COVID-19 has far-reaching effects for the South African taxpayer and, unbeknown to many, may be silently increasing their tax liability for the 2022 year of assessment. In some cases, the purpose for granting a travel allowance to employees (and the same applies to company vehicles) has been subverted by the pandemic, where business travel may no longer be required or possible. In this article we revisit the general taxing principles of a travel allowance, and the reimbursement of travel expenses claims. We also as consider how COVID-19 may increase the tax burden of an employee in this context.
The general taxing principles of a travel allowance and a reimbursive travel allowance
The SARS Guide for Employers in Respect of Allowances (2022 Tax Year) defines a travel allowance as “any allowance paid or advance given to an employee in respect of travelling expenses for business purposes.”
Fundamentally, the legislative framework makes provision for two scenarios –
- A travel allowance given to an employee to finance transport, which in the ordinary course would be a set rate or amount per pay period (“travel allowance”).
- A reimbursement given to an employee based on actual business travel (“reimbursement”).
The travel allowance “deduction” operates on the premise that an allowance is included in a person’s taxable income (see section 8(1)(a)(i) of the Income Tax Act No. 58 of 1962 (“the Income Tax Act”)), to the extent that the allowance has not actually been expended on business travel (see section 8(1)(a)(i)(aa)). The general position is private travel is taxable and business travel is not taxable.
Where the employee is granted a travel allowance, paragraph (cA) of the definition of “remuneration” under the Fourth Schedule to the Income Tax Act provides for two inclusion rates for purposes of deducting employees’ tax (PAYE), namely 80% or 20%.
The standard withholding rate is 80%, unless the employer is satisfied that at least 80% of the use of the motor vehicle in question will be for business purposes, in which case the inclusion rate is only 20%.
In certain cases, employers are cognisant that the employee will not expend their travel allowance on business travel to any degree, which prompts a 100% withholding rate. It is important to note, however, that since the release of the 2019 SARS BRS Change – Patch Phase 3, the 100% inclusion rate is no longer applicable and should therefore not be implemented on payroll.
This position aligns with the purpose of a travel allowance, which is to defray costs of business travel. Technically, where it is known at the outset that the employee will not use the allowances for business travel expenses, the amount is not a “travel allowance” as envisaged by section 8(1)(a)(i)(aa), read with the definition of “remuneration”.
Reimbursive travel allowance
An alternative to providing an employee with a monthly travel allowance amount is to provide the employee with a reimbursive travel allowance. A reimbursive travel allowance is an allowance paid to an employee for actual business kilometres travelled, according to either the SARS determined rate – which is R 3.82 per kilometre from 1 March 2021 (down 4% from R3.98) – or as determined by the employer.
The taxing of the reimbursive allowance has fundamentally changed from 1 March 2018. Where an employee is reimbursed using a rate higher than the SARS prescribed rate, the differential between the SARS prescribed rate and the rate utilised by the employer will be subject to employees’ tax (PAYE), regardless of the number of business-related kilometres travelled.
It is advisable that employers prudently consider their reimbursement rates against the prescribed rate. An unintended consequence of reimbursing an employee on a higher rate will increase the employee’s PAYE liability and may result in lower employee take-home pay. An alternative to avoid this possible occurrence would be for the employer to reimburse the employee at a rate below the prescribed rate of R 3.82 per kilometre. The reimbursement will not attract PAYE and will also not be taxable on the employee’s personal tax return.
In our practice we have a golden rule when it comes to employee travel debates, i.e. company car vs. travel allowance vs. reimbursive structure: an apples-with-apples computation must always be done. Each employee’s factual matrix will be different, and one can only determine the most optimal outcome once calculations for every scenario has been done.
Although the reimbursive changes have not altered an employee’s ability to claim against a travel allowance, they have introduced an additional record-keeping requirement. This especially becomes complex where travel reimbursive rates have changed during the tax year.
The Commissioner for SARS is alive to the fact that most employees’ circumstances have changes as a result of the pandemic, where business travel would generally have decreased to great extent. Building on their 2020 tax season approach, SARS will most likely enhance their robust stance on verifications and audits of tax returns. It is now, more than ever, particularly important to maintain an accurate and detailed travel logbook and to adopt good tax filing and compliance strategies.
Must I own the vehicle or motorcycle?
