What really moves an Israeli? In many cases it‘s a ‘‘company car‘‘ – or any car provided by an employer to an employee (rechev tsamud).
You never see abandoned company cars by the roadside. This is because the drivers remember to fill them up with fuel, oil and water, and service them periodically, usually at the employer‘s expense. On the tax side, there are a few more things you must remember to do.
When an employer provides a car to an employee in Israel, the employee pays tax on the deemed benefit – known as ‘‘usage value‘‘ (shovi shimush). This amount is added to the monthly salary on the payroll and on your paycheck.
Usually the employee uses the car partly for business purposes, partly for private family purposes.
Unlike some countries, Israel does not require anyone to track the individual operating costs and distance traveled on business for each car. Instead a system of approximations is used, which has been changing over the last few years.
Pre-2010 cars If your car was first ‘‘put on the road‘‘ by the end of 2009 according to the vehicle license, the deemed usage value depended on which price group the car belongs to.
In 2010, the monthly usage values for vehicles put on the road by the end of 2009 were as follows: group 1 – NIS 2,140; group 2 – NIS 2,330; group 3 – NIS 3,120; group 4 – NIS 3,770; group 5 – NIS 5,220; group 6 – NIS 6,750; group 7 – NIS 8,650; and motorbikes over 125 c.c and over 33 horse power- NIS 840.
For 2011, the usage values have been increased by over 10 percent and so there will be more tax to pay. The monthly usage values for vehicles put on the road by the end of 2009 are now as follows: group 1 – NIS 2,580; group 2 – NIS 2,790; group 3 – NIS 3,590; group 4 – NIS 4,310; group 5 – NIS 5,970; group 6 – NIS 7,730; group 7 – NIS 9,950; and motorbikes over 125 c.c and over 33 horse power- NIS 860.
For example, if your employer provides you with a Mazda 3 company car, which was put on the road by the end of 2009, it should belong to group 2 and you are taxed in on a deemed monthly usage value of NIS 2,330 in 2010 and NIS 2,790 in 2011. This is treated as additional salary income. If you receive the use of the car net of tax, these figures have to be grossed up. If you pay 45% income tax and 12% national insurance, the grossing up more than doubles the taxable benefit.
For cars first put on the road in 2010 onwards, a different system applies. It is based on the specific car model, not a price group.
Each car model has its own code number, which is shown on the vehicle license. In 2010, the monthly usage value is 2.04% of the new car retail price that is up to NIS 130,000 and 2.48% if that price is above NIS 130,000. The new car retail price is taken from the notification by the importer to the Israeli Tax Authority and takes no account of any equipment extras you may add or any price reduction you may negotiate. You can find out what the retail price and deemed usage value is for any model by visiting a website of the Israeli Tax Authority at: www.shaam.gov.il/mm-usecar.
For example, if your employer gives you a Mazda 3 company car, which was put on the road in 2010, (manufacturer‘s code 0588, model code 0371), the above website reveals that it‘s retail price is NIS 124,500 and you were taxed in 2010 on a deemed monthly usage value of NIS 2,540. In 2011, the deemed monthly usage value for a 2011 model of that car has gone up to NIS 3,090. But some models of the Mazda 3 are taxed differently according to the website, so you must check for your specific model code and year.
Given all these inflationary updates, wage clerks will be busy looking up the latest deemed usage value for each and every company car when calculating the January 2011 payroll and taxes thereon.
The deemed usage value assumes your employer pays for all the running costs – fuel, maintenance, etc.
If the employee pays these costs out of his own pocket, the taxed usage value doesn‘t change.
In the case of hybrid cars which are partly electrically driven, special rules reduce the above taxable car usage values by NIS 530 per month in 2011.
Suppose you own your own company. Should you let the company own the car or buy it yourself? This might seem a good idea if you are a new immigrant and can buy a car at a reduced price. On the other hand, fuel and maintenance reimbursements by the company to you are taxed as additional salary. And the amount has to be grossed up. Suppose you are taxed at a rate of 45% paying 12% national insurance and want the company to reimburse a NIS 200 petrol bill you incurred. The company must record a gross salary payment of over NIS 400 to cover income tax and national insurance and reimburse you the NIS 200 you shelled out.
What expense deduction does the firm get?
Employers may deduct all expenses of cars made available to an employee. In addition, the expenses of ‘‘operational vehicles‘‘ are fully deductible if the car is used to generate income but is not allocated to any specific employee.
However, self-employed independent contractors will be allowed to deduct the higher of: (1) total car costs minus taxable car usage benefits taxed to employees, or (2) 45% of the total car costs.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.