Chapter 2. Important Concepts
2.1 Purpose of Business Travel Compensation
The purpose of business travel compensation to:
• Compensate an employee who travels for business purposes and who has incurred the employer’s business travel expenses.
The purpose of business travel compensation IS NOT to:
• Assist the employee to purchase a motor vehicle!
If the employer does assist, this would simply be additional salary, and fully taxable.
• Assist an employee with his private travel expenses.
For good reasons, employers sometimes assist their employees with private travel expenses such as bus fares, taxi fares, etc. to enable the employee to get from home to work and back again.
This assistance is not ‘travel compensation’ as envisaged in this workbook, but it is interesting to note that while one would expect that assistance by the employer would be taxable, there are three methods available to assist employees with their private travel expenses – two are taxable, one is not taxable.
1. Taxable – the use of a company-owned or rented motor vehicle:
This would be a ‘company car’, which is one of the business travel compensation options discussed in detail in chapter 3 of this workbook. Because the use is solely for private travel, it would be taxed as normal as a company car but with no allowable deductions for business travel expenses.
2. Taxable – a transport allowance:
The employer pays a cash amount for bus fares, taxi fares, etc. This ‘transport’ allowance is paid in respect of private travel and is simply additional salary under another name.
3. Not taxable – a transport service:
The employer provides a service that takes employees in general from home to work and back again. In other words, the employer owns or rents a vehicle and employs a driver who takes the employees home after work and picks them up again in the morning from home for work as part of his duties.
2.2 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 –
1. Company motor vehicles (referred to in this workbook as ‘company cars’)
2. Travel allowances
3. 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 for 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 in respect of private or business travel.
Private travel is thus a fundamental concept that is dealt with in a later section of this chapter.
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 –
1. Company motor vehicles (referred to colloquially and in this workbook as ‘company cars’)
2. Travel allowances
3. Travel reimbursements.
It is not possible to discuss the three methods of travel compensation without an understanding of the ‘endgame’:
1. How are they taxed in the payroll for PAYE purposes during the tax year, and
2. 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, and how to report it on tax certificates, and how this remuneration relates to income and income tax.
As we will see, the closer that 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.
2.3 Principles of Remuneration and Income
An understanding of the basic concepts of employees’ tax (during the tax year) and income tax (at the end of the tax year) will be of help when formulating a travel policy for your company that is cost efficient, fair to all parties, and compliant with the legislation.
During the tax year, usually on a monthly or weekly frequency, remuneration is paid by the employer to the employee in return for the employee working for the employer.
After allowing legitimate deductions from remuneration, the employer must calculate employees’ tax (PAYE), pay it monthly to SARS, and report the remuneration, deductions, and employees’ tax on tax certificates at the end of the tax year to inform the income tax calculation.
At the end of the tax year, the employee tax certificates submitted to SARS by the employer are recorded on the SARS data base and inform what is known as the income tax assessment processing of the annual ITR12.
Those employees who are required to do so (or those who decide to do so by choice), submit an annual ITR12 return to SARS and income tax is calculated by SARS.
Employees can claim allowable deductions from income on the ITR12 that were not deducted from remuneration by the employer in the payroll to reduce taxable income and calculate the final amount of income tax after taking rebates and total employees’ tax deducted during the tax year into account.
These deductions include legitimate business travel expenses (incidentally, statistics show that business travel expenses are one of the largest and most frequent deductions that are claimed on assessment).
2.4 PAYE vs Income Tax Comparison
From the above discussion, it follows that:
• Remuneration is a form of income paid during the tax year giving total income at the end of the tax year.
• Employees’ tax (PAYE) is an advance payment towards the income tax calculated at tax year end.
The comparison table that follows below shows that the paths of remuneration and income meet one another in the Fourth Schedule definition of remuneration, in which the preamble to that definition (underlined) states:

