Travel Allowance

It has been about 2 -3 years when we published our initial article about travel allowances. Although tax law did not change that much, the industry did, and we thought it appropriate to update the previous article. Currently, many people still read the previous article, so we decided to keep that one intact and write this one to enhance the previous article.

This article will discuss a travel allowance, a travel re-imbursement allowance as well as the use of a company car or a leased company car and the tax implications of these.

Understanding a travel allowance

A travel allowance is when an employer pays an allowance to an employee for business kilometers travelled on behalf of his employer. In practice, employers often give a fixed amount monthly to the employee and may or may not issue the individual with a fleet or petrol card. In the case of a fixed allowance only, the amount paid during the tax period would appear under code 3701 on the IRP5. Where a petrol card is issued to the employee, the amount of petrol would also be added to the amount. To make sure this part is clear, let’s use an example:

Example 1

An employee is given a fixed amount of R5 000 per month for using his personal vehicle to travel for business in execution of his duties. An amount of R5 000 * 12 months = R60 000 should appear under code 3701 on the IRP5 issued around May / June each year. Where the employee maintained a proper logbook during the year, a claim of up to R60 000 may be deducted against his income. Where the claim exceeds R60 000, SARS would limit the deduction to the amount under code 3701, 3702 and 3722 (These are all local travel codes which we will look at later)

Example 2

An employee is given a fixed amount of R5 000 for executing his duties and a petrol card has been issued to the individual. Assume an amount of R50 000 was incurred on the fuel card during a tax period. Result, an amount of R5 000 * 12 months = R60 000 + R50 000 (use of petrol card) = R 110 000 would be included under code 3701. The deduction remains limited to the amount under code 3701.

Once the amount is established (found on the IRP5) the next step would be to consider a tax deduction. For this, a valid logbook must be maintained. A valid logbook must have the below minimum information:

  • Opening and closing km
  • Date of travel
  • Area traveled from and to
  • The amount of business km travelled
  • The reason for the trip

 

In the event that any of the below information is missing, the logbook may be dismissed by SARS resulting in an additional assessment. SARS may contact the individual to have the logbook corrected during the audit process. However, this should be done correctly from the start.

  • When submitting a return, always ensure that the opening km matches last year’s closing km. if the odometer does not match, SARS may dismiss the claim. If there is a reason for the mismatch, write a letter to SARS explaining the reason for the odometer mismatch. This could be for example, that the previous year’s logbook did not end on 28 February or that this year’s logbook did not start on 1 March in the current year. Whatever the reason is, make sure that a letter is written and that a reason be given for the odometer mismatch to avoid an additional assessment by SARS.
  • Check the logbook for correctness by calculating closing km – opening km = private and business. This is a test to ensure that the car did not put on more km than the amount by which the card travelled for both private and business. For example, if closing km are 20 000 and opening was 5 000km then 20 000km – 5 000km = 15 000km travelled. If private was 8 000km and business was 8 000km then there is an error which needs to be corrected first.
  • Make sure that the logbook corresponds with the service history of the car. Again, SARS may dismiss the entire claim when a discrepancy is found here on grounds that accurate records were not maintained.
  • Ensure that private km is not unreasonable. Remember that a taxpayer wants the best result and SARS wants the best result also. Being too aggressive with business km could end up having the claim disallowed as the system could have picked up an unfavorable variable and human may agree. Further investigation may be warranted which could lead to a higher-level audit such as a forensic audit. Avoid this by maintaining accurate and reasonable records. In practice, we often see individuals having their claim denied as they tried to state that only 2 000 or 1 000 km were personal. Unless there are especially warranting circumstances, this would generally be wrong and could lead to complications.
  • Trips between home to a person’s regular place of work is seen as private and not business km travelled. (Unless you are a judge) Thus, the area is from a taxpayer’s home to his regular place of work should be allotted to private travel.

