Imminent changes to tax laws pertaining to car allowances will see many South Africans not qualify for any travel deductions because they simply don’t do enough mileage in a financial year, warns Avis Fleet Services MD Laurence Savage.

Imminent changes to tax laws pertaining to car allowances will see many South Africans not qualify for any travel deductions because they simply don’t do enough mileage in a financial year, warns Avis Fleet Services managing director Laurence Savage.

Savage said although Finance Minister Trevor Manuel "provided fair warning" in the Budget speech that car allowances would be reassessed by SA Revenue Services, "the impact of some of these changes may be greater than many initially believed".

For the assessment period ending February 28 2006, deemed private mileage has increased from 14 000 to 16 000 km and this will increase to 18 000 km in the 2006/7 tax year. "With the increase in deemed private mileage coming into effect immediately, quite a number of South Africans will not qualify for any travel deductions," said economist Professor Matthew Lester.

Prof Lester said many South Africans didn't travel more than 20 000 km a year: "If you only travel 20 000 kms a year, you’re only going to get a deduction of 4 000 km".

Biggest impact on high value vehicles

Savage added that changes in the tax on vehicle schemes would have the biggest impact on high value vehicles and on employees whose car allowance was really a "perks". "Many employees may need to make provision for 'top up' payments, which might be required at the end of the year," he said.

He illustrated the expected impact by citing a case study based on a motorist whose vehicle is valued at R250 000. "Prior to the changes in the 2005 Budget, based on 20 000 km mileage, with 6 000 km deemed business mileage, some R35 323 could be deducted for tax. However, by increasing the deemed private mileage to 16 000 km, and reducing the deemed business mileage to 4 000 km, the tax deduction in now only R13 991," he added.

"A 'top up' payment of around R22 000 is now required, and this will increase substantially in the 2007/2008 tax year. Next year, with the first 18 0000 kms deemed private mileage, and only 2 000 km deemed business mileage, an amount of just over R1 000 could be claimed as a tax deduction," he explained.

Savage illustrates the impact of changes in the rate of taxation, using a higher value vehicle, but allowing for far more business mileage. "Based on 30 000 km travelled, with the first 14 000 km deemed private mileage, an employee driving a vehicle valued at R600 000 would be able to deduct R135 411,73 for the 2004/2005 tax year. However, in the 2005/06 tax year, based on the exactly the same criteria, the deduction of tax would drop to only R71 557,73.

'Receiver has closed yet another loophole'

Thus individuals who drive luxury vehicles valued at over R360 000 will be severely affected by the changes in taxation. By imposing a 30 per cent residual value on the cost of vehicles at the end of a five year period, where previously the cost of a vehicle could be written off over three years, Savage says the Receiver has closed yet another tax loophole. "This practice will prevent motorist from claiming balloon payments as expenditure," he said.

By increasing the tax on company cars from 1,8 to 2,5 per cent, the Minister has pre-empted a switch to company cars. The increased rate will however, only come into effect in the 2007/2008 tax year. Prof Lester described the increase as "substantial".

"Many individuals do not recognise that they will now be paying around 35 per cent more tax on a company car," he said.

He added that if one’s mileage was below the deemed private mileage, a company car would be the only way a taxpayer could get any tax benefit: "My research shows that you have to do 23 000 km a year before the car allowance outperforms a company car".

Company cars a better option?

Although car allowances may now be less attractive for office bound workers, Prof Lester said there were still many employers who wouldn't consider offering employers a company car. Savage added: "Companies are urged to explore the new generation company cars. These avoid many of the pitfalls of the past, which often made company cars unpopular.

Prof Lester concluded: "In the old days you walked past the showroom and said I'll have one of those. Nowadays, you need to recognise that purchasing a car is a major decision. You need to investigate what car you should purchase, instead of just following market trends".

Original article from Car