Tax burden on cars sold to employees

Tax burden on cars sold to employees

Financial Gazette

19/3/2020

Marvellous Tapera

THE acquisition of a motor vehicle by an employee from an employer at below market value of the vehicle represents a taxable benefit to the employ­ee.

The taxable benefit to the employee is the difference between the market value of the motor vehicle at the time of selling to the employee and the cost at which the em­ployee acquired the motor vehicle.

In determining the market value of the vehicle, the taxman will have regard to the valuation from a valuer prescribed by him in Gazette or motor dealers.

It is advisable to obtain at least 3 quota­tions or valuations from reputable dealers and use the highest of the 3 to avoid dis­agreements with Zimbabwe Revenue Authority (Z1MRA). This value must be measured against other quotations obtained from different reputable dealers for the value to be accepted.

These quotations are required in terms of the law to be kept for at least six years.

This is because the taxpayer has the burden of proof in terms of the law in the event of the Z1MRA lax audit.

Meanwhile, if the employee is of the age of 55 or above, the benefit will be tax exempted, i.e. no tax liability arises on the benefit.

The identification of such person is also a record which should be kept in terms of the law as burden of proof that the motor vehicle was sold to a person who qualified for the exemp­tion.

The consequence of this is that the benefit accruing to the employ­ee through the disposal of the vehicle to him or her at less than market value is a taxable benefit in terms of s8 (1) (f) of the Income Tax Act (Chapter 23:06) which brings into gross income of an employee an advantage he/she receives as a consequence of services rendered.

For some employees, this benefit may be out of their reach if their salaries have not been adjusted in line with inflation.

This is further compounded by the effect of infla­tion which will cause the market value of the motor vehicle to be at higher nominal value.

Although they may get the motor vehicle at con­cessionary value from the employer, they may have difficulties in financing the tax emanating from such a concession.

The tax should be remitted to the Zimbabwe Rev­enue Authority by the 10th of the month following the month of sale of motor vehicle to the employee. It is this short lead period that complicates matters.

Additionally, the higher nominal value of the mo­tor vehicle will push the tax bracket of the employee into a higher tax bracket and this can further com­pound the situation for the employee.

While there are different options available to em­ployees such as taking a loan to purchase the motor vehicle, this still results in a taxable benefit.

If the loan or advance is for free or is below LI­BOR plus 5 percent (albeit a cheaper option because of low interest rate), the benefit is deemed to accrue to an employee and will be processed through the payroll.

If the employer pays the tax on behalf of the employee, a concept known as the grossing up, this represents another taxable benefit in terms of the law. In the final analysis, these options may result in indebtedness by employee to employer just for purposes of funding the tax.

This is unavoidable largely because of the em­ployment tax tables which have remained fixed
since the day they were announced  despite  the run-away inflation.

Therefore, a sale of motor vehicle to an employee is currently constrained by tax burden on the discount due to stagnant tax tables. This impair values and the employee’s capacity to pay the tax accruing on the benefit.

Meanwhile, grossing up poses a challenge for public sector entities. The law makes a provision for the recovery of employee’s tax which is assessed on le public sector entity or an association from the employees and management of such public entity.

Where the commissioner has made an assessment of employee’s tax which the entity has failed to collect and that tax is then paid by the public entity but failed to be recovered from the employees, the commissioner shall be deemed to be the employer or the purposes of recovering the tax from the employees.

Therefore, if a public sector entity grosses up, the commissioner will still recover the tax on tax from the employee.

In short the grossing up in public sector entities is prohibited.

In conclusion, the disposal of the motor vehicle to the employee, will result in the benefit being out of reach for many if the key fundamentals are not addressed.

The tax tables must be adjusted regularly in line with inflation.

This is not the only item affected by the stag­nant employment tax tables. When tax rates are not changed regularly everybody is involuntarily pushed into higher tax brackets especially where they receive earnings or amounts which are market linked.

The minister of Finance should consider quarter­ly review of employment tax tables to cushion em­ployees from heft taxes.

Meanwhile, Matrix Tax School will be hosting its fourth Annual Tax Conference at the Elephant Hills Hotel in Victoria Falls from the 20-23 of May 2020. He writes in his personal capacity.

% Tapera is the chief executive of Matrix Tax School. He writes in his personal capacity.