Understanding a travel reimbursement allowance with the updates for tax year 2019

Some companies require that a form be completed or that a business trip be recorded electronically and that the employee would then be reimbursed a certain rate per business km travelled. An employer would not be interested in the opening km, closing km, etc. They are only interested in the amount of km travelled and the area traveled to. As such, a reimbursement record would not fulfill the requirements as above as expected by SARS. Thus, submitting this record to SARS would have the claim disallowed leading to complications. A proper logbook must still be maintained according to the requirements above.

As of 1 March 2018, where an employer reimburses an employee for business km travelled and the amount is equal to or less than the rate as determined by the commissioner (For tax year 2019 the amount is R3.61) the amount could be placed under code 3703 which means that the income is exempt from tax. In such case, there would be no requirement to maintain a logbook, but it is recommended to do so anyway incase the employer places the amount under 3702 and refuses to correct the IRP5.  In the past there was a limitation of kilometers but this was done away with as of the start of tax year 2019 which started 1 March 2018.

The no limit of kilometers within the prescribed rate of R3.61 (during tax year 2019) is new and a change from the past. During tax year 2018 (This being 1 March 2017 – 28 February 2018) there was a limit of 12 000km at a prescribed rate of R3.55. in other words, during tax year 2018, an employer would not be able to use code 3703 if the amount exceeded R3.55 * 12 000km = R42 600. During tax year 2017, the amount was less at a prescribed rate of R3.29 * 8 000km = R26 320.

If the employer pays any other compensation, then this code (3703) is not permitted and code 3702 should be used. The difference is that code 3703 is exempt from tax while 3702 is not and a claim against this must be made to not be taxed on this allowance.

It would therefore be impossible to give an employee an exempt reimbursement (3703) with a petrol card since “other compensation” is paid. The code would be changed to 3702 and the individual would be permitted to claim against the amount.

During tax year 2019 (March 2018 – February 2019) SARS brought in code 3722 which come as a result of code 3702 (a taxable travel reimbursement allowance) In our previous article we stated that an amount given by an employee under code 3702 is not taxed upon receipt but is included as income on assessment and fully included as income. A deduction could be made against this included income but where the full amount is not claimed, an amount must be paid in against this allowance. Due to this, many people that had a travel reimbursement allowance ended up filing their return and having to pay in on that return. This was especially the case where an employer pays a high rate (such as R4.50) and the individual has a low value car and travelled extensively during a tax period. To mitigate this problem, a new code was introduced, 3722. Where an individual is paid more than R3.61 (tax year 2019) per km travelled, the amount paid in excess would be placed under code 3722 and the employer would tax this amount upon receipt. (We welcome this approach)

Example 3

An individual is paid R4.50 per km travelled and has travelled 10 000km for business. Therefore, R3.61 * 10 000 km = R36 100 (Placed under code 3702) and (R4.5 – R3.61) * 10 000 km = R8900 under code 3722. This means that the employer will not tax R36 100 upon receipt by the taxpayer but the R8900 will be subject to PAYE. The employee can claim the full amount under code 3702 and 3722 amounting to R45 000. In this example code 3703 (exempt travel allowance) may not be used since a rate higher than what is allowed has been paid to the employee.

Some people ask why an amount has to be paid in against these allowances while other people receive a tax refund while claiming against a travel allowance. The reason for this is that employers do not deduct taxes from an amount under code 3702. This could be illustrated in the following way. Imagine a bonus of R100 000 was paid to an employee and no taxes were deducted. When the return is filed the R100 000 would correctly be included as income but since no tax was paid on that amount, taxes would be paid on assessment. In a similar way, where an allowance is given without imposing taxes on the amount given, the amount remains income when a return is filed and unless the full allowance is claimed against, an amount would be due to SARS. Income cannot be received without taxes being imposed on the recipient.

A travel allowance (fixed amount per month with or without a petrol card) is different as such amount could be taxed at a rate of 20%, 80% or 100% upon receipt. The custom is to tax such amount at 80% which means that most of the allowance was taxed unlike a reimbursement allowance which was not taxed at all.

Example 4

An individual is on the 41% tax margin and received a travel allowance of R60 000 and this allowance was taxed at a rate of 80% upon receipt. He maintained a proper logbook and was able to claim the full allowance of R60 000 as he has travelled enough business km to have the allowance claimed in full. Against the travel allowance, he can expect a refund of R60 000 * 80% * 41% = R19 680.

