4.10 Additional Travel allowance amounts
Only if the employee qualifies for a travel allowance, any payments made by the employer in respect of the running costs of the employee’s motor vehicle that are additional to the regular travel allowance amount paid in cash, must also be administered as a travel allowance, and taxed and administered as such in the payroll.
Items paid for by the employer that must be treated as a travel allowance are those expenses that are directly related to the running costs of the employee’s motor vehicle.
These include payments for fuel, maintenance, licence, insurance, and tyres, and they must be allocated in the payroll to the employee that has benefited and administered as an additional travel allowance amount.
Expense items that do not relate directly to the running costs of the motor vehicle (such as parking or toll fees), can be reimbursed by the employer as a normal business expense.
Being a reimbursement, they are not classified as a travel allowance (or a travel reimbursement), do not affect the tax calculation of the employee in any way, and are not reported on a tax certificate.
Examples follow of these ‘additional’ types of running cost expenses of the motor vehicle that are paid for by the employer –
• The employee’s petrol slips that are reimbursed by the employer
• The employee’s vehicle maintenance expenses that are reimbursed by the employer
• The use by the employee of the company’s garage or petrol card
• The employee is allowed to put in fuel on the company’s petrol account at a garage.
How the employer elects to pay for the running costs of the employee’s motor vehicle is not relevant – the point is that these payment must be taxed and administered as a travel allowance.
4.11 Payroll Calculation of Employees’ Tax
The above calculations result in an estimated income value of the travel allowance amount.
However, the travel allowance must have a remuneration value before the payroll can calculate employee’s tax.
In principle, because it is the private travel portion of the travel allowance value that is taxable, it is this portion of the income value of the travel allowance that should be classified as remuneration.
Not so easy in practice.
Remuneration Inclusion Percentage
To align the travel allowance and company car provisions, the same requirement to include 80% or 20% of the fringe benefit income value into remuneration that was discussed in Chapter 3 for company cars, is also applicable to travel allowances.
The ‘80%/20%’ inclusion rate requirement was added to the Fourth Schedule definition of remuneration from March 2010 to calculate the remuneration portion of the income value of the travel allowance.
In simple terms, 80% of the income value of a travel allowance is remuneration unless the employer is satisfied that at least 80 per cent of the total travel for a year of assessment is business travel, then 20% of the income value of the travel allowance is remuneration.
Because of the importance of this ‘80%/20%’ requirement for the employees’ tax calculation, I have copied the following from the SARS Interpretation Note # 14 for your information:
“The definition of the term “remuneration” was amended with effect from 1 March 2010 to include 80% of the travel allowance or advance as remuneration. However, should an employer be satisfied that at least 80% of the use of the motor vehicle for a year of assessment will be for business purposes, only 20% of the travel allowance or advance is included as remuneration and is subject to employees’ tax.43
This does not mean that only a portion (80% or 20%, as the case may be) is subject to tax.
The full allowance or advance is potentially taxable if the taxpayer is unable to claim a sufficient deduction for business travel when submitting his or her income tax return. It is only for the purposes of employees’ tax that 80% or 20%, as the case may be, is included in remuneration.
Employers must be satisfied that at least 80% of the use of the vehicle is for business purposes when assessing whether 80% or 20% of the travel allowance or advance should be included in “remuneration”.
The word “satisfied” suggests that the employer must actively look into the facts of each employee’s circumstances and objectively weigh up and determine whether or not the employee should qualify.
Employers must satisfy themselves that employees will use their vehicles for at least 80% business use. This can be done by –
• regularly reviewing employees’ logbooks which detail business and private travel; and
• taking into consideration changes in the roles or functions of the employees. “
The SARS Interpretation Note goes on to say (with my emphasis added):
“If employees’ tax has been withheld on 20% of a recipient’s travel allowance and circumstances change such that the employer realises that the employee will no longer use the vehicle more than 80% for business purposes for the year of assessment, from the month in which the circumstances change, employees’ tax must be withheld on 80% of a recipient’s travel allowance.
The adjustment does not need to be made retrospectively; the change must merely be made from the month during which the employer reasonably became aware of the change in the employee’s circumstances.”
Restrictions
Note that the only permitted inclusion rates are 80% and 20%, and that the inclusion rate cannot be averaged over the tax year.
Which is strange, because if the ratio of business travel to total travel changes sufficiently to justify changing from (say) 80% to 20% from a certain point in time during the tax year, then if one analyses the result over the full year, an average inclusion rate has effectively been applied.
My understanding is that in practice the inclusion rate may not be less than 20% and not more than 80%, but it could change from month to month if each change is justified by the ratio of business travel to total travel.
Again, there are many companies and individuals requesting that they be allowed to include 100% of the travel allowance income value into remuneration, preferring a refund at the end of the tax year. While this was the practice for a number of years, it is not compliant with the legal requirement, and is no longer allowed.
My understanding is also that for travel allowances, a 100% inclusion results in an error when submitting tax certificates to SARS.
Impact on the Skills levy and UIF contributions
Fourth Schedule remuneration after the exclusion of some types of remuneration is the base on which the UIF contribution is calculated, and this base amount is further reduced by allowable deductions giving the ‘leviable amount’ that the Skills levy is calculated on.
The higher the remuneration value (i.e., 80%), the higher the cost to the employer of these statutory fees, limited only by the UIF threshold.
If there are many employees and the travel allowance amounts are large, the reduced cost of employment could tempt employers to put themselves at risk by applying the 20% inclusion rate when the rate should be 80% to reduce the remuneration value of the travel allowance.
4.12 SARS Calculation of Income Tax
Logbook
From March 2010, every employee who is paid a travel allowance should keep a logbook if he wants to claim a deduction from income tax of his actual business kilometers on assessment.
A logbook must be kept if the employee wants to claim his business travel deduction against the code 3701 income value of the travel allowance on assessment.
If there is no logbook, in principle the employee will be assessed on the portion of the travel allowance that was not taxed in the payroll and will have to pay the assessed amount to SARS. This will result in some very unhappy employees paying the payroll office a visit, so remind your employees regularly of the consequences of not keeping a logbook.
Logbooks are now required for company cars, travel allowances, and for code 3702 travel reimbursements.
[As an aside, I would love to see the logbooks of those employees who have been granted a travel allowance and who don’t have a driver’s licence, let alone travel for business purposes in a privately-owned vehicle …  ]
Income Tax Calculation
Since 2002, all ‘general’ allowances have been taxed in full, and with very few exceptions, an employee is not allowed to claim business expenses against the allowance on which he has been taxed.
The travel allowance is one of these exceptions and is afforded special treatment in the legislation.
The income value of the travel allowance must be reported on the employee’s tax certificate against code 3701 and is the starting point of the income tax calculation on assessment.
The calculation of income tax on travel allowances follows.
1. The income value of the travel allowance must be reported on tax certificates under code 3701 (plus code 3702 travel reimbursements if present – see Chapter 5) on the tax certificate
2. SARS calculates the business travel expense deduction by multiplying the business kilometers from the logbook by the Cost Scale rate/km
3. Any excess of the business travel deduction value above the code 3701 travel allowance income value is discarded, highlighting the negative result of estimating a value for the travel allowance that is too low
4. Any excess of the code 3701 travel allowance income value above the business travel deduction value is added to the taxable income on which income tax is calculated.
It is important to note that SARS calculates the Cost Scale rate/km in the same way as the employer – the only difference is that the employer uses estimated total kilometers, while SARS uses the actual total kilometers from the employee’s logbook.
This means that differences between the PAYE and the income tax amounts are because of differences between the estimated kilometers and the actual kilometers for the year.
4.13 Compliance
The legislation gives the employer the right to grant a travel allowance to an employee, but along with this right there is a duty to do so in a manner that is compliant with the legislation.
It is important for employers to be aware of the main areas that are monitored to ensure compliance –
1. Only grant travel allowances to employees who travel for business purposes.
2. Estimate a realistic value for the travel allowance.
3. Include the correct estimated private travel portion of the travel allowance as remuneration (80% or 20%).
4.14 Risk to the Employer
What is the risk to the employer of being caught if the estimate of the travel allowance is too high, or if the 20% inclusion rate is used where the 80% rate should have been used?
It doesn’t take a rocket scientist to work out that the risk is high.
Firstly, if the employer’s estimated value of the travel allowance (code 3701 on the tax certificate) exceeds the actual business travel value (logbook) by a margin that SARS find unacceptable, a red flag can be raised to indicate that the employer over-estimated the value of the travel allowance.
Secondly, if the final income tax value is ‘considerably’ more than the employees’ tax value, and if the employee has a travel allowance (or a company car) and there is no other discernible reason for the under-withholding of employees’ tax, a ‘20% inclusion’ red flag can be raised.
I assume that at some stage in the future, SARS will be able to ‘red-flag’ employees who are paid a travel allowance and who don’t have a driver’s license.
‘Red flags’ equal ‘SARS audit’.
4.15 Travel allowance ‘Best Practice’ Tips
1. Never grant a travel allowance to an employee who does not travel in a privately owned vehicle for business purposes (and who does not have a valid driver’s license).

