The 2019 supplementary budget has seen the Minister of Finance and Economic Development review most monetary amounts in the tax and customs laws in line with inflation and exchange rate developments in order to maintain their economic importance to the business. The minimum taxable income for employees was raised by 100% to ZWL700. Whilst those driving cars should brace up for more taxes as the motoring benefit was increased by a shocking percentage. Alas, some are likely to go home with a negative net pay unless they give up the cars or their employers increase the salary.
The general design of the Income Tax law is to include in the income of an employee all earnings accruing to an employee whether corporeal or incorporeal property. As long as the employee has been saved from taking anything out of his pocket by an employer that must be included in the payroll of the employee and subject to tax unless there is a specific provision within the law that exempts the amount. In light of this, the provision by an employer to an employee of a motor vehicle for use constitute a benefit subject to tax. The right of use includes travelling between home and place of work or between two distinct businesses or use of the vehicle over the weekends for private purposes. Private usage is also assumed if the vehicle is kept at the employee’s home where it can be used by the employee or his family at any time. The taxable benefit is determined using the engine capacity of the applicable vehicle and with a big engine capacity commanding a higher value for inclusion in gross income of an employee. The benefit cannot be apportioned because the vehicle is used for partly business and partly private. As long as the private element is present the full benefit based on the engine capacity of the motor vehicle availed applies. Apportionment can only be made where the period of use is less than a month. Although paid by the employer, costs such as licenses, insurance, toll fees, repairs and maintenance or other cost of running the vehicle, also inure to the benefit of the employee. They do not constitute additional taxable benefit. The deemed benefit based on the engine capacity is all inclusive of the cost of running the vehicle incurred by the employer, however fuel given by the employer for employees’ private use may in certain circumstances be deemed an extra benefit.
The Minister of Finance Prof Mthuli Ncube has through the Finance Bill which is yet to be made into law released shocking increase in the values for motor vehicle benefits. The Minister reviewed these rates upwards by 700%. The minimum value for engine capacity is ZWL2,400 up from ZWL300 per month for engine capacity of not more than 1500 cc and the maximum value for engine capacity above 3,000cc is ZWL6,367 up from ZWL800. The increase by 700% will be difficult to sustain considering the salaries and wages have not increased by that much. The fact that the Minister has only increased the tax free threshold by 100% is a clear testimony that the motoring benefit would be significant portion in the taxable income of an employee. It’s clear with the recent salary adjustment both in private and public sector that if the Minister was to increase the tax free threshold beyond the proposed amount, a number of the employees will not be required to pay employee’s tax. Meanwhile, the Minister has increased some of the concessions such as values for capital allowances, some other income tax deductions etc by a factor of 8. This we compliment him, but if these same companies which the Minister has given concession are grown, the general populace must have disposal income to enable them to purchase goods and services of those companies.
The deemed motoring benefit is a notional figure, which is entered as an income item in the payroll for the purposes of computing PAYE only. It does not increase an employee’s net pay, but serves to increase the PAYE. The pay as you earn applicable on it must therefore be funded by the employee’s other income. For employees earning low salaries and afforded company cars, the motoring benefit can have a huge knock on effect on their net pay or possibly result in them getting into a negative net pay. If the parliament approve of this proposal, employees and employers will need to evaluate their options. The required salary upward reviews to avert negative net salaries or reduced salaries may be too high for some employers. If employers decide to raise salaries, to maintain profitability price of goods and services will have to be increased which may have an inflationary effect. Withdrawal of the motoring benefit may be an option, but this may be viewed by some employees as a breach of employer’s contractual obligation. Meanwhile the same values have implications in terms of VAT for employers that are registered for VAT. In terms of the law, the supply of a benefit to an employee, provided such benefit would be subject to VAT at 15% if it had been supplied in ordinary course of registered operator’s trade, is subject to VAT. The supply of motor vehicles to employees is considered to be a supply in the furtherance of the registered operator’s trade and the registered operator must therefore account for VAT on the value of motoring benefit as stated above. The rate of tax is the tax fraction (15/115). This is an additional cost to the employer.
It is in the spirit of cushioning workers already struggling with the high cost of living, the Minister may need to review downwards the proposed deemed motoring benefit figures. A gradual rise would be more ideal, starting with say 100%. A significant rise militates against the ease of doing business, making Zimbabwe an unfavourable investment destination. Also, raising the motoring benefit by a factor of 8 is too steep against income levels that cannot be raised by the same margin.