Do you need to pay tax on the disposal of your vehicle? Insights from the Inland Revenue (Amendment) Act, 2026
Do you need to pay tax on the disposal of your personal vehicle? Does your company need to pay tax on the disposal of vehicles given to employees? Insights from the Inland Revenue (Amendment) Act, 2026
As per the framework of the Inland Revenue Act (IRA), tax liability arises where a person has taxable income. Taxable income is computed based on assessable income, which is classified under four heads: employment, business, investment, and other sources.
Sections 5 to 8 of the Act define the scope of these income categories. Therefore, the fundamental principle is that if a gain does not fall within these sections, it should not be subject to income tax.
Accordingly, the key issue is whether gains arising from the disposal of motor vehicles (i.e., sale proceeds less cost) fall within any of these categories.
Analysis of relevant provisions
Section 195 defines depreciable assets to the extent to which they are employed in the production of income from a business, among other criteria. Accordingly, where a motor vehicle is used in business operations, any disposal gain can form part of assessable business income. For example, the disposal gain of a motor lorry would be liable to tax under this clause.
However, what about the aforesaid personally used motor vehicles?
A vehicle used for purely personal purposes does not qualify as a depreciable asset. Therefore, any gain on disposal falls outside the scope of business income and, in principle, outside the tax net.
Company-owned vehicles are provided to employees.
This is a more nuanced area. A key interpretative question arises: Does providing a vehicle to an employee for private use amount to “use in the business”?
A strict interpretation would suggest that “use in business” requires active utilization in income-generating business activities, not merely provision for private benefit. Supporting this view:
Such vehicles are generally not eligible for capital allowances, reinforcing the position that they are not treated as depreciable assets for tax purposes.
On that basis, a reasonable argument can be made that disposal gains on such vehicles should also fall outside business income.
Section 8 – Other Income and IRD practice
In practice, some Inland Revenue Department officers have attempted to bring such gains under Section 8 (Other Income).
However, Section 8 explicitly excludes casual and non-recurring gains.
A disposal gain on a motor vehicle typically lacks the intention of recurring the same gain at acquisition and is not part of a systematic non-casual activity. Therefore, from a principle-based perspective, such gains should be treated as casual and non-recurring, and hence excluded.
Despite this, differing interpretations have led to disputes, including assessments raised on taxpayers.
Clarification under the Inland Revenue (Amendment) Act, 2026
To address this ambiguity, the recent amendment introduces a specific exclusion under Section 8, removing motor vehicle disposal gains from the scope of “other income.”
Conclusion
Disposal gains on personal vehicles now must clearly, remain outside the tax net.
Disposal gains on vehicles provided for employee personal use have been a grey area, but in principle it should be excluded from tax liability as discussed above.
Disposal gains on business-used vehicles may still be taxable where they qualify as depreciable assets.
This amendment is a significant step toward aligning tax treatment with underlying principles and reducing interpretational disputes.
