New Legislation

Tuesday, 16 February 2010 10:43

16th February, 2010 – New legislation effective 1 March 2010, involving major changes to business travel rules, will make the payment of a travel allowance no longer worthwhile.

This is according to Ron Warren, an acknowledged tax expert and Chairman of local payroll services company nuQ, who says that the percentage of a travel allowance to be subjected to employees’ tax has been raised from 60% to 80%; and there will be no deemed kilometres allowed on assessment and only kilometres reflected in a properly kept log book will be allowed as a deduction from the travel allowance paid to the employee.

“The combined effect of the two changes above is that the payment of a travel allowance will hardly be worthwhile,” he explains. “If the employee does not keep a log book, there will be a shortfall in the PAYE deducted during the year, and the employee will be required to pay in the tax not deducted at the time of assessment.”

He points out that if an employee keeps a log book, a better option to the traditional car allowance that involves very little additional effort is to convert from an allowance to a reimbursement of actual kilometres travelled.

The default rate per kilometre for reimbursement of actual kilometres travelled for business purposes remains at R2,92, (although this may change in the 2010 budget speech) and such a reimbursive allowance is only tax efficient where the employee does not receive a travel allowance, and not more than 8 000 kilometres are reimbursed in a year.

“At the end of each month, the employee would submit a copy of the log book entries for that month to the employer, who would then reimburse the employee at the deemed rate per kilometre applicable to the vehicle used, rather than the R2,92 default rate, as the deemed rate will almost certainly be higher than R2,92.”

“One would first have to estimate the total kilometres that would be travelled during the year by the employee, to enable the fixed cost per kilometre to be calculated. For all practical purposes, the total kilometres travelled in the previous tax year could be used for this purpose, unless there is reason to believe that the total kilometres for the current year will be materially different.”

He adds that SARS has previously indicated that a genuine estimate used for this purpose will not be penalised, should it happen that the actual kilometres for the year differ materially from the estimate made.

Warren cites an example to illustrate this:

Assume that the estimate is 30 000 kilometres for the year, and the original cost of the employee’s car was R175 000. The deemed rate to be paid per kilometre will be determined as follows, from the table of deemed rates published by SARS. Note that the rates used in this example may change as a result of new rates being published for use after the budget.

The fixed cost per annum from the table is R63 424. Divide by 30 000 kilometres to give a rate of 211,4 cents per kilometre. The fuel cost is 68,8 cents per km, and the maintenance cost is 41,1 cents per km. The total deemed cost per kilometre is thus 321,3 cents. This cost can be calculated at the start of the year and stored on the payroll system for the employee.

Each month, the total kilometres travelled as per the log book would be multiplied by 321,3 cents, and the result paid as a reimbursive payment. The kilometres paid for would also have to be recorded, to enable the payroll system to decide at the end of the year whether the reimbursement is to be reported against code 3702 (if greater than 8 000 kms) or 3703 (if not greater than 8 000 kms). Code 3703 is no longer required to be reported at all.

There would also be a possible advantage to the employer in doing this. Reimbursed expenditure of this nature is not regarded as remuneration, and apart from being non-taxable, it is not subject to either the Skills Development Levy (1%) or Unemployment Insurance (1%). Of course, if a travel allowance was paid, 20% of the travel allowance would also not be taxable and there would be a corresponding saving in SDL and UIF.

Warren says that where employees are paid a travel allowance as part of a total package, an employer will probably not want to bear the cost of these reimbursements, and would want them to be part of the package. “This can be achieved by estimating the annual reimbursement that will be paid, and making the value of that annual amount payable from the total package,” he says. “This will require a bit more administration, in that when the annual total has been reached, no further reimbursements are paid.”

With regard to what happens when the reimbursements are less than the amount allowed for in the total package Warren says that there are a couple of actions that can be taken :

• an ad hoc bonus can be paid to the employee for the unused amount; or
• the employee suffers a loss.

He stresses that it would be illegal to hold the excess reimbursement back and pay it to the employee out of the following year’s package, as this would amount to deferring “income” actually earned in one year to the next year.

Comments (0)