Travel Allowance: Review of Proposed Amendments
01 February 2010
Posted by: Author: Steve Krause
Travel Allowance: Review of Proposed Amendments
The proposed amendment to the ‘deemed’ travel deduction and the implementation of a fixed log-book methodology and the increased taxability of the monthly travel allowance has necessitated a review of current structures.
Practice has identified three distinctive categories of travel allowance recipients: namely high travellers, medium travellers and low travelers.
For discussion purposes, these can be defined as:
a. High travellers: A person that does predominantly high business mileage, which is normally in excess of the 18 000 kilometres per annum.
b. Medium travellers: A person who does more than 8 000 business kilometres per annum but does not exceed in business and private kilometres, 32 000 per annum.
c. Low travellers: A person who does less than8 000 business kilometres and less than 18000 kilometres in total.
Although the proposed amendments will allow all categories of travellers to submit a claim,based on a presentation of a logbook, the higher percentage (80%) of the taxable portion of the travel allowance effectively increases the individual’s ‘self-funding’ of expenses directly incurred in the production of income.Adjustments to the current format of compensations will allow for monthly relief and improved accuracy of the classification of travel allowance holders.
An example of the adjustments is found below,based on practice found within the marketplace, please note that facts may vary between employers.
XYZ Consultants (Pty) Ltd (XYZ) grants a fixed travel allowance to an employee in circumstances where it is certain that the employee will incur business-related expenditure on behalf of XYZ but where the employee is not obliged to prove or account for the business expenditure.The amount of the allowance is based on the expected business-related expenditure (a fixed allowance).
In addition to the fixed allowance, employees are entitled to submit travel claim forms for business travel, for which they will be reimbursed per kilometres at a rate determined by XYZ from time to time. XYZ also has categories of staff who incur business-related travel expenses out of their own pockets (without having had the benefit of an allowance or advance) and is subsequently reimbursed at a fixed rate per kilometres for this expenditure after having proved and accounted for the expenditure (a reimbursive allowance).
In these instances, the allowances are treated as a travel allowance (code 3701) and employees’ tax is deducted on 60% (80% for allowances paid on/after 1 March 2010) of the allowance in accordance with paragraph (cA)of the definition of remuneration in the Fourth Schedule.XYZ has requested our advice on the tax implications of paying a reimbursive allowance to an employee.We set out below our opinion by having regard to section 8(1)(a), section 8(1)(b), the definition of remuneration in the Fourth Schedule to the Act and the Government Gazette Notice.
Interpretation of the Act
Section 8(1)(a)(i) of the Act provides as follows: "There shall be included in the taxable income of any person (hereinafter referred to as the ‘recipient’) for any year of assessment any amount which has been paid or granted during that year by his or her principal as an allowance or advance, excluding any portion of any allowance actually expended by the recipient – (aa) on travelling on business, as contemplated in paragraph (b).
Section 8(1)(a)(ii) provides as follows: "There shall not be included in the taxable income of a person in terms of paragraph (a)(i), any amount paid or granted by the principle in reimbursement of, or as an advance for, any expenditure incurred or to be incurred by the recipient on instruction of his or her principal in the furtherance of the trade of that principal; (bb) where that recipient must produce proof to that principal that such expenditure was wholly incurred as aforesaid and must account to that principal for that expenditure…”
The removal of previous allowances during 2003 with regard to, for example, cell phone,entertainment, home-office, etc. required the amendments to section 8, SARS has placed the role of verification in the hands of the employer,thus reducing its audit burden on individual claims on submission of annual tax returns.
The employer is guided as to three key verification points: namely the fact that the employee has to be instructed to incur the costs,in the instance of travel for business, only those parties instructed by their employer to use their own motor vehicle for business purposes will be allowed.
In the second instance, the employee must show that the cost was wholly incurred for business,it is for this reason that a fuel claim would not qualify, and the total cost of the fuel attracts both a private and business element.In the third instance, the employee must ac-count to the employer for the cost, in other words reason has to be tendered for the expense, in travel it would be required to account for the relationship of the destination, and the reason, (travelled to SARS Megawatt for meeting regarding PAYE of XYZ).