“remuneration” means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered, including—
(a) … Etc.
‘Remuneration’ is therefore, by definition, directly linked to ‘income’.
From that meeting point onwards, both the PAYE and the income tax calculations follow the same basic steps. Their calculation methods are aligned in principle and the tax results should be the same or very similar, depending on whether there are additional streams of income or deductions that are claimed on assessment.
The PAYE and Income Tax calculation steps are summarised and compared in the following ‘Tax 101’ Comparison table that lacks a lot of detail, but hopefully gets the principles across.
‘Tax 101’ Comparison Table: Remuneration vs Income, and PAYE vs Income tax
REMUNERATION AND PAYE INCOME AND INCOME TAX
GROSS INCOME (ITA Section 1 definition)
1 • Plus: Section 1 special inclusions
2 • Less: Section 10(1) Exemptions
REMUNERATION (Fourth Schedule definition) Equals: INCOME
3 • Plus: Defined inclusions of travel compensation • Plus: Unexpended section 8 allowances
4 • Less: Paragraph 2(4) deductions • Less: Sections 11 and 23 deductions
Equals: BALANCE OF REMUNERATION Equals: TAXABLE INCOME
5 • Calculate ‘Gross’ PAYE • Calculate ‘Gross’ Income Tax
Calculate: ‘NET’ PAYE Calculate: ‘NET’ INCOME TAX
6 • Less: Section 6 ‘age’ rebates • Less: Section 6 ‘age’ rebates
7 • Less: Section 6A Medical Tax Credit (MTC) • Less: Section 6A Medical Tax Credit (MTC)
8 • Less: Section 6B Additional MTC (AMTC) • Less: Section 6B Additional MTC (AMTC)
9 FINAL PAYE FINAL INCOME TAX
The sequence of the nine calculation steps of PAYE and Income tax in the Comparison table is very important:
1. The exemption of certain amounts (such as the uniform allowance and some of the relocation allowance amounts) from gross income in section 10(1), means that these amounts are automatically excluded from remuneration (that is linked to ‘income’ from which these amounts have already been exempted).

2. The business travel expense portions of the three travel compensation amounts are allowed to reduce remuneration and income as follows:

 
a. Remuneration:
An estimate of the private travel portion of the travel compensation that must be included in remuneration for PAYE purposes must be made using the ‘80%/20%’ inclusion rates specified in the Fourth Schedule definition of remuneration (more on this in a section beneath).
Note that the calculation of the UIF contribution, the SDL levy, ETI, and at some stage in the future, the Compensation Fund remuneration, include this estimate of the private travel value.

This means that the remaining ‘20%/80%’ balance of the travel compensation is estimated to be business travel expenses and is not included in remuneration, therefore not subject to PAYE.
b. Income:
Only the ‘unexpended’ portion of the travel compensation (the portion of the compensation that is paid or granted in respect of private travel) is included when calculating taxable income.

This means that the ‘expended’ portion (the business travel portion of the travel compensation) reduces the value of taxable income and is achieved during the assessment process by applying the employee’s logbook that details the business travel.
2.5 Legal Framework for Travel Compensation
The steps shown in the Tax 101 Comparison table and their sequence reflect the Income Tax Act requirements.
The legislation that provides for travel compensation is included in full in the appendix at the end of this manual, but the legal framework is summarised here by focusing on the provisions that provide for travel compensation.
If the ‘legalese’ is not for you, then skip this section 
Gross income and Section 8
Section 1 of the Income Tax Act defines all amounts that make up gross income, and paragraph (i) includes all fringe benefits including that of a company car into gross income, as follows –

“(i) the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit or advantage granted in respect of employment or to the holder of any office, being a taxable benefit as defined in the said Schedule, and ….

Then the definition of gross income in paragraph (c) of section 1 of the Income Tax Act includes any amounts paid in respect of services –

“(c) any amount, including any voluntary award, received or accrued in respect of services rendered or to be rendered or any amount (other than an amount referred to in section 8(1)) received or accrued in respect of or by virtue of any employment or the holding of any office …”

Note that because the three ‘special’ allowances are defined to be ‘taxable income’ in section 8(1), they are excluded from the definition of ‘gross income’ (otherwise they would be included twice in taxable income).
Section 8(1) specifies that the portion of the travel allowance and the travel reimbursement that is not business travel (i.e. the private travel portion) is taxable income.

 
Section 8(1)(a)(i) specifies as follows –

There shall be included in the taxable income of any person (hereinafter referred to as the “recipient”) for any year of assessment any amount which has been paid or granted during that year by his or her principal as an allowance or advance, excluding any portion of any allowance or advance to the extent that the allowance or advance or a portion of the allowance or advance is exempt from normal tax under section 10 (1) or has actually been expended by that recipient—
(aa) on travelling on business, as contemplated in paragraph (b), unless an allowance or advance has been granted by an employer in respect of the use of a motor vehicle as contemplated in paragraph 7 of the Seventh Schedule;

In respect of travel allowances, the above exclusion of business travel expenses in section 8(1)(a) allows the employee to claim the value of his business travel in terms of paragraph 8(1)(b) in order to reduce the value of the travel allowance or travel reimbursement that is included into taxable income.
This reduction is done on assessment if the employee declares his business kilometers travelled during the year in the logbook area of his ITR12 annual return form.
Section 23(m)
Section 23(m) was added to the Income Tax Act with effect from 1 March 2002 and is included in this workbook because there is a misunderstanding that the deductions that are no longer allowed by section 23(m) include deductions for business travel expense claims (by the way, there is no negative impact).
Firstly, section 23(m) specifies that the only category of taxpayers that are allowed to claim business expenses on assessment other than the allowable deductions listed in section 23(m) are –