Assume the same situation under a travel re-imbursement allowance where the R60 000 was taxed at a rate of 0%

R60 000 * 0% * 41% = R0 (Since no taxes where withheld upon receipt)

Where the full amount cannot be claimed, then the inverse is true. Assume the individual can only deduct against his income an amount of R40 000 which means that R20 000 cannot be deducted.

R20 000 * 100% (not taxed) * 41% = R8200 to be paid in.

A reimbursement allowance in our view generally cause complications when the returns are submitted.

How to manually calculate your travel claim or structure a travel allowance

Below is an extract from the SARS tax tables for tax year 2019. Step 1 is to calculate the value of the car used at the time of purchase (not the current market value) Use the purchase agreement for this and remember to include extras, VAT and the initiation costs but exclude any finance charges. Let’s assume the value of the car is R500 000 at the time of purchase. This means that SARS will grant R153 850 as fixed cost for that car for a full period. If the car was not used for the full period, the amount must be apportioned by calculating the number of days the car was used over the number of days in a tax year (365 or 366) This is the amount SARS will grant for the car irrespective of the amount of km travelled during the year of assessment. Divide this amount by the number of km travelled with this car for the year. This will give a rate per km travelled for that car. Add to this amount the below rate per km for fuel and maintenance to arrive at the total amount allowed as a deduction per business km travelled during a tax period.

Example 5

An individual received a total travel allowance of R150 000 under code 3701 and used a car with the value of R500 000 during the period of assessment. A total amount of 20 000 km was done of which 10 500 km were from business and the taxpayer maintained a proper logbook.

 

Result:

Value of 500 000
Fixed cost 153147
Total km travelled 20000
Fixed cost per km 7,657
Fuel per km 1,584
Maintenance per km 0,889
Total 10,130
Business km 10500
Claim for car 106369

 

Example 6

An individual with a travel allowance of R150 000 travelled 20 000km of which 10 500 km were for business between 1 April 2018 to 28 February 2019 using a vehicle to the value of R500 000. Calculate the travel claim:

 

Value of 500 000
Fixed cost 153147
(334/365) days (Apportionment) 144336
Total km travelled 20000
Fixed cost per km 7,217
Fuel per km 1,584
Maintenance per km 0,889
Total 9,690
Business km 10500
Claim for car 101743

 

Example 7

Assume the same information as with example 6 except that the allowance under code 3701 was R75 000:

Value of 500 000
Fixed cost 153147
(334/365) days (Apportionment) 144336
Total km travelled 20000
Fixed cost per km 7,217
Fuel per km 1,584
Maintenance per km 0,889
Total 9,690
Business km 10500
Claim for car 101743
Claim limited to allowance 75000

 

  • When purchasing a new car, consult with your tax practitioner to determine the bracket in which the new car will fall. It may be worthwhile paying a bit more (add an extra or two) to get the car in a higher deduction bracket. Example, if the car is sold for R424 500 why not add something to get the value over R425 001 so that a higher deduction bracket is applied when filing the next return.
  • Ensure that the travel allowance granted by the employer is enough in relation to the value of the car and the amount of business km travelled. If a car is being used for business travel and many km are racked up, the deduction would be limited to the amount on the IRP5. The balance would be disregarded and lost. Make sure the amount on the IRP5 is more than the claim to collect the full benefit.
  • If you are one that travels plenty of km per year, consider purchasing two vehicles and alternating with the cars. The reason for this recommendation is the more km travelled with a single car, the less SARS will allow as a deduction per km travelled under the fixed cost section (Not the fuel and maintenance) Adding a second car allows two fixes costs since two vehicles are being used. This is not valid for a person that does not travel extensively for business.
  • The fewer km travelled in a year – the more SARS allows as a deduction per km travelled under the fixed cost section. If total of 20 000 km travelled (This is total which includes private and business km) with a car that has a value of R400k, the fixed cost awarded would be R112 443 / 20 000 = R5.622. The same situation but with a total of 10 000km means a rate of R112 443 / 10 000 = R11.244 per km travelled under the fixed cost section. This will not boost the refund but would rather preserve the car while still claiming against the car for business km. one would have the car for a longer period to claim against suppose to racking up km.
  • Maintain a proper and detailed logbook to avoid the claim from being disallowed.

