11 Payroll Calculation of Employees’ Tax
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.
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 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, SARS Interpretation Note # 14 states the following: “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.
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: “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.
Iif 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.
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.
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.