“…agents or representatives who earn mainly [more than 50%] of their remuneration in the form of commission based on sales or turnover attributable to him…”

Section 23(m) also allows labour law independent contractors that are deemed to be employees by the Fourth Schedule to claim business expenditure related to their services income.
Secondly, section 8(1)(a)(i) of the Income Tax Act includes all allowances into taxable income after first allowing business expenses to be deducted from the special allowances (travel, subsistence, and public office).
Section 8(1)(a)(i) does not allow business expenses to be deducted from general allowances before they are included in taxable income, therefore their full (gross) value is included.
Taxable income is the balance of income after deductions have been made – no further deductions can be claimed from amounts that are classified as taxable income. Therefore, no business-related expenses can be claimed against general allowances that are reported on the tax certificate. For example, if a tool allowance is paid and reported on the tax certificate as a code 3713 general allowance, then no tool expenses can be claimed on assessment.
Agents or representatives who earn more than 50% of their remuneration in the form of commission based on sales or turnover attributable to them, as well as labour law independent contractors who are deemed to be Fourth Schedule employees, are still allowed to claim expenses from general allowances.
Employers are advised to stop paying general allowances, and to rather reimburse the employee for these business expenses.
Remember that all general allowances are remuneration, whereas reimbursements are not.
Changing from allowances to reimbursements will reduce total remuneration thereby lowering the cost of the 1% skills levy and the 1% employer-paid UIF contribution.
To confirm – all employees who are paid or granted business travel compensation are allowed to claim business travel expenses from their travel income on assessment by virtue of the section 8 provisions discussed above.
Section 8(1)(b)(ii) provides for travel allowances and specifies as follows –

(ii) subject to the provisions of subparagraph (iii), where such allowance or advance has been paid to the recipient in order that it may be utilized for defraying expenditure in respect of any motor vehicle used by the recipient, the portion of the allowance expended by the recipient during the year of assessment for business purposes shall,
unless an acceptable calculation based on accurate data is furnished by the recipient,
be deemed to be an amount calculated by applying the rate per kilometre determined in the manner prescribed by the Minister of Finance by notice in the Gazette for the category of vehicle used, on a distance travelled during the said year for business purposes (other than private travelling as contemplated in subparagraph (i))
: Provided that where an allowance or advance is deemed to have accrued under section 7B to the recipient in the year of assessment during which that allowance or advance is paid, the distance travelled for business purposes in respect of which that allowance or advance is received shall be deemed to have been travelled during the year in which that allowance or advance is paid;

Section 8(1)(b)(iii) provides for travel reimbursements and specifies as follows –

(iii) where such allowance or advance is based on the actual distance travelled by the recipient in using a motor vehicle on business (excluding the said private travelling), or such actual distance is proved to the satisfaction of the Commissioner to have been travelled by the recipient, the amount expended by the recipient on such business travelling shall, unless the contrary appears,
be deemed to be an amount determined on such actual distance at the rate per kilometre fixed by the Minister of Finance by notice in the Gazette for the category of vehicle used
: Provided that where an allowance or advance is deemed to have accrued under section 7B to the recipient in the year of assessment during which that allowance or advance is paid, the distance travelled for business purposes in respect of which that allowance or advance is received shall be deemed to have been travelled during the year in which that allowance or advance is paid;

Fourth Schedule Remuneration
Travel compensation is paid or granted to the employee on a weekly, fortnightly, or monthly frequency during the tax year, and the rules that must be followed to estimate the remuneration value of the private travel are provided in the definition of remuneration in the Fourth Schedule.
The Fourth Schedule definition of remuneration, limited here to only the sub paragraphs that are relevant for travel compensation, are specified below.

“remuneration” means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered, including—

(b) any amount required to be included in such person’s gross income under paragraph (i) of that definition, excluding an amount described in paragraph 7 of the Seventh Schedule;

(bA) any allowance or advance, which must be included in the taxable income of that person in terms of section 8(1)(a)(i), other than —
(i) an allowance in respect of which paragraph … (cA) applies;
(cA) 80 per cent of the amount of any allowance or advance in respect of transport expenses referred to in section 8(1)(b), other than any such allowance or advance contemplated in section 8(1)(b)(iii) that is based on the actual distance travelled by the recipient: Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of the amount of such allowance or advance must be included;
(cB) 80 per cent of the amount of the taxable benefit as determined in terms of paragraph 7 of the Seventh Schedule: Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of such amount must be included;
(cC) 100 per cent of so much of the amount paid or granted as an allowance or advance referred to in section 8 (1) (b) (iii) as exceeds the amount determined by applying the rate per kilometre for the simplified method in the notice fixing the rate per kilometre under section 8 (1) (b) (ii) and (iii) to the actual distance travelled;
[my emphasis added]
Subparagraph (cC) was added to the definition of remuneration with effect from 1 March 2018.
2.6 Principles of Allowances, Advances and Reimbursements
Before being able to apply the requirements of each type of payment correctly, one has to understand the legal characteristics of allowances, advances, and reimbursements.
Note that the allowances, advances, and reimbursements that are interpreted below are general of nature and not specific to business travel compensation.
However, travel allowances, travel advances, and travel reimbursements being a subset, must fit into these interpretations.
The SARS interpretations of the three types of payment follow.
Allowances
SARS Interpretation
“An allowance is an amount of money granted by an employer to an employee to incur business-related expenditure on behalf of the employer, without an obligation on the employee to prove or account for the business-related expenditure to the employer. The amount of the allowance is based on the anticipated business-related expenditure.”
The SARS interpretation is so important that I have separated the main aspects of each interpretation to put these aspects into focus and to allow comparisons to be made across the three payment types.

