7 Travel Allowance Estimate Concerns
One of the biggest difficulties facing employers who grant travel allowances is how to estimate a value for the travel allowance that will keep them out of trouble with SARS and at the same time be fair to the employee.
The estimated travel allowance amount can potentially fall into on the following three groups:
1. Excessive value: High risk to the employer, and an unacceptable practice
2. Low value: No risk to the employer; but potentially penalises the employee
3. In-between value: Travel allowance ‘heaven’ … the best of both worlds.
Group 1: An ‘Excessive’ value for the travel allowance
Historically when the private and business portions of the travel were seen to be fairly equal in value, this was reflected in lower rates of inclusion of the travel allowance into remuneration in the Fourth Schedule. As recently as the 2009/10 tax year, the split between the private and business portions of the travel allowance was 60% private, 40% business. In earlier years, these two rates were even closer to one another.
The various methods of estimating the travel allowance value took these ratios into account, and because the private and business percentages were fairly close to one another, the results of these calculations were acceptable. However, with the default private portion now being 80%, the travel allowance should not be estimated according to a formula based on the Fourth Schedule ratios.
These old methods should be discarded, and a new approach taken. Any method that results in an excessively high value being estimated for the travel allowance value must be avoided like the plague.
If SARS believe that the travel allowance value is ‘excessive’, they can change its nature from being a travel allowance to what SARS sees it to be – a disguised salary. They will rain unpaid taxes, penalties, and interest down on the employer – an unpleasant and expensive experience.
There is no definition of ‘excessive’ – it will be determined by a ‘factual examination’.
Group 2: A ‘low’ value for the travel allowance
If asked to give guidelines on how to estimate the value of a travel allowance, SARS will refer to the Interpretation Note that deals with allowance.
This interpretation states that the value of a (travel) allowance should reflect the expected business-related (travel) value. This conservative approach by SARS is to be expected – their duty is to protect the fiscus and there is nothing wrong with that.
An allowance is an amount of money granted by an employer to an employee in circumstances where the employer is certain that the employee will incur business-related expenditure on behalf of the employer, but where the employee is not obliged to prove or account for the business expenditure to the employer.
The amount of the allowance is based on the expected business-related expenditure.
Note that the interpretation states that the value of the allowance must be based on the expected business-related expenditure. It does not state that it must be equal to the expected business-related expenditure. This seems to allow the employer some wiggle room to increase the value.
Then the Fourth Schedule mandatory 80%/20% inclusion requirement anticipates that the estimated business value of the allowance must consist of a business portion plus a private portion. This is contradictory.
If the estimated travel allowance value is equal to (or very close to) the business travel value, then the only way to have a private portion is to add an amount for private travel on top of the business travel amount.
Another complication is that if the value of the travel allowance is restricted to the estimated business travel value reported on the tax certificate under code 3701, SARS will only deduct business travel expenses on assessment up to that value of the travel allowance.
If the value of the business travel expense exceeds the travel allowance value, the employee will lose out on the deduction from taxable income of the excess amount. The income tax calculation is discussed in Chapter 6.
Lastly, if the travel allowance value is equal to the business travel value, it means that the employee will be taxed in the payroll on 80% (or 20%) of the employer’s business travel expense. This is unfair to the employee.
The employee (if he keeps a logbook) will get the tax back at the end of the tax year in a refund, but that could be 6 months into the next tax year. The employee’s cash flow will suffer in the meantime.
Group 3: A ‘realistic’ value for the travel allowance
To avoid the dangers of paying a travel allowance that is too high or too low, the employer should marginally increase the estimated business travel value of the travel allowance, while ensuring that the increased value does not move too close to the red line area of being excessively high.
The travel allowance provisions in the Fourth Schedule provide for an 80% or 20% private travel portion, thereby ‘acknowledging’ that the travel allowance can include a private travel portion in addition to the business portion.
From this follows that if a travel allowance is estimated to consist of both a private and a business portion, SARS should not find fault with this principle. They can only find fault with the total value if they believe it to be excessive.
The private portion is taxed during the tax year, and if the estimate is reasonably accurate, there will only be minor differences between the employees’ tax and the income tax value at the end of the tax year.
This is fair to both the employee and to SARS.