How does it work?
What do you and your car mean to the taxman when referring to a car allowance? A lot, if you’re not careful. AutoTrader sheds some light on the matter.
Read also: Are company cars tax-deductible?
Types of car allowance
The one is where the employee is paid a monthly car allowance, R6000, for example (Code 3701 on an IRP5). The employee must then pay for tyres, general wear and tear, and fuel. Only 80% of that amount (R 6000 x 80% = R4800) is then added to their salary, and tax is calculated according to the tax deduction tables.
Related: How much is company car tax vs travel allowance?
The employee will then have to keep a daily logbook to keep track of his private kilometres travelled versus kilometres travelled for work. The employee can claim this back at the end of every tax year when doing his tax return. SARS, however, allows the employer two options to claim:
Option 1: The employee claims for the exact amount of money spent on fuel, insurance, repairs, and so forth. Every till slip or invoice should be kept on file and ready in case SARS decides to do an audit. Your car’s payment contract should also accompany these documents to show loss of value.
Option 2: The second way to claim would still involve the employee having the complete logbook and papers as in option 1, but they can use the formula that SARS supplies - this way, the owner doesn’t need to keep every receipt for every rand spent. Most tax-savvy individuals say using this formula in 95% of cases is better.
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Which car allowance is best?
Looking at the two most popular options, we would say that Option 2 is the best for those looking to make the most of their car allowance!
It’s calculated by dividing the value/purchase price of the car in multiples of R 85 000 (this changes almost every year). So let’s say the employee’s car costs R 100 000 - the fixed cost would be R 50 924, fuel R 1.018 per km and the maintenance R 0.412 per km. For example, The employee drove 34 525 km per year, of which 22 654 km were for business. The formula would look like this:
R 50 924 divided by 34 525 km = R 1.474 per km. Then add fuel (1.018) and maintenance (R 0.412) to that = R 2.904. Now multiply with the amount of work-related kilometres driven (R 2.904 x 22 645 = R 65 787). Thus, the employee will receive R 65 787 from his entire car allowance (R 6000 x 12 = R 72 000).
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The second type of car allowance is remunerative, where the employee is paid a certain amount per kilometre travelled - R 3.05, for example (Code 3702 on IRP5-form). In this case, no tax is deducted by the employer, as the employee will then use one of the two abovementioned methods to claim back these funds. In many cases, this can cause a problem for the employee who drives a low-budget car, for which he can only claim R 2.904 per km from SARS while his employer is paying him R 3.05 per km. In that case, he will owe SARS the difference.
Where an employee takes trips for work only once in a while (less than 12 000 km per year), he’s not allowed to claim tax back. This is tax-free (code 3703 on the IRP5), and no claims must be made.
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I’m thinking about buying a car for my business. For which vehicle(s) can I claim input tax?
SARS is very specific about which vehicles you can claim input tax on. It’s all about the nature of the vehicle. Even if you use your car in your business, a few are unacceptable, and you may be penalised for having the audacity to claim. These are: Double-cab bakkies, normal sedans, station wagons, SUVs and minibuses. The ones you can claim input tax on (even if you’re renting) are delivery bikes, goods transportation trucks, single-cab light and heavy delivery vehicles, vehicles with a mass of 3500 kg or more (unladen), buses that transport staff (over 3500 kg, unladen), or other specific purpose vehicles such as combine harvesters, tractors, ambulances and so forth, as well as game viewing vehicles and hearses.
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