The Act then goes on to explain the specific requirements with regard to travel, Section 8(1)(b) (iii), provides as follows: "where such allowance or advance is based on actual distance travelled by the recipient in using a motor vehicle on business (excluding the said private travelling), 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, unless the contrary appears, be deemed to be an amount determined on such actual distance at the rate per kilometre fixed by the Minister of Finance by notice in the Gazette for the category of vehicle used.”
The above applies to all categories of travelling;however, those in the low category have been provided with a simplified method of ensuring no taxability of the reimbursement as provided for in the Gazette. Paragraph 4 of the Government Gazette provides as follows, this is applicable to code 3702 and confirms the non-taxability during the year and on assessment the individual is not required to substantiate the reimbursement on his/her annual tax return:"Simplified method for distance less than 8 000kilometres where-
The provisions of section 8(1)(b)(iii) are applicable in respect of the recipient of an allowance or advance;
a. The distance travelled in the vehicle for business purposes during the year of assessment does not exceed 8 000 kilometres, or where more than one vehicle has been used during the year of assessment the total distance travelled in those vehicles for business purposes does not exceed 8 000 kilometres;and
b. No other compensation in the form of a further allowance or reimbursement is payable by the employer to that recipient, that rate per kilometres is,at the option of the recipient, equal to 292 cents per kilometre.”
In determination of the monthly ‘remuneration’ amount, we are required for PAYE purposes to determine the amount if any to be included for such purposes.Paragraph (cA) of the definition of remuneration in the Fourth Schedule provides as follows: "remuneration means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay,bonus, gratuity, commission, fee, emolument, pension,super annuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of service rendered,including-(cA) 60 per cent of the amount of any allowance or advance in respect of transport expenses referred to in section 8(1)(b), (a normal travel allowance),other than any such allowance or advance contemplated in section 8(1)(b)(iii) which is based on the actual distance travelled by the recipient, and which is calculated at a rate per kilometre which does not exceed the appropriate rate per kilometre fixed by the Minister of Finance under section 8(1)(b)(iii).” (our emphasis).
Proposed application of the relevant sections
Section 8(1)(a)(i) includes in the taxable income the unused or non-business or private part of an allowance or advance. Section 8(1)(a)(ii) excludes from income, reimbursements made to employees in certain circumstances.The function of section8(1)(b) is to define the business and private parts of an allowance or advance for the purposes of section8(1)(a)(i)(AA).
All employees, who are required on instruction of XYZ to conduct business travel on behalf of XYZ and are required to confirm accurate distance of business travel and the reason for such travel (company and person visited and nature of meeting), are to be reimbursed an amount equal to the amount referred to in paragraph 4 of the Government Gazette, currently R 2.92 per kilometre.
These reimbursements could potentially fall within the provisions of section 8(1)(a)(ii) and will accordingly be excluded from taxable income if the employee can produce proof that the actual cost of travelling was in fact R2.92 per kilometre.
In this regard, the employee cannot rely on the deemed cost per kilometre travelled (as determined in accordance with section 8(1)(b) read with the amounts fixed by notice in the Gazette referred to in that section) to prove actual cost of travelling as those are only for the purposes of travel allowances that fall under section 8(1)(a)(i)(aa) and do not apply to reimbursements as contemplated in section 8(1)(a)(ii).
We anticipate that it would be extremely difficult for an employee to prove that he/she expended exactly R2,92 per kilometre and it is also not realistic that all employees spend the same amount per kilometre (due to driving different cars with different fuel consumptions, wear and tear, maintenance,etc.)
