[Question] With Tax on dividends does it make sense to buy cars thru the business?

[Marius1975]

Hi Guys,

We looking at not loosing so much money on the Tax when paying out dividends so was thinking rather buying the cars thru the business instead. We looking at about R600k so 18% on that is a cr@pload if we pay it out... What's the pros and cons of doing it this way? Any advice will be greatly appreciated.

[AMB57]

Marius, my 2 cents:
If you purchase the car thru the business, you also get a depreciation tax benefit on top of the dividend tax saving (that's the PRO) and can claim insurance, petrol and maintenance as expenses
If really cheeky can claim the VAT back on a commercial vehicle, but when you sell it would have to VAT-rate the sale and pay that to SARS

Cons to consider:
if any salaries have a travel allowance component to it, then might not be able to double dip any more - therefore could impact PAYE cash cost
chances are for valid insurance you might have to insure the vehicles for business use rather than personal - which could increase the cash cost of insurance itself. Would check with insurance house if this reclassification is necessary when what you're doing is effectively a structuring thing only
I imagine there should be a tenable reason for the company to have vehicles in the case of an audit and questions being raised at such a stage?

[Marius1975]

Thank you, I've been hearing the same things. But someone else mentioned I have to buy new cars after 2 years again?? Does that ring any bells and what would the reason(s) be?

[AMB57]

Hi - I cannot think of any obligatory factor 'forcing' you to buy again after two years. The only thing I can think of is that, if you are depreciating the asset (and I'm not sure over what period applies to cars) then it might work out cash/tax-wise such that the cash outflow to upgrade is offset by a greater tax depreciation benefit. Personally I doubt this in strict $ terms. But "having to" buy new car(s) after two years.... I sincerely doubt that. May yrs ago I had a company bakkie where I did all of the above-mentioned things and certainly never faced any regulatory compulsion to replace it.

[Dave A]

But someone else mentioned I have to buy new cars after 2 years again?? Does that ring any bells and what would the reason(s) be?

I believe approximately two years is considered by some as an "optimal efficiency point" when it comes to car resale values (if you're not going to simply run the asset until it's totally worn out).

With low mileage vehicles in particular, the value drops sharply as you drive it out the showroom, but thereafter tends to stay pretty flat for the first two years.

It's probably also worth pointing out that this is more a function of calendar years, not the actual age of the vehicle.

Medium and high mileage vehicles are, of course, a totally different proposition.

[Marius1975]

Thx guys!! Must appreciated! now...what cars to buy...mmmm