Summit TV Takes a Look at the Risk Companies’ Take in Offering Travel Allowances To Their Staff
12 November 2008
Posted by: Author: Steve Krause
Summit TV Takes a Look at the Risk Companies’ Take in Offering Travel Allowances To Their Staff with Steve Krause from Krause Fouche.
Summit TV: Steve, why are there inherent risks for companies that offer their staff travel allowances?
Steve Krause: Effectively there are three risk areas that have been identified in practice. The first one is that most entities are trying to accommodate post-March 2002 packages – where effectively the only structuring technique available is a travelling allowance.In the same aspect, by the inflationary costs that are incurred it’s easier to structure a travelling allowance where the individual gets some kind of tax relief versus an increase in package.Other aspects that we are finding are an issue is those relating to grading systems where parties are allocated their specific travelling allowance based on grade.The third aspect is where people are effectively removing travelling allowances based on SARS’ effective marketing campaign, "If you’re not travelling for business, you are not entitled to claim a travelling allowance”.
Summit TV: What are the requirements for a valid travelling allowance?
Steve Krause: The first aspect is that the travelling allowance has to be part and parcel of an individual’s job description.In other words, by having it as part and parcel of your job description, you are automatically referring to the letter of appointment. If the letter of appointment does not stipulate that ‘person x’ is required to use their own private motor vehicle for business purposes – and as such they pay them a travelling allowance to defray the costs they are going to incur whilst operating for business purposes – SARS could disallow the allowance.The second aspect is that the travelling allowance has to be realistic. In a lot of instances you will find that an individual, for the last three years, has stated on their tax return that they have done a total of 20 000 kilometres for the year but when the package is structured they are reverting back to the 32 000 deemed principle. It’s important to ensure that the travelling allowanceis allocated correctly, and that it’s in conjunction with what the individual is effectively travelling for that specific year.
Summit TV: What is the significance of the grading system?
Steve Krause: The grading system is a system that’s been brought in from a human resources perspective. It’s a fair basis equalisation format where individuals within different job positions are graded accordingly.The problem is that you would have a scale of an individual on a grade one– across the board that might incorporate someone from the marketing department for example, and someone from the accounts department.Now, based on that, they would automatically receive the same travelling allowance.From a realistic point of view, the person who is sitting in the accounts department is less likely to do any business travel than the person in the marketing department.Needless to say, SARS is aware of this aspect and they require the companies to substantiate.
Summit TV: Is it advisable for companies to remove these travel allowances?
Steve Krause: You have a Catch 22 situation. If the individual staff member is in the same position as they’ve been for the last three years – no specific or fundamental changes have happened to their job description –the removal of the travelling allowance in the current year could be tantamount to the fact that the individual was not entitled to the allowance in the first instance.This means the declaration made by not only the company in terms of the last two to three years, but also the individuals involved could come under scrutiny by SARS. In those instances, it’s recommended that companies look at the amount or the value of the travelling allowances and reduce them accordingly.There is nothing preventing a company from taxing the full travelling allowance, in agreement with the individual, effectively allowing the individual to submit that on their annual tax return if they had done any business kilometres for that specific year.People are trying to remove travelling allowances because the market perception of a deemed 32 000 kilometres has been in place for many years.Now people are reverting back to actual kilometres– looking at the odometer readings, determining what the actual business and private kilometres for the year was –resulting in having large assessments issued.Obviously we don’t like to pay more than we have to but from a cash flow perspective, a normal-salaried person would prefer to have it on a month-to-month basis.
Summit TV: What risks, if any, are associated with payments made for fuel, maintenance and reimbursements?
Steve Krause: What we are finding is that once again a travelling allowance is a structured, fixed amount. That is normally sent across to the relevant payroll department; they load it onto the system and it runs for the year in place.What happens though is that the fuel costs that are paid by the accounts departments and other relevant exercises are not always reported on the IRP5, which is a requirement. Anybody getting a travelling allowance – it doesn’t matter if you are paying them a fuel cost or petrol cost, or whatever it may be – that aspect needs to be added to the travelling allowance.
Source: By Steve Krause, Summit TV (Taxtalk)