This article is written by a tax practitioner with extensive experience in the field of individual taxation and brings practicality to this article.
Does a travel allowance always lead to a tax refund?
With taxation being so high in South Africa and with the many economic pressures of late, many are seeking ways to maximize their personal income tax return. Having said this however, the incorrect travel allowance, in the case of this article, could lead to the opposite result where treated incorrectly. Firstly, this allowance comes in different forms such as a taxable travel allowance and a non-taxable travel allowance. SARS allows in certain cases for a small re-imbursement travel allowance not to be taxed.
For example, if an employee travels less than 8000km per year for his/her employer and the employer does not pay more than R3.05 per km travelled (Rate relevant to the 2012 income tax year for individuals however, change from year to year) then the employer should disclose this income on the taxpayer’s IPR under code 3703. In this case, SARS will not tax this allowance as income. (This is a great tool when a taxpayer has his/her own business and travels less than 8000km per year for his/her business) In the event of more than 8000km being travelled by an employee for his/her employer or where more than R3.05 is paid per km travelled is paid, this income must be disclosed under code 3702 if the employer elects the use of a re-imbursement travel allowance instead of a fixed monthly amount. SARS will, therefore, tax this income where the full allowance is not claimed.
(This is usually very hard) Lastly, and my personal favorite, a fixed monthly amount paid as a travel allowance. This is usually disclosed under code 3701 and could be taxed in various ways. (More about this later) As we have identified each class, a fixed travel allowance per month requires more detail. It is important to understand all the details as an item is best used when correctly and fully understood.
A fixed monthly allowance each month (SARS code 3701)
Under this system, a taxpayer does not have to report to his employer on the amount of business km travelled however; the employee must keep a detailed logbook. (No logbook leads to no claim and usually an amount to be paid in by the taxpayer) The reason I like this type of allowance is: employers usually tax most of this allowance. (Usually 80%) When an income tax return is filed and a travel claim is allowed, this usually leads to a tax refund. (And usually a good refund) Let’s use an example to illustrate. If a taxpayer receives a fixed salary of R30 000 per month and a fixed travel allowance of R5000 per month, the employee will be taxed as follows,
|Total Income||Included for tax purposes|
|Annual salary income||360000||360000|
|Travel allowance||60000||48000 (80%)|
In the above case, the employee who has used his personal car for business purposes has received total income of R420 000 but only pays tax on R408 000 before the income tax return is filed.
This means that the employee pays less tax each month and can still claim against his/her travel allowance. Say the logbook allows for the entire travel allowance to be deducted from this tax payer’s income, taxable income will be reduced by a further R48 000 which triggers a tax refund. Then the refund will be between 30% – 30% of the R48 000 as this is the amount of tax a person will pay less for each rand deducted from his/her income. Please remember that this refund is as result of a taxpayer using his own car for business purposes and therefore loses value and incurs cost each month.
How the travel allowance could go wrong (SARS code 3701)
A fixed travel allowance could go wrong when the fixed amount received by an employee is either too high or too low. In my experience I have seen cases where people have travel allowances of R100 000 but the value of their car is lower than R40 000. In this case, there is a huge risk that the taxpayer, despite using his own car for business purposes, will have to pay in on their tax return. This is as SARS allows a certain rate per km based on the value of the car and the total number of km travelled.
(On the deemed cost method) If you do not claim at least 20% of your travel allowance (which means R20 000 on a R100 000 travel allowance) a taxpayer will have to pay in on their tax return. This is of course; worse if a taxpayer does not have a logbook or where an employer decided to tax only 20% of the travel allowance instead of 80%. In this case the taxpayer will have to claim a travel allowance of R80 000 when a car has a low value. A huge amount will have to be paid to SARS.
On the other hand, it is possible to have a small travel allowance, say R3000, per month and have a very expense vehicle. In this case, SARS will only allow a deduction from a taxpayer’s income to the amount of R36 000 in the tax year as this represents the full travel allowance. This will result in a taxpayer getting only a small amount deducted against his/her income while a much larger amount could have been allowed.
It might be advisable to consult with a tax practitioner and confirm each year whether the allowance is at the correct level or if adjustments are required. This is especially the case when a new car is purchased or when an employer discusses a salary structure.
What does deemed cost mean for a travel allowance?
Deemed cost simply means that we are to calculate the travel claim based on a SARS table which changes year on year. We will identify the value of the car and make use of the SARS table to calculate the allowable based on total km travelled and business km travelled for the tax year. This is not to be confused with deemed km which was done away with on 1 March 2010. (Under this system, SARS deemed the first 18 000km as private travel and the following 14 000km as business travel)
What do I do if I have to pay in on my income tax return as result of my travel allowance?
The best is to make contact with a tax practitioner who could verify whether the income tax return has been filed correctly and could make recommendations on the travel allowance. Should an error be identified, an objection could be raised however; this should be done quickly and correctly and SARS has become strict with regards to when an objection against an income tax is return is done. If too much time elapses, they will no longer allow an objection due to the prescription rule. (Legal concept)
Should I remove my travel allowance?
Again, in my experience, many people ask this question as they are frustrated with the problems they had in the past and money they had to pay in as result of this travel allowance. If this type of allowance is correctly treated and a proper logbook kept, why use your personal car for work and stand to gain nothing? Rather use a tax consultant which could provide guidance and assistance where necessary. Sure, this may cost a bit but if this saves you his/her fee 100 times, will it not be well worth it? Make sure the allowance is not over or understated as this is many times the biggest problem.
Should I remove a re-imbursement allowance SARS code 3702?
Again, this type of allowance must be fully understood in order to collect the benefit. This is the concept, say your car has a value of R35 000 and you travel 15 000km for your employer and you receive R3 per km travelled. This means that your employer has paid a taxpayer an amount of R45 000 to use his/her car for business purposes. In this case it will be hard to argue that the employee did not make a profit on his/her travel. SARS wants tax to be paid on this profit. In fact, ask yourself, how much did it really cost me to travel these 15 000km? Could it cost more than the value of your car? In this case, SARS simply wants to tax the profit that was made on the business travel. Personally, I would rather accept the profit on business travel (As I will receive more money than when not travelling for business) and keep in mind that a certain portion of this profit must be paid to SARS later. (When filing your personal income tax return) If on the other hand, the car has a much larger value of say R450 000, it is quite possible that no amount would be paid in on the income tax return as SARS will allow a higher rate per km. Again, guidance is required from your tax consultant as the rate depends on the total km travelled in a year.
If you are not happy with the outcome of your personal income tax return or you would like to get your return done correctly the first time, speak to a tax consultant as they could confirm whether the return was correctly) completed (or complete your return correctly the first time and avoid an audit) and if not, raise an objection. FMJ Financial specializes in income tax returns for individuals in South Africa. We will look at your situation free of charge and propose a solution along with a quote which each individual tax payer can decide to accept or reject. Contact Monique now on 079 969 925 0 or Jacques on 082 858 5199