An allowance is an amount of money
1. granted by an employer to an employee in circumstances where
2. the employer is certain that
3. the employee will incur business-related expenditure on behalf of the employer, but where
4. 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 anticipated business-related expenditure.

There are some key concepts to take note of in the above interpretation of allowances –
1. The employer grants the allowance (i.e. the employer controls whether it is paid or not), but the employer –
a. must be certain that the expense (travel for business purposes) will be incurred.
b. must estimate a realistic (“expected”) value for the allowance.
2. The allowance compensates the employee for incurring the employer’s business-related expense.
3. The employee need not submit proof of the expense to the employer (but for a travel allowance should/must keep a logbook in order to claim his business travel expenses from SARS on assessment).
Advances
SARS Interpretation
“An advance is an amount of money granted by an employer to an employee to incur business-related expenses on behalf of the employer, with an obligation on the employee to prove or account for the business-related expenditure to the employer. The amount of the advance is based on the anticipated business-related expenditure. The employer recovers the difference from the employee if the actual expenses incurred are less than the advance granted and vice versa.”

An advance is an amount of money
1. granted by an employer to an employee in circumstances where
2. the employer is certain that
3. the employee will incur business-related expenditure on behalf of the employer, and where
4. the employee is obliged to prove or account for the business expenditure to the employer.

The amount of the advance is based on the anticipated business-related expenditure.
Where the actual expenses incurred are less than the advance granted, the employer recovers the difference from the employee, and vice versa.

If one compares the two tables that analise the components of the interpretations of allowances and advances, it can be easily seen that the wording is identical except for point 4 where an advance requires proof of the expense when it is incurred.
This difference affects the administration procedures where for advances, the difference between the advance and the actual value of the expense is sorted out between the employer and the employee when the proof is supplied.
However, the ‘substance’ (or the actual meaning) of an advance is that it is in reality an ‘early reimbursement’. The only difference between the two is that an advance is paid to the employee for a business expense before it is incurred, while the reimbursement is paid to the employee after incurring the expense.
Both the advance and the reimbursement must be proved or accounted for to the employer.
Reimbursements
SARS Interpretation
“A reimbursement of business-related expenditure occurs when an employee has incurred and paid for business-related expenses on behalf of an employer without having had the benefit of an allowance or an advance, and is subsequently reimbursed for the exact expenditure by the employer after having proved and accounted for the expenditure to the employer.”

A reimbursement of business-related expenditure occurs when
1. an employee incurred business-related expenses on behalf of an employer out of his own pocket
2. and is subsequently reimbursed for the expenditure by the employer
3. after having proved and accounted for the expenditure to the employer.

The employer must instruct the employee to incur the expense, and where an asset is purchased, the employer must be the owner of the asset.

In the employment world, a reimbursement of business expenditure occurs when an employee pays for business expenses on behalf of the employer and is then reimbursed for the expenditure by the employer after having proved and accounted for the expenditure to the employer.
The following are the general requirements for a valid (legal) reimbursement.
The reimbursement must further the trade of the employer, and there must be:
1. Instruction from the employer to incur the expense, and
2. Proof of the actual value of the expense (vouchers, invoices, etc.) must be provided to the employer
3. If an asset was purchased and reimbursed, then the asset must be owned by the employer.
Points 1 and 2 above apply to travel reimbursements.
Any amount paid to an employee wholly in reimbursement of expenditure incurred by the employee in the course of his employment, is excluded from both income and remuneration.
Reimbursements do not have to be reported on tax certificates except for:
1. Travel reimbursements (the reporting rules will be discussed in chapter 4)
2. Subsistence allowances (which SARS deem to be a reimbursement if paid below the daily expense limits).
Comments on the Interpretation of Allowances, Advances, and Reimbursements
The dual nature of an advance is made obvious by a comparison of the SARS interpretations –
1. The form (wording) of the interpretation of an advance is exactly the same as that of the interpretation of an allowance with only one difference – proof of the business expenditure is required.