We are therefore of the opinion that it is impractical to rely on the provisions of section 8(1)(a)(ii) as a basis not to include the reimbursed amounts in taxable income unless actual cost (and not deemed cost) are reimbursed on an individual basis.However, what can be done is to reimburse the employee at R2.92 per kilometre and rely on the provisions of section 8(1)(b)(iii) for determining the business portion of travelling. This will have the following effect:
a) Where the employee travelled less than 8000 kilometres per year for business purposes and no other travel allowance was received the amount deemed to be expended for business purposes is R2.92 per kilometre in terms of paragraph 4of the Government Gazette Notice.
b) This means the full reimbursement will be tax free in terms of section 8(1)(a)(i) read with section 8(1)(b)(iii).
c) Where the employee travelled more than 8000 kilometres per year for business purposes, the amount deemed to be spent on business travelling will be determined in accordance with the cost scale table provided in paragraph 3 of the Government Gazette Notice on assessment;however, the provisions relating to monthly PAYE require the amount to be lower or equal to R2.92.
In both instances, no employees’ tax needs to be withheld (by virtue of paragraph (cA) of the definition of Remuneration in the Fourth Schedule)but the full amount must be reflected on the IRP 5 (code 3703 and 3702 respectively).
Any taxation that may become payable in the case of employees who travelled more than 8000 kilometres per year for business purposes will be determined in accordance with the tables provided in paragraph 3 of the Government Gazette Notice and be payable on assessment.
By way of example the following is presented: Code 3701 Steve is required to travel for business purposes, he travels on average 25 000 kilometres in total for the year and is in receipt of a monthly travel allowance of R5 000; he has in the past relied upon the ‘deemed’ method to make his claim for return purposes at year end. This allowance is recorded as code 3701.
As illustrated in fig 1, without the recordal of accurate business and private kilometres, Steve will be unable to justify the untaxed portion of his travel allowance for 2011 and will accordingly pay-in on the amount of R12 000.
Steve is required to travel for business purposes and is required to complete a travel reimbursement claim form, XYZ will compensate Steve at a rate of R2.92 per kilometre. During the year Steve travels 7 000 confirmed business kilometres and is reimbursed R20 440 (7000x R2.92), the amount is reflected under code 3702 and is free of employees’ tax.As the distance travelled is less than 8 000business kilometres for the year, the payment of R20 440 received by Steve will remain tax-free and no further substantiation is required on hisannual return.
Steve is required to travel for business purposes and is required to complete a travel reimbursement claim form, XYZ will compensate Steve at a rate ofR2.92 per kilometre,. During the year, Steve travels 12 000 confirmed business kilometres and is reimbursed R35 040 (12000 x R2.92). Initially the amounts are reflected under code 3702 until Steve exceeds the 8 000 kilometres, XYZ then reflects the total amounts under code 3703.
As Steve’s IRP 5 will reflect code 3703, he will have to substantiate the tax free amount of R35040 on his tax return, illustrated.Accordingly, the above can be achieved only when XYZ does not pay an amount higher than R2.92 and/or any other form of compensation for travel purposes, these would include but not limited to fuel, maintenance, etc.
Employees who are in receipt of a fixed allowance or advance as contemplated in section 8(1)(i)(aa) read with section 8(1)(b)(ii), will continue to have60% of the said amounts included in the calculation of remuneration as defined and subject to employees’ tax. The full allowance should be reflected on the IRP5 under code 3701.
Employees who qualify for a reimbursive allowance as contemplated in section 8(1)(b)(iii) will be reimbursed at a rate of R2.92 on presentation of accurate logbooks which clearly identify actual business travel and confirm the reason for such business travel.Such reimbursements will be recorded as a travel allowance on the employees’ IRP5s under codes 3702 and 3703, whichever the case may be, but will not be subjected to employees’ tax.
Before implementation of the above adjustments, it is recommended that a review be completed of the current structures, policy with regard to travel, letter of appointments and individual classifications. Those entities working on a ‘cost to company’ remuneration package may be required to review a valid salary sacrifice structure as read in conjunction with the Act and relevant case law.We suggest that the above should be introduced with effect from 1 March 2010.
Source: By Steve Krause (TaxTalk)