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It Pays to Travel

25 July 2017   (0 Comments)
Posted by: Author: Thamsanqa Msiza
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Author: Thamsanqa Msiza (thamsanqa@taxconsulting.co.za)

As irritating as it might be to keep a logbook and piles of receipts, keeping a paper trail and understanding how the travel allowance deduction works is vital for successful claims.

The tax claim for travel with a private vehicle remains one of the most important tax claims for employees and independent contractors. As the tax season arrives, relooking at some of the fundamentals of the travel claim is always useful, especially the similarities and distinctions that apply regarding the claim for an employee versus that for an independent contractor.

 

Employees and independent contractors: the technical difference

 

The main difference between an employee’s and an independent contractor’s travel allowance claim is that the two claims are subject to different parts of the Income Tax Act (ITA). An employee’s travel allowance claim is dealt with under section 8(1)(b) of the ITA, while the claim for an independent contractor is dealt with under section 11(a), read with section 23(g), of the ITA.

 

Travel allowance deduction: the employee perspective

 

When trying to understand the applicable law, most tax practitioners and SARS officials prefer to just use the SARS guides and established practices, as opposed to trying to wrap their heads around the double whammy of double negative phrases found in the legislation that explain the travel allowance.

 

The travel allowance “deduction” is worded as a double negative, operating on the premise that an allowance is included into a person’s taxable income (see section 8(1)(a)(i)), the extent to which the allowance has been actually expended on travelling for business (see section 8(1)(a)(i)(aa)). Subsection 8(1)(b) then determines when an allowance is so expended on business, which is, quite amazingly, again drafted as a double negative.

 

It is nothing personal, it is just business

 

Section 8(1)(b)(i) introduces the so-called “logbook” requirement as well as the “travelling-from-home” requirement. It is interesting to note that the “logbook” requirement simply stems from the taxpayer’s ability to not prove that travel with a private vehicle for business purposes is not private travel. Practically, we know this is done through keeping a logbook and SARS gives a format which is generally accepted as discharging the taxpayer’s onus of proof on this specific requirement.

 

One critical change regarding logbooks is that the SARS format requirements now state that it is compulsory to “keep a logbook of all travel in which you record what travel was for business and what travel was for private purposes if you want to claim a travel deduction”.

 

This is quite a significant difference to the previous position, which was last noted in the SARS eLogbook Guide for 2013/2014 (“the Guide”), regarding the admin burden. The guide states, “It is now compulsory to keep a logbook of all your business travel in which you record what travel was for business. There is no requirement to keep records of private travel.”

 

As the underlying law behind this requirement has not changed and this section is not made subject to the commissioner’s discretion, our view has always been that, as long as the logbook can discharge the taxpayer’s onus of proof requirements, it would be acceptable.

 

Is the first trip always excluded?

 

The travel between home and work requirement has caused interpretation problems for as long as the section existed. There also appears different SARS practical applications, depending on the strength of the SARS auditor. The law clearly determines that private travelling includes “travelling between ... place of residence and ... place of employment or business” (see section 8(1)(b)(i)).

 

Although the law appears remarkably clear on this matter, there are interesting examples of place of residence and place of employment or business travel in the SARS Interpretation Note 14 under section 5.4.2. One such example, where a consultant stops to see a client en route to his/her place of employment, would appear more generous than what the law permits. The travel between home and the client’s premises and the travel after the meeting from the client’s premises to the office, in this regard, would be considered as business travel.

 

Which method is best?

 

There are two methods of calculating the deductible amount against the travel allowance, namely the actual costs method and the deemed costs method. Each method has its own set of requirements. In our experience, the deemed costs method does not just have less admin, it almost always yields a slightly better result than the actual costs method.

 

The actual costs method

This method requires accurate information in the form of receipts, tax invoices and other relevant source documents. Finance charges, based on the debt incurred to purchase the taxpayer’s vehicle – limited to a purchase price of R595 000 with effect from 1 March 2017 (see section 8(1)(b)(iiiA)(bb)(B)) – can form part of the total expenses incurred. Additionally, a wear-and-tear expense (again, limited to R595 000 with effect from 1 March 2017 and determined over a seven-year period – see section 8(1)(b)(iiiA)(bb)(A)), is also included in the sum.

