Chapter 6. Conclusions and Guidance
6.1 Income Tax Calculation of Travel Compensation
Focusing on travel income only, my understanding of the principle of the SARS calculation of income tax at the end of the tax year for travel allowances and travel reimbursements, is as follows:
1. Using the ITR12 annual return facilities, the employee declares the vehicle’s determined value, the vehicle’s opening and closing kilometers for the year (the difference is total km travelled), plus his daily business travel km as recorded in his logbook.

2. SARS calculates the Cost Scale rate/km from the information declared in the ITR12.

3. SARS calculates the business travel expense deduction by multiplying the business kilometers from the logbook by the Cost Scale rate/km.

4. SARS calculates the total income for travel from the tax certificate as follows:
• For travel allowances: Equals the Code 3701 amount
• For travel reimbursements: Adding together the code 3701, 3702 and 3722 amounts.

5. SARS calculates taxable travel income by deducting the business travel expense from the total travel income but limits the value of the business travel deduction to the total travel income amount.

6. SARS calculates income tax from the taxable income amount.
The above is no doubt a simplistic view of the principles that underly the SARS travel income tax calculation, but hopefully it is reasonably accurate, at least in principle.
It does indicate that for travel allowances and travel reimbursements, the most important factor in aligning the PAYE and Income tax calculations is the rate/km that is used by both calculations.
This suggests that a rate/km greater than the Cost Scale rate/km should not be used in the payroll – it will backfire on the employee when SARS raise an assessment at the end of the year.
Because of the advantages of simpler administration and fairness to all employees, serious consideration should be given to standardising on using the Prescribed ratedkm in the payroll to prevent remuneration from being calculated.
Other factors that can result in there being differences between the PAYE and the Income tax calculated on travel amounts are:
1. The ‘80%/20%’ estimate in the payroll of the value of the business travel deduction for travel allowances versus the final calculation by SARS on assessment of the business travel deduction using the actual business travel kilometers from the logbook (multiplied by the Cost Scale rate/km).

2. The employee’s kilometers (business and private) for the year are estimated in the payroll when forecasting the value of the travel allowance amount for the year ahead, whereas at the end of the tax year the actual kilometers travelled from the logbook are used for the income tax calculation.

The inevitable difference in the number of kilometers will result in a difference between the remuneration and the income value that is calculated SARS For assessment.
6.2 ‘Best Practice’ For Travel Reimbursements from March 2018
The amended legislation effective from 1 March 2018 states that the portion of the travel reimbursement that is calculated at a rate/km greater than the Prescribed rate/km must be reported under code 3722.
This encourages employers to use a rate/km that is not greater than the Prescribed rate/km (R4,64 for 2024) for all employees, but be aware of what might happen on assessment if the Prescribed rate/km is greater than the Cost Scale rate/km for the vehicle used.
The following table gives you a rough idea of when a combination of different determined values and total kilometers travelled result in a Cost Scale rate/km that is close to the 2024 Prescribed rate/km of R4,64.
Table: Combinations of Determined values and Total kilometers travelled that result in a R4,64 rate/km

Determined Value Total Kilometers Cost Scale Rate/Km
100 000 12 115 4.64
200 000 24 020 4.64
400 000 51 780 4.64
600 000 108 500 4.64
800 000 179 760 4.64

Assuming that a travel allowance is not paid in addition to the travel reimbursement (if a travel allowance is paid, the employee cannot elect to request the employer to use the Prescribed rate/km), the following principles are provided to assist you:
For travel reimbursement administration in the payroll, if the rate/km used by the employer Is not greater than the Prescribed rate/km, or even better, is linked to equal the Prescribed rate/km, then:
1. There will be no code 3722 remuneration, therefore no PAYE, SDL, UIF, ETI, etc. will be calculated.

2. Only code 3703 will be reported on the tax certificate reflecting the reimbursed amount calculated up to the Prescribed ratekm which is neither remuneration nor income.

3. The code 3703 amount will not be used in the income tax calculation.

4. A logbook is not required by SARS.

5. The employer benefits by:
• Having no SDL and UIF contribution costs calculated
• If the company’s rate/km is linked to the Prescribed rate/km, increases from year-to-year are easy.

6. The employee benefits from:
• No PAYE withholding to reduce take-home pay
• No UIF contribution on the travel reimbursement
• No logbook or ITR12 obligation for travel declaration.

 
Alternatively, If the employer’s rate/km is greater than the Prescribed rate/km:
1. There will be a portion that is remuneration subject to PAYE, SDL, UIF, ETI etc.