2. Your travel policy should put a duty on employees who are paid travel allowances to advise the payroll administrator if a different car is used to travel from the one used for the travel allowance estimate.

3. During the year, estimate the travel allowance value at the following mileposts –
a. Always at the start of a new tax year.
b. If the travel requirements for the job change.
c. If a new car is used for the travel.
d. At least once during the tax year.

4. The estimated travel allowance value –
a. Should not be excessively high
b. Should not be less than the estimated value of the business travel
c. Should be increased ‘marginally’ above the business travel value.

5. Keep a written record of how you estimated the travel allowance value in case of an audit

6. Keep a written record of why you decided on the 20% inclusion rate if you applied this rate

7. Remind your employees that they must keep a logbook

8. Don’t allow travel allowances to be structured as a component of a Cost to Company structure (if you do, ensure that the employee understands that he is effectively paying the employer’s business travel expense out of his package).
4.16 Last thoughts on Travel Allowances
Take a step back and think about the following.
1. To get a refund of any travel allowance PAYE owing to him, the employee must –
a. Keep a logbook for the whole year
b. Record his kilometre reading at the start and end of each tax year
c. Complete special sections in his ITR12 to claim a tax deduction
d. Wait 6 months into the next tax year to be refunded.

2. The employer must –
a. Estimate the travel allowance value at the start of every tax year for all employees that travel.
b. Re-estimate the travel allowance when the vehicle or the job circumstances change
c. Check the decision on the 80% or 20% inclusion rate of the travel allowance ‘regularly’
d. Change the remuneration inclusion rate (if necessary) when the nature of the job changes
e. If the travel allowance is included in a package, deal with the problems that result
f. Deal with employee queries on their travel allowances
g. Live with the risk of doing something wrong and the possibility of penalties …
I am sure that you will agree that this is somewhat crazy.
The two ways to return to a sane position is for:
1. National Treasury and SARS to phase out the travel allowance over a few years (as requested), OR
2. Employers must vote with their travel compensation policies by changing from travel allowances to travel reimbursements.
In general, it is worth considering replacing your allowances with reimbursements where it makes sense to you to do so.