 

The basis of this calculation stems from computing an actual expenditure per kilometre value and multiplying it with the business kilometres. The product of the two amounts will then represent a deductible amount against the travel allowance. Consider the following example (example is adapted from SILKE: South African Income Tax 2017):

 

Mr X owns a vehicle valued at R120 000 and incurred the following expenses:

  • Fuel costs R 8 000
  •  Wear-and-tear expenses R 17 143 (120 000 ÷ 7)
  • Maintenance costs R 4 000
  • Insurance costs R 2 400
  • Finance charges R 12 000
  • Licence cost R 400

Total costs R43 943

 

He travelled a total of 22 000 km, of which 4 000 km were for business purposes, as evidenced by his logbook. Mr X received a total travel allowance of R19 200 for the 2017 year of assessment. As a result, Mr X would be able to claim R7 990 (4 000 km ÷ 22 000km x R43 943) as a deduction against his travel allowance.

 

The deemed costs method

  • The deemed costs method comprises three components: the fixed costs, the fuel costs and the maintenance costs. These are included in a cost scale table from which the taxpayer choses the appropriate set of figures based on the value of the vehicle. The table can be found on SARS’ website and is revised every year. It is important to note that using either the maintenance costs or the fuel costs in the calculation depends on the taxpayer bearing the actual fuel and maintenance costs.

Considering the above example, note the following:

  • Fuel costs per kilometre R0.92
  • Maintenance costs per kilometre R0.386
  • Fixed costs component R2.166

(figures - cost scale table: R120 000 vehicle)

 

Total cost per kilometre R3.472

 

In using this method, Mr X would be able to claim R13 888 (4 000 km x R3.472 per km) as a deduction against his travel allowance.

 

Reimbursive travel allowance

When a taxpayer has travelled less than 12 000 business km and has received no other travel allowance or reimbursement, he or she may elect to use the “summarised” method in calculating their deduction. The taxpayer will have the option to calculate the deductible amount as follows: Business km x R3.55 (i.e., SARS’ official rate per km).

 

Travel allowance deduction: the independent contractor perspective

 

What is the difference between employees’ and independent contractors’ deductions?

Whereas an employee is funded by way of an allowance, how does an independent contractor cover the cost of travelling?

 

An independent contractor, as is explained in Interpretation Note 17, is an individual or person similar to an entrepreneur. Although the term “independent contractor” is not defined in the ITA, Interpretation Note 17 further elaborates that an independent contractor must be distinguished from an employee. The distinguishing factor is the “employer” status associated with an independent contractor.

 

Due to the relationship or nature of the contract that normally builds between an independent contractor and a client, the culmination of a travel allowance would be unusual. As a result, an independent contractor would recover business travel costs incurred by way of invoicing or as a disbursement fee.

 

Implications of travelling costs transaction

Section 8 does not cater for the situation of an independent contractor. Consequently, an independent contractor can rely on section 11(a) to obtain a deduction in this regard. As the burden of proof in this regard is placed in the hands of the independent contractor (see section 102 of the ITA), relevant source documents, including a logbook, would need to be kept and provided. The position may be summarised as follows:

  • The independent contractor does not need a travel allowance or reimbursement to make a claim.
  • Any amounts received by the independent contractor for business will form part of the gross income.
  • The tax deduction is effectively claimed in the same way as for a travel allowance for an employee using the actual costs method, with a logbook to show the portion of business travelling. However, the R560 000 limits per sections 8(1)(b)(iiiA)(bb)(A) and (B) do not apply.

When all is said and calculated

 

The maintenance of a logbook is very important and, as clearly noted in the SARS Travel Logbook, SARS reserves the right to audit and query the content and information recorded by a taxpayer in any logbook. The logbook is part of the taxpayer’s record and must be retained for a minimum of five years.

 

Although fundamental differences exist in the treatment of the travelling costs for an employee and for an independent contractor, there is a shared interest in the upkeep of a logbook as well as other source documents.

 

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This article first appeared on the July/August 2017 edition on Tax Talk. 

 


 

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