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to note, however, that since the release of the 2019 SARS BRS Change – Patch Phase 3, the 100% inclusion rate is no longer applicable and should therefore not be implemented on payroll.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.)
Where an employee travels from the office to attend a conference.
Travelling from home to a client and the travel after the meeting to the office.
Travelling from a home office to a client’s premises.
Travelling from home to another branch of your employer where you are not ordinarily working.
Examples of private travel include:
Travel between the home and office.
Travelling from a friend’s house to the office.
Regularly travelling from home to different places of work on different days.
Could the current context of COVID-19 restrictions introduce an added interpretation problem on what constitutes business travel? Where an employee falling under the essential services category has travelled for business purposes during the lockdown periods, one would not anticipate any dilemma in claiming against a travel allowance. Considering that the restrictions announced by Government were legally binding, it will be interesting to see whether a claim for business kilometres travelled by a non-essential service employee, during the same period, will also be considered as valid business kilometres. This may only find application in the periods where the country operated under very strict lockdown restrictions but may very well become an added SARS audit requirement.
Calculating the claim
There are two methods of calculating the deductible amount against the travel allowance: the actual costs method and the deemed costs method. Each method has its own set of requirements.
1. The actual costs method
This method requires accurate information in the form of receipts, tax invoices and other relevant source documents. For the purpose of finance charges (section 8(1)(b)(iiiA)(bb)(B)) and wear-and-tear expenses (section 8(1)(b)(iiiA)(bb)(A)) the maximum vehicle value is R665 000.
The qualifying deduction is based on computing actual expenditure per kilometre and multiplying it with the business kilometres. To illustrate this, let us consider the below example:
Mr X owns a vehicle valued at R280 000 and incurred the following expenses:
|Fuel costs||R18 000|
|Wear-and-tear expenses||R40 000 (R280 000 ÷ 7)|
|Maintenance costs||R8 000|
|Insurance costs||R2 400|
|Finance charges||R17 500|
|Total costs||R86 550|
Mr X travelled a total of 32 000 km, of which 8 000 km were for business purposes, as evidenced by his logbook. Mr X received a total travel allowance of R48 000 for the 2020 year of assessment. As a result, Mr X would be able to claim R21 637,50 (8 000 km ÷ 32 000 km x R86 550) as a deduction against his travel allowance.
2. The deemed costs method
The deemed costs method comprises three components: the fixed costs, the fuel costs and the maintenance costs. SARS provides a table from which the taxpayer determines the appropriate deemed cost elements based on the vehicle value. The table can be found on SARS’ website and is revised annually, per notice in the Gazette. Taxpayers who want to claim using this method must bear maintenance costs and fuel costs themselves.
Considering the information provided in the previous example, the fixed cost, fuel cost and maintenance cost components can be referenced as follows. Figures below are relevant for a vehicle fitting into the R285 000 to R380 000 cost bracket.
|Fuel costs per kilometre||R1.358|
|Maintenance costs per kilometre||R0.581|
|Fixed costs component||R2.964 (R94 871 ÷ 32 000 km)|
|Total cost per kilometre||R4.903|
In using this method, Mr X would be able to claim R39 224 (8 000 km x R4.903 per km) as a deduction against his travel allowance.
In our experience, the deemed costs method requires less administration and is almost always more favourable than the actual costs method. It is critical to note that the fuel and maintenance components can only be factored in where the employee has borne the full costs of fuel and maintenance. Where these are reimbursed to any degree, the relevant component cannot be factored in to calculate the cost per kilometre.
COVID-19 and travel allowances
The travel allowance will become a contentious item where employees are receiving a travel allowance for business travel and such business travel is not possible, or required as a result of the pandemic. In the initial stages of the pandemic, travelling was prohibited to a large extent. Since then, the restrictions have eased significantly, but this does not mean that the situation has changed. Company culture and practices have changed considerably, where employees are still precluded from working at the office or are given the option to work at home. The result is that meetings are held virtually and the need to travel to clients have diminished. The upshot is that business travel is, for the most part, no longer required. This reality was reflected in the 2021 Budget Review, where government noted that the efficacy of travel allowances will be reviewed:
“Reviewing tax provisions for travel and working from home In light of the large-scale migration to working at home over the past year, the National Treasury will review current travel and home office allowances to investigate their efficacy, equity in application, simplicity of use, certainty for taxpayers and compatibility with environmental objectives. In recognition of the potential effect on salary structuring, this will be a multi-year project, starting with consultations during 2021/22.”
Consequently, employees will be required to take extra care in preparing their logbooks and employers must consult with their employees on how their allowances should be structured and taxed.
In determining the taxing rate of the travel allowance – that is whether taxes should be withheld at a rate of 80% or 20% of the travel allowance – the employer and employee would have adopted a rate based on the actual travel performed in previous years, and on which much anticipation has been placed for the 2022 year of assessment. Regardless of the rate adopted by the employer, the sudden impact of COVID-19 and the limitations placed on the employee’s business travel may translate into a 2022 tax liability for the employee on submission of the related return.
