The far reaching effects of COVID-19 has not only impacted your freedom of movement in the past couple of months, but unknowingly to many may be silently increasing your tax liability that will be due to the South African Revenue Services (“SARS”) for the 2021 Year of Assessment. This additional tax liability will be directly linked to travel allowances which employees have received in the current tax year.
Employees should be considering the following:
- Does a travel allowance form part of their remuneration structure? and
- Due to lockdown and extenuating circumstances, have they been able to travel utilising their private vehicles for business purposes?
If your answer is yes to both the above questions, realistically, there may be a high probability that you may have an increased tax liability when filing your tax return for the 2021 year of assessment.
Travel allowances & Taxable Inclusions on Payroll
The SARS Guide for Employers in respect of allowances specifically states that:
A travel allowance is any allowance paid or advance given to an employee in respect of travelling expenses for business purposes. Any allowance or advance in respect of travelling expenses not to have been expended on business travelling, shall deemed not to have been actually expended on travelling on business.
Where the employer is satisfied that at least 80% of the travel appertains to business kilometres then only 20% of the allowance is subject to the deduction of employees’ tax. Should this not be the case then the allowance should be taxed at 80% on the payroll.
There are currently only two inclusion percentages that should be applied on the payroll namely either 80% or 20%. Since the release of the 2019 SARS Business Requirement Specification Change – Patch Phase 3, the 100% inclusion rate is no longer applicable and therefore should not be implemented on payroll by employers.
To explain this by way of a practical illustration:
- should an employee incur 80% or more on business kilometres per annum the allowance should be taxed at 20% i.e. where it is proven that 20% or less of total kilometres will be attributed to private use; or
- should an employee incur less than 80% business kilometres per annum, irrespective of what that amount is, the allowance should be taxed at 80% i.e. where it is proven that more than 20% of total kilometres are attributed to private use.
It is important to note in effect that an employee is only taxed on the private usage as a ratio of private to business kilometres, a taxpayer should keep in mind that the business kilometres travelled should be fully justified by keeping a detailed logbook to SARS satisfaction.
The Income Tax Act 58 of 1962 (“the Act”), does not define what is regarded as travel for business purposes and what constitutes the private use of a travel allowance, however, SARS has published Interpretation Note 14 to provide taxpayers with guidance, however, SARS is not bound by their published interpretation notes and may deviate therefrom.
The Ugly Truth
The reality is that both employers and employees alike have selected these inclusion percentages on a basis of their actual travel which was performed in previous years of assessment which has been anticipated for the 2021 year of assessment.
Unbeknown to employers and employees, with the sudden impact of Covid-19 and the restriction on employees to travel for business purposes, the ugly truth is that; these estimated inclusion percentages may no longer be fully justified on the payroll of the employer. The consequences of the latter are that employees may have an increased tax liability that is ascribed to the decrease of business kilometres being travelled.
In addition, employees should be aware that SARS may further scrutinise logbooks and place this on their audit radar, especially where employees indicate business travel over this lockdown period which may have been fabricated.
Nowhere to Hide
As a proactive approach, both employers and employees should assess the direct impact on business travel that Covid-19 has had on the travel allowances allocated.
In our view, the estimation and projection of this additional liability should be performed with an accurate travel tax calculator as opposed to a general thumb suck approach. In addition, employers should consider changing certain inclusion percentages on payroll because of this analysis performed.
We urge and encourage both employers and employees alike to implement corrective tax measures sooner rather than later. The direct impact on employees could be devastating in an already strained economy where there is nowhere to hide, and employees will ultimately have to pay up.
Companies should also turn their immediate focus to implementing sound and prudent tax practices, failing which will have the direct wrath of SARS in the form of penalties, interest and potential criminal prosecution measures.