KPMG Services (Proprietary) Limited

Budget proposals - increase in fringe benefits tax on motor vehicles
We wish to note our reservations and concerns regarding the proposed increase in fringe benefits taxation on company provided motor vehicles. (Refer National Treasury Slide Presentation, 27 May 2005 slide number 11.)

The following extract is from the Budget Review issued on 23 February 2005.

KPMG is a provider of audit, tax and advisory services to a number of the larger motor vehicle and component manufacturers operating in South Africa. Reservations have been noted by a number of these companies as to the potential long-term implications arising out of the proposed increase in fringe benefits tax ("FBT") on 1 March 2006 – these include, but are not limited to the following:

• The fact that the fiscus is likely to suffer a decrease in total revenue inflows, as opposed to the anticipated increase;
• Distortions in the "balance" between the provision of a company car or a travel allowance;
• The fact that the FBT cost to the employee does not represent the benefit to the employee;
• The fact that the FBT provisions are discriminatory against higher value company cars; and
• The "knock on" effects on the affected companies in terms of a reduction in overall profitability and on employment. This final point is clearly a macro economic issue which is not within the scope of this document, although it is an issue of significant concern.

1. The increase in FBT will result in a reduction in total revenue inflows for the fiscus

It is evident that the price of a motor car includes a number of taxes and duties, specifically ad valorem duty, customs duty and value-added tax ("VAT"). For purposes of this example, we have ignored the regional establishment levy that will also be raised on the sale of the vehicle.

Our concern is that, due to the increased level of FBT, employees will not wish to acquire a new company car, or will delay the acquisition thereof. The effect of this is that the fiscus will loose on day 1, the taxes included in the price of the new car, and will recover only the increased FBT, but based on the employee’s existing (and generally cheaper) car.

Table 1 reflects the consequences of such an event. For example, an employee may currently be allocated a car costing R360 000, which is due for replacement by a car costing R500 000. The value of the taxes in the new car is approximately R171 689 and the amount will not be earned by the fiscus if the vehicle is not purchased. Instead, the increased rate of FBT will increase the employee’s monthly PAYE by only R884 – it will thus take 194 months to recover the taxes lost on day 1!

Even assuming the decision to acquire the vehicle is delayed only one year, the loss of interest by the fiscus will still be approximately double the additional PAYE earned during the year.

2. The ‘balance’ between providing an employee with a company car or a travel allowance will be distorted

For the purposes of this submission, we have assumed that employees are remunerated on a ‘cost to company’ basis and that the employee is free to choose how much of his package they wish to allocate to either a company car or a travel allowance. The question of which allocation would be better in the hands of the employee is dependent on a number of issues, including the level of annual mileage and the split thereof between business and private, the value of the vehicle and often, personal choice. We clearly do not propose to analyse these in any detail, save for pointing out the following:

2.1 the effective level of tax levied on the company car far exceeds the tax levied on the travel allowance in the 2005 year, and this gap increases in the 2006 year due to the increase in FBT – refer Table 2/1, which is based on the 32 000km ‘deemed’ travel, at various car costs. For example, an employee driving a car costing R250 000 inclusive of VAT would need a travel allowance of approximately R90 000 to meet all his vehicle costs. Of this amount, R38 025 would be taxable in the 2006 year, compared to FBT of R65 789 for the same vehicle – this means that the employee with the company car pays R11 106 more in tax in the year.

This differential increases further where the employee uses a log book to support his business travel, estimated at 20 000kms for purposes of the calculations – refer Table 2/1 – the additional tax paid is now R16 304.

It is clear that the FBT levied on the company car is already too high compared to the effective tax levied on a travel allowance, and this disparity increases due to the increased level of FBT.

We thus do not agree that the FBT increase is "in line with" the adjustments made to the travel allowance table.

2.2 The FBT levied on a company car is effectively based on 10 000kms per annum private travel as is evident from paragraph 7(7) of the Seventh Schedule. The private mileage allowed on travel allowances is effectively 18 000kms in 2004, 16 000kms in 2005 and 14 000kms in 2006, based on 32 000kms travelled. It is clear that the FBT deemed private mileage needs to be increased accordingly, with a resultant reduction in the FBT charge.

3. The FBT cost to the employee does not necessarily represent the benefit to the employee

For purposes of the Seventh Schedule, a taxable benefit arises in the hands of the employee "…. if as a benefit or advantage of or by virtue of such employment or as a reward for services rendered or to be rendered ….." "…. the employee has been granted the right of use of an asset for his private or domestic purposes .…"(paragraph 2 introduction and paragraph 2(b)).

A large number of employees are provided with a company car essentially as a ‘tool of the trade". This would apply specifically to persons such as sales representatives, dealers and others who are regularly and necessarily required to use their cars in order to generate income for their employers. The exclusions in paragraph 7(10) may not necessarily apply to such persons and the FBT levied may thus far exceed the actual benefit derived by the employee. As distinct from claiming a reduction in FBT in terms of paragraph 7(7) (which would only apply where the employee does less than 10 000kms private travel), consideration should be given to the employee claiming a deduction for actual business travel using his company car – this would assist in restoring the "balance" between company cars and travel allowances referred to above.

4. The FBT provisions are discriminatory

It is evident from Table 1 that the rate of ad valorem duty and customs duty is higher on more expensive motor cars than it is on cheaper ones. This is intentionally punitive and discriminatory against purchasers of higher value cars and the increase in the rate of FBT merely serves to compound this discrimination. This could ultimately lead to a significant shift away from higher value cars to less expensive ones, to the obvious detriment of manufacturers, distributors, retailers and their component suppliers, at the higher end of the market. The long term effects of such a shift need to be identified and evaluated.

5. Effect on profitability and on employment

In summary, we do not believe that there has been sufficient consultation with the relevant parties in the motor industry and that further detailed research needs to be carried out to determine the impact of the proposed change.

Yours faithfully

Patrick McGurk
Director, Tax Services