Big tax problem in South Africa that’s costing drivers of certain cars

South Africa’s tax system has not been updated to account for the adoption of electric vehicles (EVs), creating issues for companies and individuals who typically rely on policies such as travel allowances.

This is according to Joon Chong, a tax lawyer at Webber Wentzel, who noted that EVs are rapidly growing in popularity in South Africa as consumers seek to avoid high petrol costs and reduce their environmental footprint.

Similarly, businesses are adding EVs to their commercial fleets to reduce running and maintenance costs.

Despite this, South Africa’s tax system hasn’t been updated since a time when the mass adoption of battery-powered vehicles seemed remote.

Chong said the issue was not that EVs fall outside the tax framework. Rather, most of the rules around vehicle usage are written using language that assumes cars run on liquid fuel like petrol or diesel.

This makes it unclear whether an electric car is still subject to legislation that uses the term “fuel.” One such case involves travel allowances.

Employees who receive a travel allowance can generally choose between claiming the actual cost, or using the deemed-cost method.

A deemed approach relies on prescribed rates that include fixed fuel and maintenance costs. In this instance, the legislation does not define the word “fuel.”

This wasn’t an issue when practically every car on the road used petrol or diesel, but things are less clear now that EVs are becoming widespread.

“Electricity is clearly the vehicle’s energy source, but the legislation was drafted with liquid fuels in mind. SARS has not issued guidance addressing whether electricity should be treated as fuel in this context,” said Chong.

“That creates uncertainty around the deemed-cost method. By contrast, the actual cost method appears easier to apply because charging costs can be treated as part of the vehicle’s operating expenditure.”

“The practical result is that taxpayers may find themselves on firmer ground when relying on actual costs rather than prescribed rates.”

Keeping track of EV running costs

There are other complications that EVs present as well. Since they rely on chargers rather than petrol stations, they don’t leave a convenient paper trail the same way a fuel receipt, card statement, or transaction record does.

Charging at a public outlet is easier since operators issue invoices and transaction records, but this doesn’t apply to home charging.

Electricity used to charge an EV at home is usually included in the broader municipal bill, along with the household’s other electricity usage.

Chong said it may be necessary for chargers capable of recording their electricity usage to become widespread, not from a convenience aspect, but as a tax compliance tool.

“Without reliable records, separating vehicle-related electricity costs from ordinary household consumption can be difficult,” she said.

Offices and business parks that install EV charging infrastructure can face other problems, depending on how the chargers are used.

“When an employer provides electricity free of charge to power an employee’s private vehicle, the arrangement potentially falls within the fringe-benefit rules. In principle, the employee is receiving something of value by virtue of employment,” explained Chong.

This becomes even more complicated if renewable energy is involved. If the electricity is supplied from excess solar generation, the marginal cost of providing the power is very low.

Whether SARS would accept a correspondingly low fringe-benefit valuation is another matter that is unclear under the current legislation.

Not all aspects of EV use are so complicated, however. Chong said that companies that install charging infrastructure should be able to claim allowances under existing capital allowance provisions, like any other business asset.

“The broader challenge lies elsewhere. South Africa’s tax rules still operate on assumptions developed during the age of the internal combustion engine,” she said.

“For decades, that created few practical difficulties because almost every vehicle shared the same basic source of energy. Electric vehicles are beginning to test those assumptions.”

She said the issue is not whether South Africa’s tax system can accommodate EVs, but rather if existing legislation designed around petrol and diesel cars can still effectively apply.

“Until National Treasury or SARS provides greater clarity, taxpayers will continue to navigate a framework that generally works but was clearly built for a different era.​”