Fringe Benefits
1321. Travel allowances become a taxing issue
August 2005 – Issue 72

 

 

By way of background, taxpayers who receive travel allowances are entitled to claim a tax deduction against the allowance in respect of their business travel costs. Business travel costs are essentially the costs of running the vehicle, as they relate to business travel. It is worth mentioning that travel between your home and workplace is regarded as private as opposed to business travel.

 

In order to determine the value of the business travel costs that will be deducted against the allowance, SARS provides a table setting out deemed fixed and running costs, per kilometre, which are based on the value of the vehicle.

 

In addition, in the absence of a logbook, SARS assumes that a portion of the taxpayer’s total travel relates to private travel and only the balance is regarded as business travel, limited to an upper level. The business travel kilometres determined in this way are applied to the deemed costs calculated in terms of the table.

 

Based on this table of deemed costs and the deemed business kilometres, the taxpayer can determine the applicable deduction and hence which portion of the allowance will be taxable.

 

An alternative to using the deemed costs and deemed kilometres would be for the taxpayer to retain accurate records of business travel kilometres and expenditure.

 

The Taxation Laws Amendment Act No. 9 of 2005 changed the deeming provisions described above in three respects, as from 1 March 2005. Essentially, the deemed private kilometres have been increased (from 14 000 to 16 000km), which results in a reduction of the deemed business kilometres. In addition, the deemed cost table has been adjusted to reflect the economic reality that a motor vehicle will not have zero value after five years. If the new deemed cost table is compared to the old, it is evident that the "fixed cost" amounts have been drastically reduced, which will result in a lower deemed cost per kilometre. Lastly, the value of the vehicle for the purposes of the deemed cost table, has been limited to R360 000.

 

But how does all this affect the average person receiving a travel allowance?

 

Firstly, the monthly employees’ tax deduction relating to travel allowances remains the same – 50% of the monthly allowance is subject to employees’ tax. Taxpayers will, therefore, not experience any immediate change in their monthly disposable income as far as travel allowances are concerned.

 

But the new deemed rates are going to have a significant impact on the tax deduction that can be claimed against the tax allowance and, as a result, the tax payable/refund at the end of the 2006 tax year.

 

The following examples illustrate how drastically a taxpayer’s state of affairs may change at the end of the 2006 year in comparison to the 2005 tax year:

 

Example 1

Mr A receives a travel allowance of R30 000 per annum. He does not keep accurate records of his business travel and costs. He uses a vehicle to the value of R200 000, and travels a total distance of 20 000 km in the 2005 year. His deemed business travel cost deduction in 2005 would be R27 992. In contrast, based on the same facts, his deemed business travel cost deduction in the 2006 tax year will be R15 174. Therefore, Mr A’s deduction against his travel allowance will decrease by R12 818 as a result of the amendments.

 

Example 2

Ms B receives a travel allowance of R100 000 per annum. She does not keep accurate records of her business travel and costs. She uses a vehicle to the value of R400 000, and travels a total distance of 30 000 km in the 2005 year. Her deemed business travel cost deduction in 2005 would be R94 089. In contrast, based on the same facts, Ms B’s deemed business travel cost deduction in the 2006 tax year will be R63 854. Therefore, Ms B’s deduction against her travel allowance will decrease by R30 235 as a result of the amendments.

 

Example 3

On the other hand, Mrs C, a travelling sales representative receives a travel allowance of R40 000 per annum. She uses a vehicle to the value of R200 000 and travels a total distance of 60 000 km in the 2005 year. Her deemed business travel cost deduction in 2005 would be R34 748. In contrast, based on the same facts, Mrs C’s deemed business travel cost deduction in the 2006 tax year will be R30 120. Therefore, Mrs C’s deduction against her travel allowance will decrease by only R4 628 as a result of the amendments.

 

In many cases, had the taxpayer determined the travel allowance deduction based on actual business kilometres (based on an accurate logbook), the deduction would be greater. This is especially so where actual business kilometres are high.

 

Taxpayers should, therefore, get into the habit of retaining accurate records to enable them to determine the allowable deduction in the most favourable way. Practically this means that the taxpayer should keep a logbook in his vehicle and make a note of each business trip, including the odometer reading at the beginning and end of the trip and ideally a note of the client, customer or supplier visited, as further corroboration.

 

These actual business kilometres should then be added up at the end of the year and applied to the deemed costs in the table provided by SARS, to determine the allowable deduction. The taxpayer could also retain proof of all running and maintenance expenditure which would alleviate the need to use the deemed cost table.

 

Instead of using the tables of deemed costs, taxpayers may use actual costs incurred, which may give a better result. In terms of the Taxation Laws Amendment Act, where the tables are not used and the taxpayer uses actual expenses, certain restrictions have been placed on the amounts that may be claimed. In the case of a vehicle being leased, the total lease payments may not exceed the fixed costs in terms of the tables of deemed costs. In any other case, wear and tear must be calculated over a period of 7 years, the cost must be limited to R360 000 and finance charges must be limited to an amount of debt of R360 000. Editorial comment: This applies even if the cost of the vehicle exceeds R360 000.

 

Thus, for the average taxpayer who receives a travel allowance and keeps no records of business and private travel, it is highly probable that he may need to pay in additional tax (or receive a lesser refund) on assessment at the end of the 2006 year, even though it was not required in respect of his 2005 and earlier assessments. Taxpayers should be aware of this likelihood and set aside funds to do so or request their employer either to deduct additional employees’ tax during the course of the year or decrease the total travel allowance granted.

 

The more stringent measures relating to travel allowances are not necessarily an indication that taxpayers should rather switch to the company car option. With effect from 1 March 2006, the monthly taxable benefit in respect of a company car will increase from 1.8% to 2.5% of the value of the car. Effectively, the employee will be taxed on the full value of the company car over a period of 40 months.

 

Deloitte

 

IT Act:S 8(1)(b)