2. The tax certificate will contain the following codes:
a. Code 3702: The income portion (amount up to the Prescribed ratekm)
b. Code 3722: The remuneration and income portion (amount above the Prescribed ratekm)

3. The total travel reimbursement (code 3702 plus code 3722) will be assessed for income tax

4. The employee must keep a logbook and submit the details on his ITR12

5. The difference in the value calculated at the employer’s rate/km and the Cost Scale rate/km used by SARS will result in either an assessment or a refund of income tax.
If the employer’s rate/km is greater than the Prescribed rate/km, and if the cost scale rate/km of the employee’s vehicle is less than the employer’s rate/km, it would be best to reduce the employer’s rate/km to the Cost Scale rate/km of the employee’s vehicle to prevent the employee from being assessed for income tax on the excess value resulting from the employer’s rate/m being above the Cost Scale rate/km.
6.3 Travel Compensation and Package Structuring
The subject of remuneration package structuring (or ‘Cost to Company’ or ‘Cost to Employer’) is complex and could be the subject of a morning webinar on its own. To keep the terminology short, I am going to use the term ‘package’ for all of these concepts.
A discussion of the principles of package structuring must start with the labour law concept of remuneration.
The BCEA defines remuneration to be the amount paid in cash or in kind in return for one person (the employee) working for another (the employer). Payments in cash are obvious, and payments in kind are employer-paid contributions to medical schemes, retirement funds, funeral schemes, etc., as well as benefits in kind.
By definition, allowances are not BCEA remuneration. Allowances are payments made to allow word to be done, not in return for work done. Therefore, in labour terms, allowances cannot be a component of a package.
The employer and the employee agree (usually contractually) on the services that the employee will provide to the employer, and they further agree on the remuneration that the employer will pay in return for his services rendered. This remuneration is then the employee’s package.
The purpose of a ‘package’ is therefore to reward the employee for his services.
The purpose of business travel compensation is to compensate an employee who has incurred the employer’s business travel expenses. Therefore, the supply of a company car (which could be only for private travel), the granting of a travel allowance or the payment of a travel reimbursement, compensates the employee for incurring the employer’s business expense.
In principle this is a reimbursement of business expenses incurred by the employee. Reimbursements are not remuneration, and therefore don’t belong in a package structure. Travel compensation should be paid ‘on top’ of the package, along with variable remuneration such as commission and overtime, and statutory costs such as UIF, SDL and OID).
In principle then, company cars, travel allowances and travel reimbursements cannot be included as a component of the employee’s package otherwise the employee would be paying the employer’s expense out of his own pocket, which would be unfair to the employee.
However, ‘principle’ and ‘practice’ are quite often two different things, so where does leave this us as far as travel compensation is concerned?
Company cars
Company cars are a regular feature in the packages of managers and senior executives, and companies that provide company cars have mostly sorted out the question of fairness of value in terms of ‘who gets what car’ in their company car policy.
There is an important difference between company cars and travel allowances in that the use of a company car can be legally granted to an employee solely for private travel.
If there is only private travel, structuring a company car into a package does not break the principle that the employer’s expense should not be paid for by the employee out of his package, and justifies including the company car as a package component.
However, this is not always the case – the company car often has both a private and a business value embodied in its ‘cost’ value.
From this it appears that if the employee is prepared to do the job for the package total that rewards his services, and as long as the employee understands that if there is a business portion of the use of the company car is coming out of his own pocket, then you have an agreement.
Kyk Noord en gaan voort.
Travel allowance
The problem with a legitimate travel allowance is that its value will always include a business travel portion.
As discussed in Chapter 2, the business cost of the travel allowance should be marginally increased to provide an element of private use value that is essentially ‘salary’.
The business portion of the travel allowance cannot be included in the package, while the private portion can be included. If included, the private portion must have an accurate cost value otherwise it would make no sense to include it in a costing structure whose purpose it is to control the employer’s costs.
The private travel value of a travel allowance can only be calculated with accuracy at the end of the tax year, but the value is needed from the start of the tax year for the package calculation. Therefore, the estimated value of the private portion must be used, in the full knowledge that the final private travel value at the end of the tax year will differ from the estimated value.
In practical terms, this boils down to the same thinking as for the company car.
If the employee is prepared to do the job for the package that is offered as the reward, and as long as the employee understands that the business expense portion of the travel allowance is coming out of his own pocket, then you have an agreement.
However, be aware that once included as a component in the package, the value of a travel allowance can become a bit of hot potato.
Generally, in line with remuneration package structuring principles, as the travel allowance value increases, the cash component value gets less.
Employees will start to request a lower travel allowance value in order to get more cash, until one day somebody realises that they are not getting the full value of their claim for business travel expenses on assessment because the claim value is limited to the travel allowance value.
They will then demand a higher travel allowance value, and the employer might get into a risk position by overestimating the value of the travel allowance, and the cycle will repeat itself.
This is perhaps an unfair comment but including a travel allowance into a package gives one the impression that the company is ducking its responsibility to manage its business travel expenses by shifting control from the employer to the employee.
Travel reimbursement
It is crystal clear that a travel reimbursement is the employer’s expense, and therefore it cannot be used as a package component.
Conclusion
In my opinion, the general answer to a difficult question is that –
1. Company cars can and are often included in a package
2. Travel allowances can but should not be included in a package – if they are, then only the private travel portion should be included, and what then is the value of the private travel?
3. Travel reimbursements cannot be included in a package.
6.4 Comparison of the Tax calculations
Note that only the remuneration and employees’ tax aspects of company cars have been addressed in this workbook. Company cars require extensive management, and then there is also the impact on company tax and company costs in general to be considered.
In order to compare the tax efficiency of company cars, travel allowances and travel reimbursements, we need to be able to compare apples to apples as far as possible.
This is not easy, as they are different things.
Fortunately, the starting point of the tax calculation being the determined value of the motor vehicle used for the travel, is now calculated in the same way for all three types of travel compensation.
Let us use the following base values for the comparison calculation –
• Determined value: R228 000
• Total kilometers: 30 000 km
• Prescribed rate R3,78 per km.
Remember that these are values that apply to the motor vehicle irrespective of whether it is a company car, or a privately-owned car subject to either a travel allowance or a travel reimbursement being paid.
Also, it is assumed that it is a perfect world, and the kilometers recorded in the logbook at the end of the year, are the same as the kilometers that were used to estimate the travel allowance value at the start of the year.
The following table compares the results of applying these values to the tax calculation for the three methods of business travel compensation. Note an old value of R3,78 per km is used (instead of R4,64 for 2024), but the principle of the calculations, the result, and the conclusion stays the same.
Low Business travel (20% of total travel)
VARIABLES FOR THE TAX CALCULATIONS
Determined Value Business Km Private Km Total Km Prescribed Rate/km Private Ratio Inclusion Rate Marginal Increase
228,000 5,000 20,000 25,000 3.78 80% 80% 0%
TAX CALCULATIONS
DESCRIPTION INCOME PAYROLL ASSESSMENT
Travel Compensation Business Portion Private Portion Private Portion (%) Total Value Remun. Value Business Expense Taxable Income
Company Car 0 0 95,760 95,760 76,608 19,152 76,608
Travel Allowance 18,900 75,600 0 94,500 75,600 18,900 75,600
Travel Reimbursement 18,900 0 0 0 0 0 0