Employers that have resolved to taxing 20% of a travel allowance paid to an employee who is not an essential services employee, or one that will no longer travel as normal, should perhaps consider adopting the 80% rate. This will likely assist the employee to “prepay” the pending tax liability resulting from an expected reduced travel allowance claim.
In case of a reimbursive travel allowance, the above dilemma appears to be conveniently avoided, even where a tax liability arises. A reimbursive allowance is paid to an employee at a rate multiplied by business kilometres travelled. This thus creates a relationship between the allowance and the business kilometres travelled. Employees will find that the risk of a deferred 2022 tax liability is eliminated, as their business travel claim will be directly aimed at the reimbursive allowance. The importance of a well-maintained travel logbook, for such employees, must be emphasised.
It is best practice that the employer’s resolution to tax more of the allowance be performed on a case-by-case basis and based on the factual circumstances of the employee, as opposed to a blanket approach. The change in withholding taxes will reduce take-home pay and will be felt immediately in the employee’s pocket, although preventing a cash flow burden in the long run.
Travel allowance deduction: The independent contractor perspective
What is the difference between employees’ and independent contractors’ deductions?
Due to the nature of the contract between an independent contractor and a client, the provision of a travel allowance would be unusual. An independent contractor would usually recover business travel costs incurred by invoicing or charging a disbursement fee.
An independent contractor, as explained in Interpretation Note 17, is an individual or person similar to an entrepreneur – someone clearly distinguishable as an “employer” and not an “employee”.
Implications of travel costs deduction
Section 8 does not cater for an independent contractor. Consequently, an independent contractor can rely on section 11(a) to obtain a deduction for travel costs – as well as section 11(e), in terms of claiming a capital allowance on the wear-and-tear incurred on his or her vehicle. The burden of proof is placed on the independent contractor (section 102 of the Tax Administration Act). This means relevant source documents, including a logbook, would need to be provided. The position may be summarised as follows:
- The independent contractor does not need a travel allowance or reimbursement to claim, and any amounts received by the independent contractor for business travel will form part of their gross income.
- The tax deduction is effectively claimed in the same way as an employee would claim against a travel allowance, by using the actual costs method, with a logbook indicating the portion of business travel.
Further to the above, the R665 000 limit for wear-and-tear and finance costs per section 8(1)(b)(iiiA)(bb)(A) and (B) is not applicable to an independent contractor. As mentioned above, the vehicle wear-and-tear expense is claimed separately as a capital allowance under section 11(e).
Example (based on the details provided above):
Mr X owns a vehicle valued at R280 000 that he bought on 1 March 2018. He incurred the following expenses:
|Fuel costs||R18 000|
Wear-and-tear expenses (claimed under section 11(e) – see below)
|Maintenance costs||R8 000|
|Insurance costs||R2 400|
|Finance charges||R17 500|
|Total costs||R46 550|
Mr X travelled a total of 32 000 km, of which 8 000 km were for business purposes, as evidenced by his logbook. As a result, Mr X would be able to claim R11 637.50 (8 000 km ÷ 32 000 km x R46 550) as a business travel expense against his gross income. In addition, Mr X would be able to claim a R14 000 wear-and-tear capital allowance – according to section 11(e), read together with Interpretation Note 47.
The wear-and-tear capital allowance is calculated as follows:
(R280 000 ÷ 5 × (12 months ÷ 12 months)) × (8 000 km ÷ 32 000 km) = R14 000
It is important to note that in this instance – as per section 11(e), and read with Interpretation Note 47 – an independent contractor who seeks to claim this capital allowance needs to be the owner of the vehicle or should have borne the cost of purchasing the vehicle. Contrary to section 8, the ownership of the vehicle is one of the important factors that need to be adhered to, in order to claim the section 11(e) capital allowance.
Key take aways
- Maintaining an accurate logbook remains imperative. For verifications and audits on the 2020 tax returns, it appears that SARS will look to build on the stance adopted during 2020, and scrutinise the information included on a travel logbook. A taxpayer must retain a logbook for at least five years, and SARS reserves the right to audit and query the content and information recorded in it. Where documents are not kept for five years, it is a criminal offence.
- Considering that the COVID-19 travel restrictions announced by Government are legally binding, it might be expected for an essential services employee to further support their essential service designation to SARS, in addition to providing a logbook.
- An employee might be facing a tax liability on assessment, where the employee is receiving a travel allowance or company vehicle for business travel and such business travel is not possible or no longer required.
- Similarly, in light of the restrictions and changes brought on by the pandemic, a reimbursive travel allowance might be viewed as a more apt option and suited to the circumstances. Even where an employer withholds taxes on the reimbursive allowance, an employee will be able to align their business travels to the reimbursive allowance and will find themselves more efficient come the 2022 tax submission.
- Where an employer is withholding taxes on 20% of the travel allowance paid to an employee whose business travel will be substantially limited due to the pandemic, the employer should consider adjusting their tax withholding strategy to align to the circumstances, where possible. It should be noted that generally SARS will legally come after the employer (and so they should for collection efficiency) where the 20% withholding is incorrectly applied. In saying that, failure by the employer to withhold the correct employees’ tax does not absolve the employee from a tax liability.