# BRIEFING NOTE MOTOR VEHICLE ALLOWANCE by monkey6

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```									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

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