simple, yet fraudulent, overstatement of odometer readings for purposes of the deemed distance formula has required increased audit intervention by SARS. Proposed changes The first proposed change relates to the deemed distance formula. The deemed private distance will be increased to 16 000km for 2005/6 and to 18 000km for 2006/7. Audit interventions will continue and changes in behaviour over this period will be monitored. The second relates to the deemed cost table. This table will be updated to reflect a residual value of 30% of original purchase price after five years. It will simultaneously be updated to reflect current fuel and maintenance costs. In addition, the maximum value of a motor vehicle for purposes of determining the cost of business travel for a motor vehicle allowance will be capped at R360 000. Thus an individual with a vehicle costing R1 million will use the same costs in the deemed cost table as an individual with a vehicle costing R360 000. The First Interim Report of the Katz Commission proposed a cap of R150 000 in 1994. If this proposal were to be adjusted for general inflation the equivalent cap would be set at R280 000. If adjusted for the increases in the cost of a basket of vehicles over the same period, it would be set at R310 000. The cap of R360 000 compares favourably on both bases. Finally, in order to pre-empt a switch to company cars over the short to medium term, the deemed value of a company car will be increased from 1.8% per month to 2.5% per month with effect from 1 March 2006. The deemed value of a second or more company cars will remain at 4% per month. No change is proposed in respect of PAYE so individuals should bear in mind that, while the changes discussed will not have an immediate effect on their pay packets, they may reduce refunds or even require additional payments to be made, either on assessment or for the third provisional payment for 2005/6. Individuals who are likely to face additional payments may wish to consider requesting their employers to apply a portion of the income tax relief they have received this year to voluntary additional PAYE deductions. As a result of these changes additional revenue of R1.7 billion is expected for Government in 2005/6.
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