Employees’ Tax - Travel Allowances and Reimbursements – Are you at risk?
29 May 2014
Posted by: Author: ENSafrica
Author: ENSafrica and adapted by Erich Bell (SAIT Technical)
does a travel allowance work?
Most employers are aware that a
travel allowance may be granted to an employee where it is anticipated that the
employee will be required to undertake business travel by virtue of the duties
of his/her employment and that a travel allowance should not be merely used as
a mechanism to reduce an employee’s employees’ tax ("PAYE”) liability.
In order to ensure that the
employee is not taxed on the portion of the travel allowance which relates to
the distance he/she actually travelled for business purposes, SARS would, on
assessment, allow the portion of the allowance used for business travel not to
be taxed if the employee can provide an accurate logbook. It should be noted
that PAYE must, in most instances, on a monthly basis, be deducted from 80% of
the travel allowance received by the employee.
The South African Revenue
Service ("SARS”) has in some instances issued employees’ tax assessments in
respect of travel allowances granted to employees on the basis that, in order
to qualify for a travel allowance, an employee must in fact have travelled on
business. SARS is further of the view that where employees who received travel
allowances were also able to claim a reimbursement for business mileage
(typically on a rate per kilometre basis) and he/she did not do so, it may be
concluded that an employee did not in fact travel on business. In these
circumstances, it is then reasoned that the employee’s travel allowance does
not constitute a ‘true’ travel allowance and that consequently the full amount
of the travel allowance should have been subject to PAYE (as opposed to only
SARS’ approach correct?
There are two aspects to the
above argument. Firstly, is it a requirement when granting a travel
allowance to an employee that the employer must ensure that that employee does
in fact travel for business purposes? The second aspect is whether it is
reasonable to conclude that an employee who received a travel allowance but did
not submit a claim for business mileage, did not travel for business purposes
and that such employee’s travel allowance is accordingly not a ‘true’ travel
allowance which would cause PAYE to be deducted from the full travel allowance.
stated above, 80% of a travel allowance is subject to PAYE. However, in earlier
tax years which may still be under review by SARS, this percentage was as low
as 50% or 60%. Should it be found that the allowance did in fact not qualify as
a travel allowance as envisaged in the Income Tax Act (No. 58 of 1962) (Act),
the potential exposure to the underpayment of PAYE could be significant.
to travel for business purposes
Act requires an inclusion in the taxable income of the recipient of any amount
which has been paid or granted as an allowance or advance by his/her principal,
excluding any portion actually expended by that recipient, inter
alia, on travelling on business. The section requiring the
inclusion therefore deals with an individual taxpayer‘s final tax liability in
respect of an allowance or advance granted by a principal (employer).
Act also provides that any allowance or advance "in respect of transport expenses” shall, to
the extent to which such allowance or advance has been expended by the
recipient on private travelling (including travelling between his place of residence
and his place of employment or business or any other travelling done for his
private or domestic purposes), be deemed not to have been actually expended on
travelling on business.
The section requiring the
inclusion does, in our view, not require that an employee must have travelled
for business purposes or account to his or her employer for actual business
travel undertaken in order for the allowance granted to him to qualify as a
travel allowance. There is furthermore no requirement imposed by
legislation on an employer who grants an employee a travel allowance to monitor
the use of this allowance by the employee.
This is confirmed in SARS
Interpretation Note No.14 (Issue 2) which states that an allowance is an amount
of money granted by an employer to an employee in circumstances where the
employer is certain that the employee will incur business-related expenditure
but where the employee is not obliged to prove or account for the business
expenditure to the employer.
We maintain that a travel
allowance may be given to an employee on a prospective basis having regard to
the reasonably anticipated business travel requirements of the employee’s
position, without the employer being required to confirm whether or not the
employee actually travels for business.
Where an employer’s travel
allowance policy also allows those employees who receive travel allowances to
submit reimbursive fuel claims at a rate per kilometre for business travel,
submission of these claims by the employee is typically optional.
The fact that an employee may
not have claimed a per kilometre reimbursement in respect of his or her
business travel does not imply either that such an employee was not required by
the nature of his duties of employment to travel on business, or that he/she
did not in fact travel on business.
In practice, it is often the
case that employees who travel for business purposes choose not to submit a
claim for a fuel reimbursement in addition to their fixed monthly travel
allowance because it is not worth their time and effort to do so. Also,
the requirement to keep a log book was only introduced in the 2010 tax year.
Prior to this, most employees used the gazetted tables to calculate their
allowable travel allowance deductions in their annual tax returns. It was
therefore not necessary to keep a record of actual business travel.
It therefore cannot be said
that employees who received travel allowances but who choose not to submit
reimbursive fuel claims, did not in fact travel for business purposes.
In addition, whether or not a
reimbursive fuel claim was submitted by an employee should, in our view, not be
regarded as a criterion to be applied with hindsight as to whether the employee
qualified for a travel allowance.
Provided that the employer duly
applied its mind whether to grant a particular employee a travel allowance
based on the business travel requirements of his/her job and not, for example,
as an automatic benefit by virtue of his/her position within the organisation,
a travel allowance granted on this basis should be regarded as an allowance of
which 80% thereof is subject to PAYE and which may be reduced by the business
portion of the expenses on assessment at the end of the year of assessment.