Company car fringe benefit: how it is valued
How SARS values private use of a South African company car as a fringe benefit, the lower maintenance-plan rate, and what the employer must report.
By Achekam · · 4 min read · For Running a business businesses in South Africa
Giving a manager the use of a company car feels like a perk that sits outside payroll. The car is a company asset, the fuel card is a company expense, and the employee simply drives it. SARS sees it differently: if the employee can use the car privately, that use has a value, and that value is taxed as part of the employee's pay.
For the employer, this is mostly a payroll and reporting job. The value has to be worked out each month, run through payroll, shown on the year-end tax certificate and covered by a declaration in the annual reconciliation. This guide explains how the value is set, the lower rate where a maintenance plan was bought with the car, and what goes wrong when the benefit is left out.
A monthly percentage of the determined value
SARS's guide for employers on fringe benefits says the private use of an employer-provided motor vehicle is valued at 3.5% per month of the vehicle's determined value. That monthly figure is the cash equivalent: the amount treated as part of the employee's remuneration for that month.
The determined value is a term with its own meaning in SARS's rules, so do not substitute a guess at what the car would sell for. The SARS guide for employers in respect of fringe benefits explains how the taxable value of benefits such as a company car is worked out, with examples. Work out the determined value once, when the car is first made available, record how you arrived at it, and keep that working with the vehicle's purchase papers.
A worked example in words
A business buys a car and gives the sales manager full use of it, including private use. Its determined value is worked out from SARS's guide. Each month, payroll adds 3.5% of that determined value to the manager's taxable remuneration as the company car benefit. PAYE is then worked out on the total. The benefit is shown on the payslip each month and on the manager's year-end certificate.
The lower rate with a maintenance plan
SARS's guide gives a lower rate where a maintenance plan was included in the purchase price: 3.25% per month of the determined value instead of 3.5%.
The condition is specific. The plan has to have been part of the purchase price when the vehicle was acquired. Check the purchase agreement, not just whether the car happens to have a service plan now, and keep the agreement on file so the lower rate can be supported.
Showing the benefit on the IRP5, and the penalty
The employer carries the responsibility here. SARS's guide says the employer must determine the cash equivalent of each taxable benefit and show its nature and value on the employee's IRP5/IT3(a). It adds that a failure to do so can attract a penalty of 10% of the cash equivalent or of the amount understated.
Leaving a company car off the certificate does not make the benefit disappear; it moves the problem to the employer, with a penalty on top. Getting the value right each month is cheaper than correcting a year's certificates afterwards.
The declaration in the annual EMP501
There is also a formal confirmation. SARS's guide says the employer's declaration that all taxable benefits are included in employees' certificates forms part of the annual EMP501 reconciliation. When the reconciliation is submitted, the employer is confirming that benefits such as company cars have been dealt with. Make sure the person who signs it knows which employees have cars.
A note on VAT
The VAT side runs separately. SARS's VAT 404 guide says that, as a general rule, VAT incurred to acquire a motor car may not be deducted as input tax, even if the car is used for making taxable supplies. Input tax on cars and entertainment covers the VAT side in more detail.
Setting the benefit up in Achekam
Achekam's payroll lets each employer keep its own employees, earnings, deductions and pay settings. Pay runs can be monthly, fortnightly or weekly, and each period's overtime, commission, allowances, reimbursements and unpaid leave can be entered as variable inputs.
For a company car, that means:
- Work out the monthly cash equivalent yourself or with your adviser, using the determined value and the correct rate.
- Set the benefit up as an earning for the employer, named so it is recognisable as the company car benefit.
- Before the first live run, check how that earning appears on the payslip and how it will be reported on the year-end certificate, and adjust the set-up with your adviser if it is not treated as a taxable benefit should be.
- Keep the determined value working and any maintenance plan evidence on the employee's file.
Year-end IRP5 and IT3(a) certificates are prepared in Achekam from issued payslips and download as PDFs, and a certificate cannot be issued while an employee's ID or tax number is missing. Because the certificates come from the payslips, a benefit that was set up correctly from the first month carries through to the certificate. If the car is replaced by a cash allowance instead, see the travel allowance and PAYE.
Company car checklist
- Determined value worked out and recorded for each vehicle
- Rate confirmed: 3.5%, or 3.25% with a maintenance plan in the purchase price
- Monthly cash equivalent set up as an earning and checked on a test payslip
- Nature and value shown on the IRP5/IT3(a)
- EMP501 signatory aware of every employee with a car
- Purchase agreement and value working on file
Review the list whenever a car is bought, replaced or handed to a different employee. Those are the moments when the value, the rate and the person all change.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