In certain circumstances, employees who receive travel allowances can find themselves travelling with a vehicle that is not self-owned, for example a relative’s motor vehicle. Will this disqualify the employee from claiming against the travel allowance? No, it is not imperative that the car in question should be owned by the employee. Section 8 of the Income Tax Act does not limit or disallow the claim against the travel allowance in this instance. Obviously, this can lead to an enquiry by the SARS auditor, possibly to check that there is only one person claiming against the same vehicle.
Travel allowance with the right of use of motor vehicle
Where an employee receives a travel allowance and has made use of a company-provided car, a tax claim against the travel allowance (in terms of travel for business purposes) will not be allowed (see section 8(1)(a)(i)(aa)).
This will raise a concern with the employee, as the use of a company motor vehicle is considered a taxable fringe benefit, according to paragraph 7(2)(b)) of the Seventh Schedule to the Income Tax Act. Taxes on the fringe benefit may also be withheld at either 80% or 20% of the benefit. Does this mean that even where the employee travels for business, he or she may not claim against taxes on the travel allowance and the company car fringe benefit? No, there is a way out.
Tax deduction against a right of use of motor vehicle
Although a deduction against a travel allowance is not possible under section 8, a reduction of the fringe benefit constituted by the use of an employer-provided vehicle can still be claimed. Like section 8(1)(a)(i), the claim against a fringe benefit under paragraph 7(2)(b)) of the Seventh Schedule has been worded similarly. The reduction of the fringe benefit operates on the premise that the fringe benefit should be excluded from a person’s taxable income to the extent that it is expended on business travel.
In other words, the fringe benefit can be reduced to the extent that the benefit has been actually expended on travelling on business, and not on private travel. To reiterate: private travel is taxable and business travel is not taxable. Similarly, the COVID-19 restrictions will have a direct impact on the business claim lodged against the fringe benefit. This may very well create an employee’s tax exposure for those employers who apply the 20% rule or otherwise will cause an unwelcome surprise in relation to the employee’s tax liability.
How does one prove or illustrate that travel was for business v private?
Section 8(1)(b)(iii) provides that “where such allowance or advance is based on the actual distance travelled by the recipient in using a motor vehicle on business … or such actual distance is proved to the satisfaction of the Commissioner to have been travelled by the recipient … the amount expended by the recipient on such business travelling shall … be deemed to be an amount determined on such actual distance at the rate per kilometre fixed … in the Gazette for the category of vehicle used”.
It is interesting to note that the word “logbook” is not specifically mentioned in the Act. Rather, reference is made to a travel allowance claim being allowed to a taxpayer that proves business distance travelled to the satisfaction of the Commissioner.
Nonetheless – and in practice – a taxpayer can discharge the onus of proof that travelling with a private vehicle was travel for business purposes through keeping a logbook and recording the necessary information related to business travel (see SARS Interpretation Note 14, paragraph 5.4.2). SARS has provided an acceptable format.
According to the SARS eLogbook Guide for 2021/2022 on the acceptable format, the bare minimum information required to claim a tax deduction is the following:
- The date of business travel
- The business kilometres travelled
- The business travel details (where to and the reason for the trip)
It is not necessary to keep record of the details of private travel. This format and the requirement to record only business kilometres travelled have remained consistent since the 2018 year of assessment. This was not the case during the 2015, 2016 and 2017 years of assessments, as per the respective 2015, 2016 and 2017 SARS eLogbook Guides. Furthermore, the SARS eLogbook Guide for 2020/2021 and 2021/2022 continues the same chorus and requires record of business travel only – continuing to provide taxpayers with administrative relief.
Whilst the law does not specifically require a format in which the onus must be discharged, the SARS logbook format is generally recommended as the path of least resistance. Nonetheless, as long as the logbook can discharge the taxpayer’s onus of proof it will be acceptable.
What is defined as business travel?
The Income Tax Act does not define what is regarded as travel for business purposes, and what constitutes private use of a travel allowance. The “travel between home and work” exclusion has caused interpretation problems for as long as can be remembered. The law clearly determines that private travelling includes “travelling between … place of residence and … place of employment or business” (see section 8(1)(b)(i)). In alleviating any further uncertainty, SARS has published Interpretation Note 14, noting the examples below to distinguish between business and private travel. (These should only be used as a guideline. It must be noted that SARS is not bound by Interpretation Notes and may deviate from them.)