Vehicle Fringe Benefits in a CC: South African Tax Implications

Vehicle Fringe Benefits in a CC: South African Tax Implications

• 21 July 2025
• Corporate Tax
• The Tax Faculty

This article is based on tax law for the year ending 29 February 2026.

Question:

Two members of a Close Corporation (CC) have vehicles that are:

• Registered in the name of the CC
• Used 100% privately by the members
• Financed through bank loans
• Not recognised on the CC’s financial statements as assets or liabilities
• All operating and running costs paid personally by the members
• Members receive no salary or other remuneration from the CC

Answer:

The Problem / Facts

Two members of a Close Corporation (CC) have vehicles that are:

• Registered in the name of the CC
• Used 100% privately by the members
• Financed through bank loans
• Not recognised on the CC’s financial statements as assets or liabilities
• All operating and running costs paid personally by the members
• Members receive no salary or other remuneration from the CC

Analysis of Tax Issues

This structure gives rise to complex tax implications stemming from the divergence between legal ownership and beneficial use. The CC legally owns the vehicles, while the members derive all private benefit. That creates taxable fringe benefits and potential deemed distributions. The absence of formal employment arrangements further complicates PAYE compliance and other tax obligations.

Tax Issues & Pertinent Legislative Provisions

• Fringe Benefits – Seventh Schedule, paragraph 7 to the Income Tax Act 58 of 1962 (calculation of motor vehicle use as a fringe benefit)
• PAYE Obligations – Fourth Schedule to the Income Tax Act
• Expense Deductibility – Section 11(a), which permits deduction only for expenses incurred in producing income
• Deemed Distributions – Section 64C (companies/CCs)
• Right‑of‑Use Benefit – Section 8C imposes inclusion of fringe benefits in the individual’s gross income

Applicable Tax Law

• Section 8C: Fringe benefits must be included in the recipient’s taxable income.
• Section 11(a): Excludes deduction for expenses not incurred in generating income.
• Section 64C: Treats private use of assets held by a company/CC as deemed distributions.
• Seventh Schedule, paragraph 7: Prescribes calculation of taxable fringe benefit on right‑of‑use of a motor vehicle at 3.5% per month of the vehicle’s determined value, reducing to 3.25% if a qualifying maintenance plan exists 

Application of the Law to the Facts

For the Close Corporation:

• Fringe Benefit Liability: Under paragraph 7, the CC must assign a monthly fringe benefit equal to 3.5% (or 3.25% if under a maintenance plan) of each vehicle’s determined value.
• PAYE Obligations: The CC must register as an employer and deduct PAYE monthly on that fringe benefit; the members are effectively taxed on the deemed remuneration.
• Skills Development Levy: Charged at 1% of the fringe benefit value.
• Expense Deductibility: Section 11(a) disallows the CC from deducting any vehicle costs, since the assets are not used to produce income.

For the Members:

• Taxable Fringe Benefits: Members must include the vehicle benefit in their taxable income based on the 3.5% (or 3.25%) calculation.
• PAYE on Fringe: The CC must deduct and pay over PAYE on this benefit each month.
• Deemed Distribution: The private use potentially triggers a deemed distribution under section 64C, exposing the CC or its members to secondary tax and distribution reporting obligations.

Recommended Actions

• Legal Ownership Transfer: Members could transfer legal ownership of the vehicles to themselves personally, aligning legal and beneficial ownership and removing the fringe benefit liability.
• Formal Leasing Arrangement: Alternatively, the CC could enter into a bona fide lease with the members, including consideration for private use, with proper logbook records and monthly contributions.
• Voluntary Disclosure: If there has been historical non‑compliance, consider utilising the Voluntary Disclosure Programme under section 227 of the Tax Administration Act to regularise past omissions and mitigate penalties.
• Record‑keeping: Maintain accurate logbooks and documentation of all vehicle usage, business versus private, to support any fringe benefit reductions on assessment.

Summary

The current structure results in multiple tax exposures:

• The CC has a fringe benefit exposure and PAYE liabilities without corresponding expense claims.
• Members are receiving a taxable benefit without formal employment terms or documented contributions.
• There is exposure to deemed-distribution treatment and potential distribution tax consequences.

Immediate restructuring—either by transferring ownership or implementing a formal lease arrangement—can reduce tax leakage and align legal, beneficial and tax positions. A voluntary disclosure may lessen penalties and ensure compliance moving forward.

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