2. Background to Business Travel Compensation
Most organisations need one or more of its employees to travel for work purposes for the organisation. When the employee bears the costs in any way for this business travel, the employer is obligated to compensate the employee for incurring the company’s expense.
The first problem is to differentiate between what portion of the travel is private travel and what portion is business travel.
The second problem is how to, legally and fairly, compensate an employee for incurring business travel expenses.
For the same reason that the employer must bear all the other costs of being in business, the cost of an employee having to travel from point A to point B for business purposes is the financial responsibility of the employer.
The obligation of the employer to pay for these business travel expenses gives rise to the three methods of business travel compensation that are currently provided for in the legislation, being:
• Company motor vehicles (also referred to as ‘company cars’)
• Travel allowances
• Travel reimbursements (referred to in the legislation as ‘reimbursive travel allowances’).
The travel compensation rules are complex and prescribe the rules for the determination of the remuneration and income value of the private travel portion of the compensation, the calculation of PAYE and the reporting of travel compensation amounts on tax certificates for income tax assessment purposes.
These rules are as widely misunderstood as what travel compensation is prevalent, and if incorrectly applied, can place the employer at risk of having to pay penalties and interest, and potentially prejudice the employee’s tax position.
Broadly speaking, any compensation paid or granted to assist an employee with his private travel expenses is taxable, while compensation for business travel is not taxable. It is therefore essential to know whether the compensation is being paid for private or business travel.
Private travel is thus a fundamental concept.
There are three methods of travel compensation that can be used to compensate employees that travel for the employer’s business purposes by motor vehicle:
• Company motor vehicles (referred to colloquially and in this workbook as ‘company cars’)
• Travel allowances
• Travel reimbursements.
It is not possible to discuss the three methods of travel compensation without an understanding of the ‘endgame’:
• How are they taxed in the payroll for PAYE purposes during the tax year, and
• How is income tax calculated by SARS at the end of the tax year?
This in turn requires an understanding of how to determine the remuneration value of travel compensation that is subject to PAYE, how to report it on tax certificates, and how this remuneration relates to income and income tax.
As we will see, the closer the value of remuneration that is calculated during the tax year is to the income value calculated at the end of the year, the better for all three parties: the employee, the employer, and SARS.
This is true of PAYE and income tax values in general, but it is of particular importance for business travel compensation because of the significant differences that can exist because of either a lack of understanding or the incorrect application of the rules.