If the next car you buy comes with a motorplan, be aware that there are tax implications to consider before you finalise the deal.
A motorplan is, generally, an upfront payment, made when you buy the car, which is designed to cover the cost of the maintenance of the car after the purchase. It means no further charges will be made to you for normal maintenance and repair costs for a period of time, or distance covered.
The motorplan may be included in the purchase price or it may be added to the price separately.
In this article I do not propose to discuss the merits or disadvantages of motorplans. I merely propose to set out the tax implications. These differ depending on whether you are an employer or an employee.
If you are required to buy your own car, but are given a travel allowance by your employer, you will need to establish whether, on your tax return, you will claim a deduction against that travel allowance based on actual costs or on the deemed costs as set out in the Government Gazette.
If you are going to claim the deduction based on actual costs, it would be better to ask the seller of your new car to invoice the motorplan separately.
This is because maintenance costs may be deducted when incurred. So if the motorplan is invoiced separately you may claim a deduction of the full amount in the tax year you buy the car.
But if the motorplan is not invoiced separately it will be included in the price of the car and you will claim wear and tear over five years.
Under this arrangement it will effectively take five years for you to claim the motorplan costs.
If you are going to claim a deduction based on the deemed costs, then the higher the cost of the car the higher the deductible deemed costs will be. It would be better to include the motorplan in the cost of the car and claim higher deemed expenses every year.
In the situation where you receive a company car your employer provides you with a car that you can use privately, as well as for business you will be taxed on its private use.
This is based on the fringe benefit value of 1,8 percent of the determined value of the car a month. The determined value is the cost of the car, excluding VAT and finance charges.
You need to minimise the cost of the car so that the fringe benefit tax will be as low as possible. It will be better, in this instance, for the seller of the car to invoice the motorplan separately and not to include it in the cost of the car.
This will also benefit your employer.
For income tax purposes, the employer will deduct the cost of the car over five years, in the form of wear and tear.
If the motorplan is included in the cost it will also only be claimed after five years. If it is invoiced separately, the full cost of the motorplan may be claimed in the year the car is bought.
The employer also experiences two VAT advantages if the motorplan is invoiced separately.
As I mentioned in a previous article, except in specific circumstances, the VAT charged on the cost of a car cannot be claimed as an input tax refund for VAT purposes.
The VAT on the maintenance of a car, however, can. So, if the motorplan is invoiced separately, the employer can reclaim a refund of the VAT on the motorplan costs from the South African Revenue Services.
In addition the employer must pay a special output tax because the car is provided as a fringe benefit to the employee.
This is also based on the determined value of the car. The lower the cost of the car, the lower the amount of the output tax.
Clearly, a motorplan could cost you more than you thought if the tax implications of its being included in the cost of the car or invoiced separately are not considered up front.