8 Estimate of a Travel Allowance amount
Calculate a Travel Allowance based on ‘Actual’ costs
Before discussing the usual method of calculating a ‘deemed’ travel allowance amount, note that it is possible to calculate a travel allowance based on an ‘actual’ rate per kilometer.
Section 8(1)(b)(iiiA)(bb) – provides that the employee can calculate the actual rate per kilometer as long as the actual cost of ownership and running costs of a motor vehicle are recorded and that the cost of wear and tear and finance charges must be calculated on R665 000 if the cost of the motor vehicle exceeds R665 000 ((this looks like an error – it should have been amended to be R800,000).
Calculation of a ‘Determined’ Rate per kilometer from the Cost Scale table
The SARS Cost Scale table and the Prescribed rate/km that are effective from 1 March 2023.
The determined rate per kilometre is the sum of –
1. The fixed cost from the table divided by the total (private plus business) kilometers estimated to be travelled in the vehicle during the year ahead
2. If the vehicle has been used for business purposes during a period in that year which is less than the full period of that year, the fixed cost must be an amount which bears to the fixed cost the same ratio as the period of use for business purposes bears to 365 days
3. The fuel cost from the table if the employee has paid for all the fuel (private plus business travel)
4. The maintenance cost from the table if the employee has paid for all maintenance costs including the cost of repairs, servicing, lubrication, and tyres.
The Prescribed rate per kilometre
Section 4 (the ‘Simplified Method’) of the ‘Fixed Rate’ regulation that provides the ‘Cost Scale’ table, specifies a standard ‘Prescribed’ rate per kilometer that for 2023/24 is R4,64 per kilometer.
This is known as the ‘Prescribed’ rate.
The regulation gives the employee the option to use either the Cost Scale rate per kilometer or the Prescribed rate, and presumably, the employee will always choose the rate per kilometer with the highest value. This is because the travel allowance will then have a bigger value, meaning more cash in the payslip for the employee and also allowing a larger business travel expense to be deducted before it is limited by the value of the travel allowance.
The benefits of using the prescribed rate per kilometer are:
1. Employers must recalculate the Cost Scale rate whenever the car or the anticipated kilometers change.
2. A standard rate simplifies the administration
3. All employees are treated equally
The best would be to specify the use of the Prescribed rate in the company’s travel policy. Then the employees are informed, and they would be in a position to object if they want to.
Calculation of the Income value of a Travel allowance (in words)
The following steps describe in words how to estimate and calculate a travel allowance amount that is ‘closely’ aligned to the business travel value:
1. Estimate the number of kilometers that will be travelled in the coming year for –
a. Business travel (supplied or estimated by either the employee or the employer)
b. Private travel (supplied by the employee)
c. Total travel (total of business plus private travel).
2. The employee must confirm or provide the determined value of the vehicle used for the travel.
3. Use the SARS Cost Scale table to calculate the cost rate/km for the car as follows –
a. Use the car’s determined value to position it in the correct row in the Cost Scale table
b. Divide the ‘Fixed Cost’ value by the total number of km (step 1c above) to get a R/km
c. If the employee pays for the full cost of fuel and/or the full cost of maintenance, add the fuel R/km and/or the maintenance R/km to the fixed cost R/km from step 3b to get the ‘determined’ R/km rate
4. Calculate the travel allowance value by multiplying the determined rate/km (3c above) by –
a. Business kilometers (1a above) to calculate the business value for the travel allowance.
b. Then decide whether or not to increase this business value marginally by applying a marginal percentage increase such as 10% to provide for a private travel portion.
A few comments regarding the estimate of kilometers in point 1 above:
• Employers can estimate the business kilometers for the new year by using last year’s business kilometers, or a job of similar nature, then adjust for differences between this and last year, or between the jobs.
• Employees should assist the employer to estimate private kilometers (the employer may not know that the employee who lived 2 kilometers from the workplace last year, now lives 40 kilometers away.
• If a travel reimbursement is paid in addition to a travel allowance, the estimated value of the travel allowance must be reduced by the estimated value of the reimbursements. Alternatively, the number of business kilometers used for the travel allowance estimation can be reduced by the number of kilometers that are expected to be reimbursed.
The estimation of a realistic travel allowance value is best done at the start of each new tax year, but it is recommended that it is re-estimated at least once during the year. However, if the employee uses a different car, or if the nature of the job changes, the travel allowance value must be changed to reflect the new circumstances.