High Business travel (80% of total travel)
VARIABLES FOR THE TAX CALCULATIONS
Determined Value Business Km Private Km Total Km Prescribed Rate/km Private Ratio Inclusion Rate Marginal Increase
228,000 20,000 5,000 25,000 3.78 20% 20% 0%
TAX CALCULATIONS
DESCRIPTION INCOME PAYROLL ASSESSMENT
Travel Compensation Business Portion Private Portion Private Portion (%) Total Value Remun. Value Business Expense Taxable Income
Company Car 0 0 95,760 95,760 19,152 76,608 19,152
Travel Allowance 75,600 18,900 0 94,500 18,900 75,600 18,900
Travel Reimbursement 75,600 0 0 75,600 0 75,600 0
What conclusions can be drawn from these comparisons?
1. The remuneration and taxable income values for company cars and travel allowances are surprisingly close to one another.
This is probably as a result of the intention to align the travel allowance and company car provisions, and some clever actuarial work on spreadsheets by SARS to arrive at the 3,5% pm for company cars, as well as the SARS Cost Scale table from which the SARS cost rate/km is calculated.

2. The travel reimbursement is the best option.
6.5 Comparison of Attributes
In this workbook I have pointed out some of the pros and cons of the three methods of travel compensation as we moved through their requirements and provisions.
In order to help you to decide which is the best method for your business, I have drawn up a table that summarises the main attributes of each method of travel compensation.

DESCRIPTION Company Car Travel Allowance Travel Reimbursement
Employer – discretion over base tax value No discretion Discretion Discretion
Risk to the employer of non-compliance Low High Very low
Administration burden on the employer High Medium Medium
Is there a Remuneration value Yes Yes Generally, No
Is there a negative impact on SDL and UIF costs Yes Yes Generally, No
Taxed in the payroll on the Employer’s expense Possibly Yes No
Employee must keep a logbook & submit claim Yes Yes If > Prescribed rate
Easy for employees to understand Yes No Yes

 
6.7 Last thoughts on Travel Compensation
There are good reasons to use travel reimbursements in your company –
1. The employer controls the rate/km (and therefore the eventual cost to the employer)
2. Depending on the rate/km used, the travel reimbursement is excluded from remuneration, whereas the travel allowance and company car add to the company’s total remuneration amount.
3. Using a travel reimbursement lowers the employer’s costs of the SDL and UIF contribution costs – depending on the numbers, this could result in a substantial saving for the employer.
4. There is no confusion in the minds of employees or employers that this is the employer’s business expense, and that it simply does not belong in a package.
The only downside of the travel reimbursement is that the employer must administer the claim forms for the reimbursements, but as suggested earlier, using spreadsheets for the business travel claims can simplify and reduce administration for both the employer and the employee.
My advice –
Change to a travel reimbursement policy but ensure that the rate per kilometre does not exceed the Prescribed rate to prevent the reimbursement from being assessed.
6.8 Proposals to Change the Travel Compensation Legislation
Travel compensation legislation has been changed over the years to close loopholes and to keep up with the changing nature of employment.
It remains a difficult area for employers, employees, SARS, and the legislators.
For several years the PAGSA has proposed that the policy makers consider phasing out travel allowances over a few years, to be replaced by travel reimbursements.
We will have to wait and see if this ever happens.