An individual can only claim against a travel allowance once they have such allowance granted to them. If a person is self-employed (Sole proprietor) or is an independent contractor or is in receipt of mostly commission income, the tax tables may not be used. Rather, Section 11a of the income tax act needs to be applied which states and an amount “actually incurred’ must be deducted. In this regard, wear and tear may be claimed on the vehicle (7 years for a brand-new car) and amounts incurred on fuel, maintenance, insurance, interest, licensing fees, etc. may be claimed. (Wear and tear for a car where ownership changes such as an installment sale agreement or monthly rental paid in a case where ownership does not vest to the taxpayer) This is a lot more complicated and warrants assistance using a tax practitioner.

A company car and company leased car works differently

We have spent a lot of time understanding how a travel allowance works and going through various examples. How about the use of a company car?

A company car is disclosed under code 3802 on an IRP5. When an employer provides an employee with a company owned vehicle, a monthly fringe benefit of 3.5% or 3.25% of the value of the car including VAT is added to their income depending on whether a maintenance plan was included or not included. (The cost of fuel should not be included in addition to the above amount) This means that either 39% (3.25*12) or 42% (3.5* 12) of the value of the car is included as income to the employee. (This amount may be reduced by the amount an employee pays towards the vehicle)

The employee may claim against the use of a company car provided that a valid logbook, as discussed above, was maintained to record business km. The percentage the vehicle was used for business may be deducted against to total fringe benefit amount.

Example 8

An employee has the use of a company car, with a maintenance plan, which has a value of R550 000 (Inc VAT) and has travelled 25 000 km of which 14 000 km was for business.

Result

Included under code 3802 (Taxable fringe benefit for use of company provided vehicle)       R214 500
(Calculated as 3.25% *12 months * R550 000)

Reduced by percentage used for business 14000/25000 * R214 500                                             -R120 120

Resolving a problem with a travel allowance

In conclusion, most travel cases represent a high claim at a high tax margin and therefore could often fall under audit. Sometimes SARS would engage with an individual and other times an additional assessment would be issued. If an additional assessment was issued and one is not entirely confident with the case, rather appoint a tax practitioner due to the complicated dispute rules as governed under the tax administration act. An objection may be submitted and when doing so, proper legal grounds need to be communicated along with a letter addressing any concerns the auditor may have had. (A call to SARS is often warranted to understand the reason for disallowing the claim) FMJ Financial tax practitioners have extensive experience dealing with cases of this nature. Contact us to see how we could help.

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Travel allowance structure
(Published 26/09/2016)

We work with so many people and have often found that many do not have their travel allowances properly structured and this could lead to problems such as amounts to be paid in when the income tax return is filed or amounts lost as the allowance is too low but the amount on the IRP5 is the ceiling or maximum amount that SARS will allow to be deducted.

For example; let’s say that you have a car to the value of R200 000 and a travel allowance of R40 000. Your allowance on the IRP5 under code 3701 and or 3702 is R40 000, as stated above, but you have done enough business km to claim, say, R70 000 against your allowance. Now, SARS will only allow R40 000 to be deducted from your income as this is the ceiling amount. This means that you have lost a claim of R30 000 * your tax rate (let’s assume 31%) so a loss of R9300. Would it not have been better to get advice on where the allowance should be?

Get your allowance right

The other side of the coin is as follows. Say you have a huge travel allowance in relation to the value of your car and your company taxes the allowance at only 20% (your company can tax it at a rate of 20% or 80%), you might have to pay in on the return as you would have to claim 80% of your travel allowance but if the allowance was excessive to begin with, there will be an amount to be paid in on the return. So, despite working hard and going through the SARS audit, there might still be an amount to be paid in.

Therefore, understand your allowance and get it right the first time. When we recommend a structure, we document our working and issue you with a letter which your HR or payroll can simply implement.