Tweaking Your Car Allowance
27 February 2010
Posted by: Author: Steven Jones
Tweaking Your Car Allowance
There are a lot of things to consider when working out the "ideal” car allowance
I often get asked the following question by people who have their own businesses or receive total cost-to-company remuneration packages: "What is the ‘ideal’ amount that one should take as a car allowance?” The glib answer would be, "It depends”—on a lot of things. This article provides you with a list of factors to take into account when determining the appropriate amount required.
But before we get to that, an attitude change will be required by most people. With National Treasury and SARS seemingly turning the screw sever-tighter on travel allowances,one gets the impression that the days are numbered for this tax-planning tool. But the reality is that a travel allowance was never intended to merely cut your tax bill,or provide you with a slice of tax-free income—it was actually intended a s a means of compensation in exchange for you using your private vehicle for business purposes.
This means that you need to stop seeing your travel allowance as part of your salary. It’s not. In the "old days” of company cars, there was clear separation between the transport component (the car) and the remuneration component (your salary). Get this clear in your mind,and changes to the tax rules need never bother you again.
Such a mindset change will put paid to the argument that "I must buy a new car—I’m paying too much tax!” If you need to replace your car anyway, then it makes sense to do the whole thing in the most tax-efficient way possible. But doing something "just for tax purposes” makes about as much sense as spending R1 on something so that you can save 40 cents on something else—which is effectively what you would be doing in this case.
Having said all that, let’s get onto the specifics of structuring your tax allowance properly. Does your job actually require you to do business travel?As far as SARS is concerned, going to and from work each day is not regarded as business travel, anymore than you can justify claiming your grocery bills because you need to eat to be fit to work so that you can generate income. This type of "private maintenance” expenditure is not claimable.
Genuine business travel is where your travel is a direct requirement of your job, over and above merely pitching up for work. This means that, for instance, you have your own professional practice and need to visit clients; you are a minister who needs to visit members of your congregation; you are a field technician visiting installations at various sites; or you are a sales representative calling on existing and potential customers.
If your job entails going to a set office and being tied to your desk all day, don’t even bother with a travel allowance—you won’t have the business kilometres in your logbook to be able to submit a claim, which means that SARS will(in any event) tax your travel allowance in full.
Does your job justify the car you drive?
One of the famous tax dodges is that of the civil engineer who drives a beat-up old Datsun bakkie to the various construction sites of his clients—which means that he is doing the travel—but then bases his claim on the 7 Series BMW that is parked in the garage and used on weekends. But if you have done your 2009 tax return (which you should have by now!), you may have noticed that SARS now wants to know the make, model, and year of your car, whereas in previous years they were only interested in the registration number and the cost price.
Maybe I’m reading too much into things, but I reckon that this is a diabolically clever move by SARS which is aimed at combating schemes such as this one. You will also no longer be able to claim that your aging Fiat Uno cost you R200 000 just so that you could bump up your refund.
Having said that, the principle of tax deductions as enshrined in Section 11(a) of the Income Tax Act is that expenditure should be "actually incurred”, rather than "necessarily incurred”. So if doing house calls in a Rolls-Royce is your thing, then no problem. The cost of the vehicle will however be capped at R400 000 for purposes of your claim, although the last time I looked R400 grand can still get you some fairly smart wheels! Is your allowance reasonable when compared to your over all salary package?
With the portion of the travel allowance that is subject to monthly PAYE being increased to 80% of the allowance from 1 March 2010, the incentive for ridiculous allowances has diminished somewhat, but in the days when only 50 or 60% was subjected to employees’ tax, one often saw absurd situations where a person’s monthly basic salary was R2 000 and their travel allowance was R8 000. This was done in order to maximise the monthly cash flow. SARS is not going to take kindly to these kinds of shenanigans, and both you and your employer can expect some fairly hefty penalties if you are caught engaging in such practices. Your IRP5 at year-end will be a dead give-away.
So what would be a reasonable allowance for cost-to-company package-earners? Circumstances obviously vary, but a good rule-of-thumb is not to exceed 30% of your total package.Is your allowance reasonable when compared to the cost of your car?
This may sound like a silly question, but in my corporate days I had colleagues who drove 1.4 Citi Golfs receiving allowances of over R12 000 per month. Given that 80% of your allowance is going to be taxed each month anyway, you are probably safe instructuring your allowance so that the after-tax amount covers your monthly instalment , fuel, maintenance, and insurance. For most people this should result in a break-even situation at year-end, if not a small refund. Is your allowance reasonable when compared to the business distance travelled? With the "deemed business travel” method being scrapped last year,keeping a logbook is now compulsory if you intend to claim against a travel allowance. But the form of logbook need not be complicated—although many commentators differ with me, I believe that provided that you record your odometer reading on the last day of February each year, it should be sufficient for you to record only your business trips. SARS is really not interested in how many times you drop Johnny off at school or go shopping, since this is all private travel which is non-claimable in any event.
From this logbook you will be able to determine the proportion of business to private travel. If you assume that a break-even situation with SARS is desirable at year-end (a refund is nice, but why lend SARS money interest-free? And no-one likes to pay in!), then you could increase your travel allowance if your business travel is a higher proportion of your total travel, and reduce it if private travel makes up the greater proportion.
Source: By Steven Jones (Taxbreaks)