Travel allowance – debunking the myths
17 February 2015
Posted by: Author: PwC South Africa
Author: PwC South Africa
In a recent judgment handed down in the Gauteng Tax Court (Tax Case No. 12984, judgment delivered 5 September 2014), the Court (Mavundla J) made findings on the basis upon which employees’ tax (PAYE) should be determined in respect of transport or travel allowances.
It is widely known that SARS has taken the position in PAYE audits that an allowance may not be paid as a travel or transport allowance unless the employee is required to travel on business.
The findings are set out in paragraph  of the judgment:
The respondent further took into account that a number of employees received travel allowances and are entitled to elect this allowance as a percentage of their package. The policy limits the allowance to 25% of the package. Depending on the employees’ grade, allowance became an automatic elective and in some instances the quantum of the allowance is unrealistic or considered excessive, e.g. Havenstein—R680 000 p.a. It further took into account the fact that the provisions of Section 8(1)(b)(ii) of the Income Tax provides that the principal (employer) has made payment a payment to recipient (employee) to be utilised for the defrayment of expenditure with regards to any motor vehicle for business purposes. The advance or allowance is based on actual expected business travel. An example, a person has been in the same position for two years, on the average the employee travel 20 000 km for that year, no material change has occurred to duties and obligations, thus an allowance based on 32 000 km would be viewed as excessive. Clause 3.2 of the car allowance scheme reads ‘the full value of the amount required by the employee to finance and run his car is paid via the payroll as a car allowance. Fifty per cent (50%) of this allowance is subjected to PAYE and the onus is on the individual to justify business travel to render the remainder of allowance tax deductible at the end of the tax year. The applicant makes use of a percentage methodology to quantify the travel allowance. It is a requirement that the allowance or advance be based on expected business travel. The respondent took the view that the allowance subjected to tax at fifty per cent is not expended on actual business travel as contemplated in section 8(1)(b) of the Act.’ (sic)
The Court upheld the arguments of the respondent (i.e. SARS).
It is widely known that SARS has taken the position in PAYE audits that an allowance may not be paid as a travel or transport allowance unless the employee is required to travel on business. This view appears to have found support from the Court in this matter. However, a close examination of the law reveals that the argument of SARS is flawed, and that it should be considered that the Court erred in accepting and applying the argument.
The purpose myth
The core of SARS’s argument, and the decision of the Court, is found in the assertion that:
the provisions of Section 8(1)(b)(ii) of the Income Tax [Act] provides that the principal (employer) has made payment a payment [sic] to recipient (employee) to be utilised for the defrayment of expenditure with regards to any motor vehicle for business purposes. (Our emphasis)
As this is a PAYE matter, SARS has to have a basis for justifying the principle upon which the PAYE assessment was raised. If one examines the relevant provisions of the Fourth Schedule to the Income Tax Act, the definition of ‘remuneration’ in paragraph 1 (as it provided at the relevant time) included:
(c) 50 per cent of –
(i) the amount of any allowance or advance in respect of transport expenses referred to in section 8(1)(b)…
Therefore, the argument made by SARS is that the amount of the allowance was ordinary salary and not an allowance or advance in respect of transport expenses referred to in section 8(1)(b)(ii).
Section 8(1)(b)(ii) referred to the allowance in the following terms:
‘any allowance or advance in respect of transport expenses’ (section 8(1)(b)(i)); and
where such allowance or advance has been paid to the recipient in order that it may be utilised for defraying the costs of any motor vehicle used by the recipient (section 8(1)(b)(ii)). (Emphasis added)
Section 8(1)(b)(ii) refers to an allowance in respect of transport expenses (‘such allowance or advance’) and does not provide that a payment that the employer makes for defraying the costs of operating a motor vehicle should be confined to a vehicle used for business purposes.
The quantum myth
The second argument accepted by the Court was that:
The advance or allowance is based on actual expected business travel.
It should be emphasised that section 8(1)(b) provides clarification in respect of section 8(1)(a), which deals with the amount to be included in income in respect of any allowance or advance. Section 8(1)(b) identifies the portion of an allowance in respect of transport expenses which may escape taxation by reason that it is expended for purposes of business. It seeks to distinguish between portions that may be regarded as having been expended for private purposes and portions that may have been expended for business purposes. It is therefore implicit that an allowance may have been expended for private purposes.
However, it is clear that the allowance referred to in section 8(1)(b) is an allowance in respect of transport expenses. This allowance may be used for the purposes of transport by any means (road, rail or air), and is not necessarily restricted to the use of a motor vehicle. Section 8(1)(b) then identifies the circumstances in which the amount of the allowance will not be included in taxable income, and section 8(1)(b)(ii) deals specifically with a sub-class, namely an allowance utilised to defray the expenses of a motor vehicle operated by the employee.
This begs the question – ‘why would the definition of "remuneration” include 50% of an allowance or advance if the allowance was based solely on the use of a vehicle for business purposes?’ Surely, none of this amount would be included in taxable income, and there would be no necessity to withhold tax in those circumstances.
The answer appears self-evident. The allowance or advance referred to in section 8(1)(b) is an allowance in respect of transport expenses. Where it relates to the operation of a private vehicle, it is referred to as an allowance ‘utilised for defraying the costs of any motor vehicle used by the recipient’. Section 8(1)(b) then describes circumstances in which travel or use of the motor vehicle will be regarded as not being for purposes of business.
Section 8(1)(b)(ii) does not prescribe that the purpose for which the allowance is granted must be to defray the costs of business travel; it merely identifies the extent to which such allowance may be treated as having been expended for business purposes.
On the basis that, on assessment, the allowance or advance may be found not to have been expended exclusively for business purposes, the legislation required that a portion of the allowance be included in remuneration and PAYE be withheld and paid in respect of such amount. This is the context in which the inclusion of an allowance for transport expenses as an element of remuneration for PAYE purposes was introduced into the Fourth Schedule to the Income Tax Act in 1991, and this view was expressed at the time by the editors of the noted authority, Silke on South African Income Tax, in the commentary on the 1991 tax changes in their 1991-92 Yearbook.
There is therefore no basis in law, either in the Fourth Schedule to the Income Tax Act or in section 8(1)(b), for a finding that ‘the amount of the allowance is based on actual expected business travel’. If this were so, paragraph (c) (now paragraph (cA)) of the definition of ‘remuneration’ in the Fourth Schedule) would not have been necessary.
It submitted that the Court was wrong in holding that allowances to defray the cost of travelling must be paid in respect of business use and must be based upon the anticipated business use.
However, where there is a clear indication that the amount of the allowance exceeds the reasonable operating costs in respect of the vehicle, it will be difficult to resist an assertion that the allowance is excessive and, to the extent of the excess, should have been subjected to PAYE in full.
This article first appeared on pwc.co.za.